One of the things I’ve learned in the years I have been writing this blog is just how many people there are whose eyes begin to glaze over at the mere mention of investing.
They know it is important but their mind just shuts down when the topic comes up. They have better things to think about, to do. Curing diseases, negotiating world peace, building bridges, teaching our children, patrolling the streets, raising their families and any number of other engaging activities that better fit their inclinations.
The problem is, of course, that money is key to surviving and thriving in our complex world.
Typically, these people turn to financial advisors and in truth the right advisor can be a sound solution. But not often. The problem is good, skilled and honest advisors are thin on the ground and finding the right one is often more work and risk than just learning this stuff yourself. But the harsh truth is, frequently that learning is just not gonna happen.
I can relate. Many are the subjects that cause my own eyes to glaze, and I just want to tell somebody this is the outcome and say, “Make it so!”
Now, with a company called Betterment, we have exactly that…
I first came across these guys at FinCon; these guys being Jon Stein the Founder and CEO and Katherine Buck, Community Manager.
Over that long weekend we had several conversations that piqued my interest and several more by Skype and email these past couple of months. Plus I’ve been poring over their website and discussing them with other financial folks I know and whose opinions I respect.
A. Your money is secure. This was my biggest issue and we spent a lot of time discussing it. More time, I gather, than they had been asked to spend before. Once I was satisfied, I asked Jon to put it into simple language and in his own words:
- Betterment is an investment manager. We advise customers how to reach their goals through a predetermined portfolio of ETFs and then purchase those shares for our customers based on their final allocation setting, which they choose. We guide customers, but they finalize the stock /bond mix.
- Betterment maintains books and records of our customers’ accounts, and the clearing firm we work with keeps records of the same.
- We tell our customers what they are invested in—customers own these securities. If Betterment were to fail for any reason, customers would receive shares of the ETFs they own in-kind through SIPC insurance.
B. They understand and use the concept of index investing.
C. Your money is invested in low-cost Vanguard or iShares index funds, and I like the funds they’ve chosen.
D. Your money gets invested more broadly and in more funds than I discuss in my post Portfolio Ideas to Build and Keep Your Wealth. While the funds in that post get the job done, for the sake of simplicity I limited the number used. Adding more just doesn’t add enough value for the effort. But, with the effort seamlessly taken on by Betterment, a few more provides for a bit of useful fine tuning.
E. They create stock/bond portfolios based on your goals and then maintain that allocation for you automatically. You can accept their suggested allocation or customize it to your preference. Their software will then predict your odds of success.
F. You can create multiple accounts for multiple goals.
G. Once set they also automatically adjust the allocation in each account over time and you can easily change that allocation if you choose.
H. They can handle both your taxable and IRA/Roth IRA accounts.
I. Their costs are simple, low and clearly stated on their site. Under 10k = .35%, 10-100k = .25% and over 100k = .15%. Plus, of course, the expense ratio of the underlying funds.
J. They have a cool and engaging website that allows you to track your investments and might just kindle an interest in this investing stuff.
For example, here’s a chart showing how an allocation might change for a goal with a 25 year time frame. The closer to the time the money will be used, the more conservative the allocation. The various stock funds are represented in shades of green and the bond funds in shades of blue.
One of the things that most intrigues me is that idea of easily having multiple accounts each targeted at different goals and with the different allocations those goals require.
For instance, one of the questions I frequently get here on the blog is what to do with money that is going to be spent within the next five years or so. Say, money being saved for a house down payment or a vacation or to buy a car.
As I stress throughout my Stock Series, successful investing in stocks requires a long-term view and their short-term volatility makes them unsuitable for short-term goals.
The ideal solution would be a fairly complex blend of stock and bond funds balancing out the risk and adjusting as the time frame closes. I’ve never recommended this approach because implementing it was simply too cumbersome. But with Betterment this becomes easy-peasy.
Let’s suppose you plan to buy a car five years from now. Reading this blog you know paying cash is the way to go. Better to make the payments to yourself and buy when you have the money in hand.
Using Betterment you set up an account, make an initial deposit and tell it you are going to need, say, $10,000 in five years. Not only will it then sort out the most effective allocation and adjust it over time, it will tell you how much you’ll need to save/add to it each month to get there.
