11 Sep Betterment Review
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Millennial Money Snapshot: Betterment is a robo-advisor that uses an algorithm to manage and re-balance an investors portfolio. I spent 1 year using Betterment. While I am not currently a Betterment user, I do recommend the platform for both people who are learning how to start investing and more experienced investors who are looking for an easy to use hands-off investing platform with an exceptional user experience.
One year ago I started using Betterment for some of my taxable investments after maxing out my 401k and Roth IRA contributions. I am really into both personal finance and technology startups so I was excited to use Betterment – which is essentially the most popular robo-investor in 2015 with over $2 billion dollars under management. Before deciding to invest I spent time researching a number of robo-investing platforms, which have grown significantly in popularity over the past few years and include Personal Capital and Wealthfront. More recently larger investment services like Vanguard and Charles Schwab have added their own robo-investing type tools to their services.
I am also a big fan of easy to use websites, so after reading many positive reviews of Betterment (clearly the front runner for Millennials who are new to investing) I decided to make an initial deposit of $1,000. For me personally I wanted to try the platform with a $1,000 deposit so I could learn how Betterment really worked and the returns I could get over a 3 month timeframe before committing more money to the platform. After testing Betterment for 3 months I then decided to invest $50,000 and I was very happy with the results over the one year I used Betterment.
Betterment is an easy to use platform that helps users start investing with as little as $10. The way the platform works is Betterment asks you a series of questions about your age, income, risk tolerance, and financial goals. In recent years there has been a shift towards “goals based” investing, which I like because it helps you save towards something tangible like buying a home, college tuition, taking a dream vacation, or retirement. The Betterment platform also let’s you know when you are “on-track” or “off-track” to meet your goals and tells you how much more you should be saving in order to meet your goal (based on expected returns) within the time frame you have selected.
How to pick your asset allocation mix
Once you answer the series of initial questions then Betterment recommends an asset allocation mix between stock and bonds based on your age, tolerance for risk, and goals. Your asset allocation (the percentage of your assets in stocks/bonds/cash) is essentially your tolerance for risk. Historically stocks are the most risky type of investment and have the biggest potential for both losses and gains. Bonds are traditionally a more conservative investment and have less general volatility but lower returns.
Your asset allocation is one of the most important decisions you will make in your Betterment investment account since it will determine your long term investment returns and how well you sleep at night. Quick question: How would you feel losing 30% of your money in a short time span? If that makes you sick to your stomach then you might be a more “conservative” investor so you pick a higher percentage of bonds in your asset allocation mix. If this sounds like you and you are a Millennial (under the age of 35) then I recommend you work on your fear of losing money in the stock market and if you have a long time horizon (10+ years) then you shouldn’t have a lot of your money in bonds. It will significantly returns your potential investment returns over time. So how do you pick the ideal asset allocation mix?
There are a number of theories on how to pick the ideal asset allocation for your age or the time horizon for when you will need the money you are investing – many financial experts recommend you should subtract your age from 120 and invest that percentage of your long term money in stocks. So for most Millennials this will be between 85%-100% in stocks. One of the nice features of the Betterment account is that it let’s you adjust your asset allocation mix with an intuitive slider if you decide you want to change your asset allocation at any time. However one of the key principles for successful investing is that you shouldn’t adjust your asset allocation often (maybe once every year based on your age), so I wouldn’t recommend using the slider too frequently.
Pick the type of your investment account
There a number of account type options, but for most new investors I would recommend setting up a Roth IRA (individual retirement account) if you don’t already have one. A Roth IRA is a tax advantaged account (meaning your money grows tax free!) that is often used to save for retirement. If you want to focus on long term savings and building wealth then opening a Roth IRA is a no brainer. If you are trying to save for goal that is not retirement – like buying a house, taking the vacation of a lifetime, or saving for your child’s college tuition then it makes more sense to save that money outside of a Roth IRA. There are some rules that allow you to take out money from your Roth IRA in order to pay for your first house, but those rules can get complicated and a Roth IRA is really best used for retirement. If you want to save for anything else then open a general taxable investment account with Betterment.
