Investing Made Simple
In early 2011, I discovered a new investment service called Betterment. It was described as "investing made simple," by diversifying across stocks and bonds. One deposits money, chooses an allocation of stocks vs. bonds (e.g. 30% stocks, 70% bonds), and that's it. As a guy who has always managed his investment portfolio manually--picking and choosing stocks, bonds, funds individually--I wasn't sure I would like this approach, but I am a glad I gave it a try.
In this article I share my experience with the service now that I've been a Betterment.com
What I Like
Simplicity - Once an account is active, the user simply sets a slider anywhere from 0% to 100%. This represents the percent of your funds that will be invested in stocks. The remainder will sit in bond funds. Dividends are automatically reinvested in your account on your behalf and if your allocation of funds starts to deviate from your desired allocation due to market fluctuations, Betterment automatically readjusts to fit your target allocation. The allocation slider can be adjusted at any time. Aside from that simple step of choosing an allocation (and adjusting it when you change your mind), there isn't much an account holder needs to do. Betterment really is "investing made simple."
All that a Betterment investor needs to know is that the stock basket is riskier, but has historically provided higher returns, and the bonds basket is less risky, with lower historical returns. An aggressive investor with a long-term outlook might choose to allocate most of his money in the stock basket, while a more conservative investor will probably be more heavily weighted with bonds. Betterment provides some advice and tools on how to choose that allocation based on individual goals and risk tolerance.
Charts and Graphs - The charts and graphs that Betterment provides are fantastic. My favorite is one that allows you to see your investment percentage gains over time, compared head-to-head with how you would have done with other allocation scenarios (such as 100% stocks or 100% bonds).
iPhone App - Betterment did a great job with their iPhone app. It allows users to do pretty much everything that can be done on the website, including allocation changes and balance checking. The ease of use is fantastic and my account is never out of reach, as long as I have my phone.
What Could be Better
Deposits are Not Immediate - It seems to take three days for money transferred into Betterment to become available for use. This seems to be consistent with all financial institutions, but since everything is electronic, I wish it was all instant.
Fees - Betterment's approach to fees is actually very good, but out of principle I cannot classify fees under the "what I like" heading. Betterment charges a fee of 0.3% to 0.9% annually, depending on the account balance (the more money in the account, the lower the fee percentage), and that's it for fees. The good news is that this fee structure is transparent and easy to understand. There is no nickel and diming like commission fees or minimum balance charges. From my experience with funds, an annual fee under 1% is a competitive rate, so I can't complain too much.
Behind the scenes, there are ETF funds that make up the "stocks basket" and the "bonds basket." The nice thing about Betterment is that users don't have to bother with these details, but if you are interested, here are some of the specifics:
The funds that make up Betterment's stock basket include various US and international broad stock market ETFs, including funds like VTI (Vanguard Total Stock Market Index) and IVE (iShares S&P 500 Value Index). Check Betterment.com for the full list.
The funds that make up Betterment's bond basket currently include two ETFs: TIP (iShares Barclays TIPS Bond Fund) and SHY (iShares Barclays 1-3 Year Treasury Bond Fund).
The Bottom Line
I hope you enjoyed this Betterment.com