After years of putting money into trading stocks in a brokerage account, it was finally time to admit that it just wasn’t working. I simply wasn’t getting ahead.
It looks stupid when you write it down, but here’s how I was investing:
- Every month I would put money into my eTrade account.
- I would buy stocks based on ‘stock tips’ (a pox on you Jim Cramer), or I would bolster existing positions based on the fact that they were down which meant that they had to go up at some point.
- I would sell stocks when it ‘felt right’, and I would spend ten bucks in trading fees every time I made a decision.
- I was in my eTrade account waaaay too often, investing my monthly deposits and emotionally jumping in and out of positions at exactly the wrong time, seemingly every time.
At the end of each year I would sit down and look at my net worth, and it wasn’t really getting anywhere. I was spending a bunch of time and hundreds or thousands of dollars in trading fees every year, and I didn’t beat the market on average. At some point, you just have to admit to yourself ‘I’m not very good at this’, and you have to try something different.
I concluded that I needed the following:
- I needed something simple.
- I needed something automated.
- I needed something that forced me into best practices.
- I needed to be removed from all of the emotional decisions.
After countless hours of internet research (maybe ten minutes on topic, the rest looking at cat pictures), I came up with two options – Betterment and Wealthfront. For my initial foray, I chose Betterment.
What is Betterment?
Here’s how it works. You sign up, you answer a couple of questions about your risk tolerance, you agree to deposit some amount from your checking account every month, and then they automatically invest your money in a diversified mix of stocks and bonds based on modern portfolio theory.
That’s it. That’s all you do. If you want to take money out, you take money out. If you want to add more money, you add more money. Everything is done for you automatically – they automatically invest the money you add every month, they automatically re-invest any dividends that you receive, they give you everything that you need for your taxes, etc.
How much does Betterment cost?
The annual fee is between 0.15% and 0.35%. To put that in perspective, a $5,000 portfolio would cost $17.50 per year (and the fee percentage decreases at the $10K and $100K levels). So, that’s around 4 lattes per year to be sure that your 5 grand is being managed as logically as possible using modern portfolio theory. Yes, there is an argument that you could do all of this without Betterment and save the fees, but that takes time, conscious thought and discipline. I don’t have any of these things. To me, the fees are worth it.
What decisions do I have to make?
Decision #1 – how much will I invest?
You should aim for at least $100 per month to get a decent break on fees. It’s also possible to reduce fees further and remove the requirement for regular deposits with an initial investment of $10K.
Decision #2 – how much risk am I cool with?
Betterment invest in a mix of stocks and bonds on your behalf, with the exact percentage of each dictated by your level of risk tolerance. The basic model is this – the higher your risk tolerance, the more stocks you should have in your portfolio. There’s lots of argument about the correct proportion of stocks to bonds that you should have in your portfolio. The most common guidance that you see is ’100 minus your age’ to get the correct proportion for stocks, which would mean that you would have 70% stocks at age 30. My risk tolerance is much higher than most, so I went for an aggressive 80/20 mix.
Decision #3 – WTF am I investing for anyway?
They ask you to set a goal – it doesn’t really do anything except provide some pretty tracking graphs, so give it as much or as little thought as you like. You can allocate money towards a specific goal, and track progress towards that goal. I have absolutely no idea what I want to do with my life, so in this example I’m buying an orbital space canon in 4 years time for $35,000.
And ummmmm….that’s it!
That’s all you need to do. Sign up, fund the account, set a goal, and then reward yourself with a snack! You don’t even need to ever look at it again – even if your account is going down in value, you’re following best practices and you won’t save yourself with a course correction, so just leave it alone. Essentially, money will simply disappear into this black hole once a month, and it’s your job to simply forget that this money ever existed until you really need it.
- If the value of your account goes up, you can look at it and feel like a boss.Modern portfolio theory FTW!
- If the value of your account goes down, that means that you are dollar cost averaging with your new investments every month. You’re still a boss!
What does it look like when I login?
When you login to check on your expanding financial empire, it looks like this. You can see your balance, you can see what percentages you have allocated in stocks and bonds, you can see how much you have earned, and you can see how much money you’re putting in every month.
What does Betterment invest your money in?
The underlying stocks and bonds that they buy are a small number (eight to be exact) of well known ETFs (Exchange Traded Funds), which in turn are themselves invested in diversified holdings of individual stocks and bonds. The theory is that you’re invested in a tiny piece of a vast range of different companies, industries, nations, etc., and that you should be reasonably well insulated from localized disasters, such as an individual company going out of business, or an individual country going into recession.
Is Betterment safe?
Depends what you mean by ‘safe’. Your portfolio is protected against crazy stuff happening (like Betterment going out of business) up to $500K by SIPC, which is the same protection that you would get from any other reputable broker. Of course, what you’re not protected against is the movements of the market, so if we had another shit-show like 2007-2008, you could take a kick in the pants in the short term. Your investments will likely track the overall market pretty well, and if the market goes south temporarily, you will go south temporarily with it.
The good news is that you’ll be extremely well diversified, so if your Betterment account really nose-dives, that can really only be because the entire world economy has nose-dived. It’s probably fair to say that if your account dropped by 80%, it would be because the outside world had entered a Mad Max style post-apocalyptic state, and you would likely have reverted back to a primitive hunter gatherer lifestyle anyway.
How do I take money out?
You can take money out or add additional money anytime you want. Your Betterment account is linked to your checking account – to withdraw money, simply type in how much you want and it gets transferred back to your checking account. You don’t have to sell anything or go through any complex process, and it doesn’t cost you anything to make a withdrawal.
What about doing my taxes?
Betterment send you a 1099-B and a 1099-DIV. Just throw them into Turbotax (or give them to your accountant) and you’re done.
What are the returns like?
It depends. It depends what the stock market does. It depends what the bond market does. It depends if you go in there and take money out or mess with your stocks/bonds allocation every time the market changes direction.
If you’re in it for the long term, Betterment themselves state that if you follow their allocation advice and don’t mess around with your account, you can expect long term returns of 7.86%. Of course, this number is complete nonsense, since nobody knows what the market is going to do in the future, but if history is any guide, this number seems realistic for the long term investor. You won’t get rich fast, but you’ll at least be making some progress.
Where Do I Find Out More?
From the Betterment website, oddly enough.