A Hands-Off Investing Strategy with Betterment Robo-Investing
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Betterment investing offers one of the few truly hands-off investing sites for your financial goals
Betterment is the ultimate in robo-investing or do-it-for-me investments. The financial and investing platform helps you find the amount of money you need to meet your financial goals, the amount you should be investing monthly and then it does the rest for you.
There are some drawbacks to the system but if you want a truly hands-off investing strategy that’s less expensive than a traditional financial advisor then Betterment is for you.
Why should you want a hands-off approach to investing?
Just ask the average investor that earned just 2.6% annually over the 10 years through 2013 according to research firm DALBAR. Bad investing behaviors like panic-selling and buying expensive stocks mean most investors underperform the market and miss their goals.
Using a stress-free strategy with a robo-advisor may just be the solution.
Betterment has stepped in as a good in-between for those that cannot afford or don’t want a financial advisor but also do not want the stress of managing their own investments. Even for those that don’t mind picking stocks and using discount online investing platforms, there are some good reasons to check out Betterment to avoid bad investing behaviors that lead to high fees and missed goals.
While Betterment has increased its selection of exchange traded funds (ETFs) to include international and emerging market investing, it still doesn’t make commodities or real estate funds available. The lack of commodity funds may not be a big deal but the lack of REITs is a big miss and I hope they add some funds for the asset class soon.
Overall, Betterment is a great financial tool for investors that want a hands-off investing approach or just don’t have the time to learn about investing. It will literally do everything for you and you’ll have a much better shot at meeting your investing goals than most investors.
Editor's Update: I've recently switched from Betterment to another robo-investing platform called Wealthsimple. Wealthsimple is offering the same quality, stress-free investing you get on Betterment but also some great bonuses like a year's free management and bonus cash.
All the detail on robo-investing in this article applies to Wealthsimple as well. I published a Wealthsimple review if you want a closer look.
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What is Betterment Investing?
I started investing on Betterment after learning about the investing platform last year at the financial bloggers conference in Charlotte. I was impressed at the level of education that was built into the site and the low fees for a robo-advisor investing website.
Betterment is the complete package for meeting your financial goals. It starts by helping you to figure out how much you need in retirement; collecting info about your current savings, age, spending and financial goals. It then works backwards from the money you need in the future to work out an investing plan.
This investing plan is based on a concept called Modern Portfolio Theory which is really only interesting for us finance nerds so I’ll spare you the details.
The idea is that, for the level of return you need, there is a perfect set of investments that gives you the right amount of risk but is also diversified so not all your investments are tumbling with the next market crash.
MPT is nothing new and you would get the same thing from most financial advisors…if you could afford them. Fee-only advisors are notoriously ‘busy’ when anyone with less than $250,000 calls and commission-based advisors just want to sell you the next hot stock to get you trading and running up fees.
The Betterment investing platform automates the process so everyone has access to professional-level advisor services.
Once you’ve found the amount you need and set up for a monthly deposit from your bank account, Betterment takes over and does the rest. Yeah, it kinda sucks that at least monthly deposits are required but you should be doing this anyway. Too many people set up a great investing plan but then fail in consistent deposits and end up never meeting their goals.
Betterment is like your financial mother…nagging you with, “have you been putting money towards retirement?” Ok, so it won’t nag you but it does require the automatic deposits.
Choosing a robo-advisor can be frustrating because the fees and features are often similar. It's usually the little differences that make a particular platform best for your needs. It's helpful to have a robo-advisor comparison chart to see everything side-by-side.
Anyway, Betterment then takes all your information and invests your money in a group of exchange traded funds. These are groups of stocks, sometimes hundreds of stocks, all around a theme like large-companies or emerging market companies. The investing platform separates your investment between stocks and bonds and in different funds within each asset class.
Betterment regularly rebalances your investments, meaning it buys less of the funds that have become a bigger part of your investments and buys more of the ones that have lagged behind. This is the best way to ‘buy-low and sell-high’ even though you aren’t doing any selling.
Rebalancing keeps your investments on track to meet your financial goals. Best yet, Betterment does this all for free!
Is Betterment Really Hands-Off Investing?
Getting started on Betterment takes all of ten minutes to answer the questions around your finances and link your checking account. The platform will show you a graphic of your current balance and the likelihood that you will meet your financial goals in the future depending on how much you have in stocks and bonds.
Betterment then selects the investment funds to meet your investing goals. Whenever you deposit money, Betterment automatically spreads it out across your investments. Any dividends you receive are also automatically reinvested.
If one investment fund becomes much larger or smaller than the target percentage, Betterment will rebalance so you stay on track.
