Monday, January 19, 2015

What's the Deal With Betterment?

I've been asked a few times "What exactly is Betterment?" In this article, I plan to go over what you can expect when you open a Betterment account. Betterment offers Traditional IRAs, Roth IRAs, Trust Funds, and taxable retirement accounts. I'll go over setting up a bank account, allocations, funding, and more!

Put simply, Betterment is a website where you can deposit money and have it invested for you on your behalf. You control how risky you want your investments to be, but other than that it's completely hands off. For a more in-depth discussion of the technologies behind Betterment and similar tools, see my article "All About Automated Investing"

The first thing you'll see when you open up Betterment is your account overview. Here, you can see how much you've invested, how much you've earned, fees, and the average return. This view is an average of your Betterment "Goals". Each goal can have a separate stock/bond allocation. For example, you can have one goal for an IRA, and another for an emergency fund.

As you can see, my account is underperforming right now. That's fine. My money has only been in the account for a little under a month, and the market returns 7% on average (more or less). Since I don't plan on using my Betterment money for years to come I'm not worried about this at all.

Which brings me to my next point! Betterment provides awesome graphs to visualize the magic of compounding interest. Below is a picture of one of my goals and the associated graph. Once you open an account you can adjust this feature as many times as you want. If you're curious you can setup an account in just a few minutes. If you use the link at the bottom of the article you'll get 30 days free!

This is the screen you see once you click on one of your goals. On the top you can adjust your target amount, auto deposit, one time deposits, timeline, and allocations. This is a very powerful page and will probably be the one you spend the most time on when you're in betterment. As the graph shows, if I contribute $25 a month for 20 years, I will have $15,166 in my account if the market does average. That's the power of compound interest.

To compare to a savings account with the same deposit rate that earns 1% a year will only have $6,770 at the end of 20 years. This is almost the same as if the market preformed poorly for 20 years. Betterment says that there is only a 2.5% chance of that performance. It is just as likely that your Betterment account will have $35,745 after 20 years. This seems more than worth it to me. To get the full experience you can open an account and play with the numbers for free. Betterment only charges fees if you deposit money.

If you like more detail or just want to see where your money's going, Betterment's got you covered.

On the "Current Holdings" page, Betterment breaks down where all of your money is invested. It even gives you the ticker symbol so you can lookup performance for an individual fund.

This page also shows you the percent your portfolio has "drifted" from the allocation you set. Betterment automatically rebalances your portfolio if you get above 5% drift. Drift happens when certain stocks outperform/underperform the rest of the portfolio. This throws off your predetermined allocation and can change returns.

One of the great things about Betterment is that they will take your deposits and automatically offset the drift, reducing the likelihood of you paying taxes. You'll never have to think about it again.

Lastly, we come to fees. All of this doesn't come for free, although it is heading in that direction. Don't let them scare you, these fees are much cheaper than what you would be charged elsewhere. With no cost per trade, Betterment removes the typical $7 or so transaction fee that almost every other institution charges for buying or selling. The added expense ratio is super low too, as funds average 0.50%. For those that don't know, an expense ratio is the percentage a fund manager or advisor will take, and there is almost no way around this.

Currently, Betterment charges a maintenance fee of 0.35% for accounts under $10,000, 0.25% for accounts under $100,000 and $0.15 for accounts over $100,000. More detail on their fees can be found on their pricing page. Accounts under $10,000 must deposit at least $100 per month or they will be charged $3 monthly, instead of 0.35%. This isn't all that much, and if you can't afford it this may not be your best option. You could pay down debtbuild an emergency fund, or invest in other brokerages. I will be writing articles on all of these topics in the near future.

So what are you waiting for? It takes minutes to setup and once you do, your money is working for you! You can open an account without penalty, click around see if you like it before funding. There's no commitment if you're just opening an account without depositing money, which is amazing. That's what I did.

Betterment is one of the first automated investors to hit the scene. They are also, in my opinion, the one with the best web interface. Their site has great graphs and descriptions of everything you'd have questions about. Plus if you sign up using my link, you get 30 days free! (If you decide to invest with them) Sign up for Betterment now!

If you already setup an account and are having trouble, see my article "All About Automated Investing" or contact me! I will be happy to help.

Did I miss anything? Do you still have questions? Let me know in the comments below!

I have not been paid by Betterment to write this article, I'm just a satisfied customer.

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