Of course, I’m not going to recommend this to you without trying it myself, and that example above is exactly how I’m going to use it. My initial deposit was $2500 plus the $25 they gave me for opening the account. So starting with $2525 and based on that five-year time horizon, I’ve set up the automatic monthly deposits of $100 Betterment has told me will get me to that 10k. I also chose to accept the 65%/35% stock/bond allocation they suggested. Depending on how my portfolio performs, they will also offer suggestions over time. Pretty slick.
But what is really slick is then you can begin to play. Plug in other numbers and do a little “what if” analysis. What if I funded it with an extra $1000? What if I deposited $200, $300, $500 or any other number per month? What if I let the money ride for 20 years? The software instantly shows you where you might end up.
Might not sound like a big deal, but it is surprisingly intoxicating. And very motivating. Just the thing if you are trying to inspire your children and introduce them to the magic of compounding. Or yourself.
If you want to give this a try, here’s how and what you can expect:
First, click here: Betterment
If you then follow the steps and open an account two things with happen:
- This blog will earn a commission. (Not that you should do it for this reason, but in the interest of full disclosure.)
- Betterment will waive their fees on your new account for 3 to 6 months depending on how much you start with.
Signing up takes about ten tedious minutes, but then I find form-filling-out especially tedious. Still as such things go, it wasn’t too bad and I never threw up my hands in disgust or quit in despair. No small thing given my temperament. Heh.
Next they’ll send you a couple of emails verifying some stuff.
- You’ll link to your bank.
- They’ll make a small deposit in your bank account based on the info you gave them to verify that link works.
- Once linked you can with a click move money into your Betterment account and set up automatic investments if you care to.
- Once the money arrives in your account, Betterment sends you an email letting you know. Personally, I really liked this feature as it saved me having to log on to check.
- Even more importantly you can, with a click, access your funds in Betterment. Not that us long-term investors want to do much of that. But it is always good to know you can get to your dough anytime and without fuss.
You’re good to go.
Recommending these guys is a big step for a hard-core Vanguard index investor like me. It might have you wondering just how and where I see them fitting in. They, of course, would say they can and should handle everything short of your 401k/403b/TSP plans. But there are fees involved here and, modest as they are, you don’t want to pay fees unless the value added is worth the price.
I see it this way:
If you have/can read through and understand the Stock Series here on the blog you are good to go and DIY (Do It Yourself) directly with Vanguard.
But you might do well to consider Betterment if:
1. You really have little or no interest in this stuff and just want a solid plan created based on your personal goals. This is the same attitude you’d bring to an advisor but with Betterment you get the plan and results with less cost and risk.
2. You want to be invested now, but are still too early in the learning curve to DIY.
3. You are personally comfortable with investing but you also have this responsibility for your child or parent and see this as an easier, more effective tool for them. This is why I suggested Betterment to Colin in this post.
4. You are looking for an effective and efficient method of saving for short-term goals. This is how I’ll personally be using them.
5. You want to leave a financially disinterested spouse an easier way to deal with money than the DIY approach you’re comfortable with.
6. The time comes when you are no longer interested, willing or able to monitor your investments.
There could be many reasons for #6, but the one that as a geezer I’m personally starting to think about these days is aging. The harsh truth is that at some point, if we live long enough, our cognitive abilities begin to wane. Happens to all of us. And when it does, you don’t want to be hands on with your investments. Far too easy to be tempted into some wild scheme by those who specifically prey on the elderly or simply by our own delusions. When that time comes, .15% is a very small price to pay.
One final thing. If you’re like me you also like to know the people you’re dealing with.
As I said in my second to last post, I like smart people. And when it come to investing I like people who understand the key basics that lead to financial success. Jon fits the profile.
Since I can’t introduce him to you personally, this 2.5 minute video will help. In it Jon walks you thru a quick overview of the Betterment approach and how it works. He also talks a bit about how he runs the company. My guess is, like me, you’ll be impressed on both scores. But more importantly you’ll get a sense of the guy behind the company.
If I’d known him sooner I would have been an early backer. Were I younger, I’d be sending him a resume.
Addendum #1: A note from Betterment to my International Readers…
“Betterment currently only operates in the United States, and for regulatory reasons cannot accept customers residing outside the country. A customer must have a permanent U.S. address, a U.S. Social Security Number, and a checking account from a U.S. bank.”
But the good news is, I’ve asked them personally about this and as they grow expanding internationally is definitely in the plans. I’ll keep you posted.
As of 2017, Betterment has changed its fee structure to a flat .25%