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If you’ve stopped by my site before, you probably know that I am a proud supporter and practitioner of passive investing strategies. In fact, in January of this year, I started The Carnival of Passive Investing just for the purpose of spreading the word about this very effective style of investing.
Essentially, passive investing involves the use of different types of index ETFs and mutual funds to obtain a target asset allocation based upon your personal tolerance for risk. By applying this simple passive investing approach, we are able to actually outperform 70-80% of investing “professionals.”
So, needless to say that I am a big supporter of any new products or services that makes it easier for individual investors to get off of the foolish active investing (individual stock investing) track and in to the proven world of passive investing.
One of these services facilitating passive investing that I was recently exposed to is Betterment.com.
What Does Betterment.com Offer?
Tools to Help You Decide Your Asset Allocation
What Does Your Money Get Invested in With Betterment?
- 20% VTI: Vanguard Total Stock Market
- 20% IVE: iShares S&P 500 Value Index
- 20% IWD: iShares S&P 1000 Value Index
- 15% IWN: iShares Russell 2000 Value Index
- 15% IWS: iShares Russell Midcap Value Index
- 10% DIA: DIAMONDS Trust Series 1
- 50% TIP: iShares Barclays TIPS Bond Fund
- 50% SHY: iShares Barclays 1-3 Year Treasury Bond Fund
What Fees Will You Pay? + Other Account Details
The fee structure at Betterment is in my mind, a very good deal. There are no minimum account balances (I started my account with $10), no transaction fees, and you can withdraw your money at any time. In addition, you can change your asset allocation a maximum of once per day and your portfolio is rebalanced once per quarter back to your asset allocation targets. Not bad right?!
For all of this, you pay a fixed expense ratio/fee of 0.3-0.9%, based on what amount of money you have invested. Since most actively managed funds charge far more than 1% to under perform the market, this is quite good!
Currently, Betterment is only offering individual, taxable investment accounts. I would like to see them add Traditional and Roth IRA options at some point, and the VP of Marketing for Betterment just informed me that they will be on the way shortly!
Another really cool feature of Betterment is that they offer a simulator that will allow you to predict the value of your portfolio a set number of years in the future based on various asset allocation levels. I’ve pasted a screenshot of this tool below.
How Does Betterment Stack Up Against the Competition?
- Target Retirement Date Mutual Funds
- These funds are similar to Betterment in that they place an investor’s money in a mix of equity and fixed income mutual funds.
- An example of this category of funds are the Target Retirement Funds from Vanguard.
- Vanguard’s expenses are much lower than Betterment’s (0.1-0.2% vs. 0.3-0.9%). However, they do require a $1000 minimum initial account balance, and you don’t have complete control over what asset allocation levels the funds uses (Vanguard decides for you).
- One good thing though about these Target Date Retirement Funds is that you can invest them in an IRA with Vanguard.
- So, in this case, Betterment has higher fees, but MUCH more flexibility.
- Target Retirement Date ETFs
- An interesting new type of ETF that has come out is the ETF version of the target retirement funds discussed above.
- The only provider of these that I could find was iShares. You can view an example of one of these target date ETFs by clicking here.
- These ETFs offer lower expenses than Betterment (around 0.3%) and slightly more flexibility in withdrawing your money. However, the asset allocation level is still dictated to you by the folks at iShares and you will most likely pay commissions on each trade you make.
What’s the Bottom Line?
“So, what’s the bottom line, Jacob? After reading this Betterment review, how do I decide if Betterment is right for me?”
As you might have guessed, this comes down to your personal preference of how involved you want to be in your investing strategy of any money outside of your retirement accounts (because remember, Betterment doesn’t yet have IRAs).
Betterment is not right for you if you enjoy selecting which ETFs or index mutual funds to invest in and rebalancing back to your asset allocation targets throughout the year.
Betterment is right for you if you want a very simple, low-cost way to invest the correct way by making one asset allocation decision and then just watching your money grow.
How about you all? Have you used Betterment? Are you a fan of these single solution asset allocation investments?
Share your experiences by commenting below!