This is what I did – I opened a general investment account with the goal of building “long term savings.” After setting up the goal I was given the option to make an initial deposit and set up automatic deposits. While simple, the automatic deposits is an essential feature that allows you to automate your investing (an essential key to long term financial success is to continue to add to your investments over time). For new investors setting up automatic investing can seem like a daunting task – just because money is pulled directly out of your bank account. I definitely recommend setting up automatic deposits when you set up your account – even if the amount is $10/month it will get you in the habit of saving into your investment account and you then work to increase how much money you are depositing over time.
The Betterment User Experience
After depositing my first $1,000 then I was given access to the Betterment platform and was completely blown away. The overall user experience of the Betterment investing platform is exceptional – it is easy to use, intuitive, and has a ton of features that give you a detailed look at your investments. One of the things I really liked and could see other young investors liking is that the platform ends up making investing not only easy, but also kind of fun. After getting into the platform I literally spent two hours just playing around with all of the features and trying to imagine the potential growth trajectory of my investments.
The mobile iPhone app is also easy to use and has a bunch of useful features – like deposits and the ability to your progress towards your investing goal. While investing with Betterment I found myself checking my investments a lot just because I liked using the app and seeing my money grow. But be careful checking too often! It is hard to login to your account and see that you have lost money when the stock market is down for the day and not be tempted to pull out your money. After investing over $50,000 in Betterment some days I lost thousands of dollars in my portfolio and when combined with all of the “market volatility” news about the stock market it is tempting to touch your investments or change your stock/bond allocation to try and time the market. Don’t do it!
My recommendation, which is shared by many of the top financial thinkers, is to not touch your portfolio or look at it too often. When it comes to money we as humans don’t behave very rationally – it is very common for new investors who haven’t experienced “market volatility” to freak out when they lose money. As Millennials we are better off investing over the long term and there is a strong chance that if you are investing over a 10+ year time horizon your investments in a low cost index fund driven portfolio like those built by Betterment will give you positive returns and help to grow your money.
What does Betterment invest in?
Some of the critics of Betterment point out that you can’t choose the funds that you invest in – just your asset allocation, but this actually makes investing a lot easier for beginning investors because choosing funds can be pretty difficult for new investors. Betterment does this work for you and pick a mix of low cost index funds from reputable companies like Vanguard and Charles Schwab and others. Here is a run down of the diversification for a 90%/10% stock and bond split portfolio.
These recommendations are heavily weighted in Europe which is the majority focus of the VEA: Vanguard FTSE Developed Markets ETF, which Betterment recommends at 37.5% of the portfolio. It is worth noting that a majority of the funds in this recommended profile are from Vanguard.
Is Tax Loss Harvesting Worth It?
One of the key questions I had when evaluating Betterment was whether or not the purported tax loss harvesting (which was only available to investors with $50,000 under management when I signed up, but it’s now available to everyone) was valuable. Tax Loss Harvesting, which is the practice of selling stocks at a loss and using that loss to offset gains, is a topic that stirs a lot of spirited discussions on the Bogleheads investing forum that I frequent. Based on my understanding there is clearly value in tax loss harvesting, but it is much more beneficial for high income earners who are in a high tax bracket and who are investing money in a taxable account. It is arguably so beneficial for high earners that people believe it actually makes up for the fee Betterment charges to manage most accounts. But if you have an IRA with Betterment or you have a low income and are in a low tax bracket then tax loss harvesting won’t be very beneficial.
Why I don’t use Betterment Now
Because Betterment mostly invests in low-cost Vanguard index funds or ETFs, I decided to invest directly with Vanguard because I have the time and interest in re-balancing my own portfolio. But if you don’t have interest in re-balancing your own portfolio and don’t want to go through the work required to evaluate different fund options then Betterment is an exceptional option for both new and advanced investors.
Conclusion: Betterment was designed for Millennials by Millennials
As more Millennial investors are starting to look for where to start investing, the team at Betterment have done an exceptional job marketing their service Millennials. Anytime I am searching online about personal finance and investing it is hard not see Betterment ads across most websites. A number of top financial bloggers also use the platform themselves, including Mr. Money Mustache who’s $100,000 investment into Betterment generated a spirited discussion in the comments on his website. Betterment is a solid choice for new investors who are looking to an easy to use platform and simple way to start investing.
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