When it comes to investing, one of the most important factors is cost. That’s why it is important to invest in low cost mutual funds and ETFs, and to use a low cost broker if you buy individuals stocks and bonds. And that brings me to this review of Betterment, an online tool that makes investing in stocks and bonds simple and easy.
Initially, I was going to title this review–Are you Better Without Betterment? And the reason was the fees that Betterment initially charged. Having signed up for Betterment, however, I’ve come to a slightly different view. In addition, Betterment has significantly lowered the fees it once charged.
So let’s get to the review.
What is Betterment?
Betterment is a website that enables investors to invest in stock and bond exchange traded funds (ETFs). But rather than picking the individual ETFs, Betterment picks them for you based on an asset allocation that you select. As an investor, all you have to do is decide how much of your investment you want in stocks and how much in bonds. And if you need some help with that decision, Betterment has several tools that can offer you some guidance.
Betterment is a registered investment advisor, and securities in customer accounts are protected up to $500,000 by the SIPC.
How Betterment Works
After you signup (which is free and takes about 5 minutes), you link your checking account to Betterment. Linking your checking account enables you to make online contributions and withdrawals from your Betterment account. You can then either make individual contributions whenever you’d like, or set up a recurring contribution. This makes monthly investments and dollar-cost averaging very easy.
As you can see from the above image, setting up a one-time transfer or a recurring transfer takes just a few clicks of the mouse.
Once you’ve funded your account, the next and final step is to select your asset allocation. Here you are deciding between how much to invest in stocks and how much to invest in bonds. “>Betterment helps you select your allocation is several ways. First, when you sign up you provide your current age and the date you plan to retire. Based on this information, Betterment sets your initial allocation for you. In my case, it was set at 67% stocks and 33% bonds.
You can then change your allocation (limit one change per day) anytime you want. Using your age and income range, you can compare your asset allocation to others similarly situated. Betterment also shows you the potential upside and downside of your allocation over one and ten years. and it offers a handy sliding scale to show you the likely outcomes of different allocation decisions (see image below):
Betterment invests your funds in you money in 8 different ETFs. Six of the ETFs invest in stocks, and two invest in bonds. Here are the eight ETFs, along with the percentage of your money invested in each:
The portion of your total investment allocated to stocks is invested in the following six ETFs:
- 20% VTI: Vanguard Total Stock Market
- 20% IVE: iShares S&P 500 Value Index
- 20% IWD: iShares S&P 1000 Value Index
- 15% IWN: iShares Russell 2000 Value Index
- 15% IWS: iShares Russell Midcap Value Index
- 10% DIA: DIAMONDS Trust Series 1
The portion of your total investment allocated to bonds is invested in the following two ETFs:
(Note that the specific ETFs Betterment uses do change from time to time, so be sure to confirm directly with Betterment what investments it currently uses.)
So how do these investment stack up? Well, the chosen ETFs are all good choices in my opinion. But there is one gaping hole–no international exposure. All of the ETFs invest in U.S. stocks and bonds. A well diversified portfolio absolutely must invest in foreign stocks and bonds. So if you decide to use Betterment, you’ll want to consider getting international stock and bond exposure through other mutual funds or ETFs.
When Betterment first launched, the big negative was its fees. I even spoke with Betterment’s CEO about the fees and a conference we both attended. Since then, Betterment has lowered its fees significantly.
Its current fee structure depends on how much you have invested. Note for the “Builder” fees listed below, you must have a minimum of $100 auto-deposited into Betterment each month, which is what I do.
Investing costs may not seem like a bid deal at first. The problem is that over a lifetime of investing, these fees make a huge dent in your retirement savings. Ron Lieber of the NY times recently published a must-read article on why 401(k) plans should offer index funds. The article included the following chart depicting the effect fees can have on a retirement nest egg:
With Betterment’s current fee structure, I think it’s an ideal option for those that don’t want to actively manage their investments. Because Betterment automatically reinvests dividends and rebalances the portfolio, there’s really little for you to do. Some like it that way.
If you’d like to checkout Betterment, they are offering a bonus worth up to 6 months of no fee investing. The number of months you get for free depends on the amount of your initial deposit:
- $1 – $4,999: Customer receives 1 month free
- $5,000 – $24,999: Customer receives 3 months free
- $25,000 – $99,999: Customer receives 4 months free
- $100,000 and above: Customer receives 6 months free
You can check out the deal and get more information from the Betterment website.