This week I’m reviewing Betterment. I’ve been looking at different investment options for ourselves and Couple Money readers and after hearing about Betterment.
While getting this review up, I had the pleasure of talking with Betterment VP Alan Cohen on the phone to get some questions answered and points clarified. Not sure if Betterment is the right option for you? Hopefully my review will help you make the decision.
Betterment – Background Info
For their clean cut approach to investing, Betterment received recognition as “Best in Show” at Finovate 2010.
Since this is a fairly new company, you’re probably wondering if it’s safe to put your money in their accounts. Rest assured that Betterment is registered with the Securities and Exchange Commission. As they explain on their site:
Securities in your account are protected up to $500,000 by the Securities Investor Protection Corporation (SIPC). SIPC helps people whose money, stocks and other securities are stolen or put at risk if a brokerage fails.
The focus of the company is to help people invest their money in a system that is as easy as depositing money into a savings account. It’s to encourage more people to start investing and reduce some for the hassle associated with the process. How do they do it?
Investment Options at Betterment
The method for investing is fairly straight forward. The company uses exchange-traded funds (ETFs) for their portfolios and users choose how much of their portfolios they want invested in stocks and portfolios. ETFs track a particular index (like a index fund), but they’re traded like stocks.
Here are Betterment.com’s stock ETFs:
- 20% Vanguard Total Stock Market (VTI)
- 20% iShares S&P 500 Value Index (IVE)
- 20% iShares S&P 1000 Value Index (IWD)
- 15% iShares Russell 2000 Value Index (IWN)
- 15% iShares Russell Midcap Value Index (IWS)
- 10% DIAMONDS Trust Series 1 (DIA)
There are only two ETFs for bonds:
- 50% iShares Barclays TIPS Bond Fund (TIP)
- 50% iShares Barclays 1-3 Year Treasury Bond Fund (SHY)
Investing Made Simple
Investing with Betterment does have a huge advantage in that it’s simple to use and track. Keeping investment options simple also helps to keep their fees low. There’s a small annual fee based on your account’s balance.
Betterment’s fee is a straightforward 0.3% to 0.9%, depending on your balance. For balances under $25,000 the fee is just 0.9% annually. The portion of balances over $25,000 will be charged 0.7% annually, the portion of balances over $100,000 will be charged just 0.5% annually, and the portion of balances over $500,000 will be charged at 0.3% annually.
|Portion of Balance
|$0 – $25,000
|$25,000 – $100,000
|$100,000 – $500,000
What they don’t have is also impressive:
- No Transaction Fees
- No Deposit/Withdrawal Fees
- No Rebalance Fees
Sometimes what you don’t charge is a big plus for customers. Less fees means you can keep more of your money.
Why is it important to keep your asset allocation in check? Asset allocation is about maximizing your portfolio’s return while minimizing your risk. While maximizing returns seems fairly clear and measurable, risk is subjective and differs person to person. Betterment will make sure that your portfolio stays within your guidelines. That’s one less thing to stress about and a helpful way to help you maintain your personal investing goals.
Who Betterment is For
If you believe in passive investing, this could be the model for you. If you’re an investor looking for a simple, no hassle option, then I think Betterment could be a good for for you.
One concern for new and would be investors is how risky it seems. They see the news and wonder if putting their money into the stock market is the right move for them. How can tell when they should buy low and sell high? What metrics can they use to find out how to time the market?
There are definitely people who find it easier and more successful to work with index funds. Schultheis, author of The New Coffeehouse Investor, provides plenty of data on the historical returns of the stock market from 1926-2008. persuasively argues that by comparing different investment vehicles, long term investing is not as risky as some imagine.
If you’re interested, you can sign up for a new account at Betterment here.
Who Betterment is Not For
Betterment is not designed for those interested in active investing. Active investing is focused on trying to beat the market. If you also want to add individual stocks into your portfolio, you’ll have to use someone else.
You also need to consider your timetable before you decide to invest. If you need your money in the next couple of years, then investing is probably not the best bet for you. Instead you should focus on other options, like savings accounts or CDs.
- Easy access to it in case of emergency – It does you no good to have a high interest rate if you can’t get to it quickly when it’s most needed.
- Safe place to store you money – Whatever you choose, make sure it’s either covered by the FDIC (banks) or NCUA (credit unions).
My personal suggestion is ING Direct – we’ve been very happy with their service and their rates are better than the local banks and credit unions here.
Thoughts on Investing and Betterment
If you’re handling your own investments, I’d love to hear your thoughts on the topic. How did you determine your asset allocation? What resources do you recommend on learning more? Are there any hurdles people should look out for when investing? How many of you have signed up for Betterment? What are your goals for your accounts?