Besides being a completely hands-off investing site, one of the biggest advantages of Betterment is that all your investing is free. You pay no fees when Betterment buys or sells funds in your portfolio. Rebalancing or dividend reinvestment costs nothing as well.
The only fees you pay are from 0.35% to 0.15% to Betterment and the management fees on the individual funds. Since Betterment invests mostly in Vanguard funds, the least expensive funds in the industry, your total expenses stay extremely low.
You can set up just about every type of retirement account (IRA, Roth, SEP) as well as trusts and regular investing accounts on Betterment. While I would generally recommend the IRA account for tax advantages, Betterment offers some great tax advantages for regular investing accounts.
Betterment Investing Funds for Stocks and Bonds
Betterment invests your money in up to 13 different funds, mostly from Vanguard but with a few iShares funds. These pretty well cover the range of different types of stocks and bonds.
Betterment Stock Funds
Vanguard U.S. Total Stock Market
Vanguard U.S. Large-Cap Value
Vanguard U.S. Mid-Cap Value
Vanguard U.S. Small-Cap Value
Vanguard FTSE Developed Market
Vanguard FTSE Emerging Index
Betterment Bond Funds
iShares Short-Term Treasury Bond
Vanguard Short-Term Inflation-Protected Treasury Bond
Vanguard U.S. Total Bond Market
iShares National AMT-Free Muni Bond
iShares Corporate Bond
Vanguard Total International Bond
Vanguard Emerging Markets Government Bond
Investing on Betterment means you accept the system’s investing style which is skewed to value-investing. You’ll get overall stock market exposure with the total stock fund but three of the six stock funds focus on value investing so you’ll end up being over-weighted in that strategy. That’s not necessarily a bad thing if you believe value stocks are the way to go.
Betterment Fees and Features
Betterment fees are much lower than a traditional financial advisor but higher than the do-it-yourself alternative on an online investing platform. Accounts under $10,000 pay 0.35% a year while accounts above $10k but under $100k pay 0.25% annually. Grow your investments above $100k and you pay just 0.15% per year.
This is much lower than the typical 1% charged by an advisor but still higher than other online investing sites. Paying 0.25% annually on a $50,000 account would mean $125 in fees. That’s between 12 and 25 trades on most online investing sites, more than you would make on a similar investing strategy.
Using Betterment means you never have to worry about managing your investments. You just make your monthly deposits and wait to reach your goals. That kind of service is worth a little extra in fees.
Another great feature of Betterment is automatic tax-loss harvesting. Betterment will manage your investments each year to save you as much as possible on taxes. It does this by selling funds that have lost money to take the maximum $3,000 off your annual income. Again, this is completely free and you pay no additional fees.
Two more features called SmartDeposit and RetireGuide are nice but secondary in comparison with the other features. SmartDeposit can be set up to take money out of your bank account if it reaches a certain amount, i.e. it will deposit anything over $1,000 into your Betterment account. It’s a good feature to max out the amount of money you invest each month.
RetireGuide links all your financial accounts to give you a bigger picture for your retirement goals. It’s not necessary to start investing on Betterment but gives you a much clearer picture of your income and spending in retirement. You can even upload your Social Security statement from the SSA.gov to see exactly how much you can expect in retirement.
What I like about the Hands Off Investing Strategy on Betterment
Betterment is an investing platform you will either love…or you’ll think it’s not so great. If you want a completely hands-free investing platform and don’t want to worry about your investments, Betterment is one of the best robo-advisors available.
There’s a lot to be said for this kind of stress-free investing. You’ve spent years learning your own job, why should you have to learn investing as well? Do what you do best and let Betterment worry about your financial goals.
- No transaction or rebalancing fees
- Completely hands-off investing
- Free tax-loss Harvesting
- Vanguard funds offer the lowest expense in the industry
What I don’t like about Betterment's Hands-Off Approach to Investing
If you don’t mind spending a little time doing your own investing, Betterment is nothing special. The fee is higher than you are going to pay on a discount investing site…provided you can keep from buying and selling too often.
The funds leave a lot to be desired including lack of commodities and REITs and the investing strategy is heavily-skewed to value stocks and international investing.
- Investing style skewed to value and international stocks
- No investment in commodities or real estate
- The overall list of funds is pretty limited and leaves out many strategies
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If you are like four out of five Americans that doesn’t want to worry about meeting your investing goals, Betterment investing could very well be the perfect solution. For someone like myself that loves to follow the market and invest…not so much, but Betterment offers one of the few truly hands-off investing platforms available. You’ll get professional-level investing service at discount online prices. Click on the link above to check out the Betterment investing site.
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