Over the past 8 months, I have become more and more interested in investing. Not only did I give the topic of investing a more prominent position on this site (by having at least 1 post per week on the topic), but I have also been doing a lot of research on the topic. When I started investing, I didn’t know that much about investing. In the beginning, I didn’t even know the difference between a stock and ETF. Who does when they are first starting out, right?
I often think that this uncertainty is the very thing that keeps young adults from investing when they are young. They feel overwhelmed when they start looking at investing and immediately throw in the towel. They rationalize their decision by saying they have plenty of time to invest for retirement and ultimately they put it off another few years. This is one of the biggest mistakes any investor can make.
Instead of putting of your investments as a young adult, you should start putting money away. My wife and I were hesitant at first because we knew we were putting our money at risk, but it got easier with time. Investing doesn’t have to be as difficult as it is often portrayed as. With the development of technology and new types of funds (like indexes or ETFs), it’s entirely possible to invest your money properly without knowing how to select an individual stock. In fact, I was lately introduced to a new investment broker that is making it even easier on investors.
Betterment: A Brief Summary
Betterment is an investment broker. For those unfamiliar with that that means, it is a place where you can invest in the stock market. It isn’t like any other broker, like Fidelity or Vanguard. Instead, it uses advanced technology to help you automate your investments.
They put a huge emphasis on allocation. Normally, when people talk about allocation or diversification in their investments, they talk about a tedious, time-consuming task to make sure they have enough of their money in different types of investments. With Betterment, you can literally re-allocate your investments with a push of a button. Actually, it’s more of a dial. You can click and drag one way or another to adjust your allocation. If you want to invest aggressively, you move it one way. If you want to be more conservative, move it the other way. Below is a screenshot of how easy it really is. This is one of the most attractive features to Betterment.
Not only is Betterment easy to use, but it is also cost effective. They now have an annual fee of .15%-.35% depending on your balance. Based on what you are getting with this low fee, it is a great way to invest. For example, my wife and I are using target retirement funds in our Roth IRA’s (not with Betterment). We had set them up prior to me learning of Betterment. We are currently paying an expense ratio of about .7% per year. It’s not the lowest management fee, but it is easy to use. While I don’t want to go through the hassle of moving my IRA to another investment broker, if I had to do it all over again, I’d think twice about where I invested my money. In fact, I’m thinking seriously about rolling over an old 403(b) into an IRA with Betterment (more on that later). Betterment offers a competitive option for investing your money. Betterment can offer these lower rates because they are a tech-based company. They don’t have to cover the expenses that brick and mortar brokerages have.
Benefits of Investing with Betterment
Investing with Betterment has many advantages:
- Simple and Easy Way to Invest – You don’t have to sweat over which investments you should buy. All you have to do is set the allocation of stocks to bonds.
- Fast and Easy Way to Diversify Investments – Betterment’s use of technology is one of their biggest assets. It lets investors change their entire portfolio with a click of a button.
- Built-In Technology to Set Personal Goals (and track progress) – Betterment also uses previous market performance to predict future performance. You can create a goal and Betterment will continue to track your progress. This is extremely helpful because it lets you know if you need to invest more money.
- Cost-effective Way to Invest – The low annual fee and the cost of the ETFs still average less than many actively managed mutual funds.
Disadvantages of Investing with Betterment
While I’m a huge fan of the automation tools to invest, you are choosing to sacrifice some features that you would have with a more traditional brokerage.
- Lack of flexibility in types of investments – Unlike a traditional brokerage account with someone like Fidelity, you won’t be able to purchase an individual stock. All of your investments with Betterment will be in ETFs. The reason they do this is to make it easy and cost-effective for investors to move in and out of investments. It’s not necessarily a bad thing unless you really want to buy an individual stock.
- Easy to Confuse Predictions with Guarantees – This second disadvantage is more of a personal position, but the predictive element with their online tool can be misleading. In fairness, Betterment is clear to emphasize that these are not guaranteed returns, but I can’t help but think that I will have this projected amount if I meet the contribution requirements. Investors with Betterment need to remember that nothing is guaranteed.
Betterment: Who Should Invest There?
If you are looking to start investing, Betterment is a great place to start. It is just so easy! It’s true that you can find other brokerages with lower fees to invest your money, but that will require a lot more time and energy managing your portfolio. Based on the things that I have already mentioned, there are a number of people who should invest with Betterment:
- An inexperienced investor who does not know enough to make wise investment decisions.
- Someone who does not know how to manually diversify a portfolio.
- An investor who is too busy to actively manage their portfolio.
- An investor who prefers to keep things simple.
- An entrepreneur who knows their time is worth more to them managing a business than trying to actively manage their own portfolio.
- Someone who needs simplicity to start investing.