Traditionally, simple investing meant investing in a index funds, securities that track the entire stock market or large sectors of it in a single low-cost investment. But even index investing isn’t that simple. There are thousands of index funds to choose from and index investors paying attention to their asset allocation strategy will likely end up with more than one or two funds that they then must monitor and rebalance periodically.
Betterment is an investing platform that takes index investing and actually makes it dead simple. When Betterment first launched, I liked the idea enough to open an account, to which I still contribute. Betterment is an ideal way to invest for anybody who doesn’t want to worry about picking stocks or mutual funds.
Betterment makes rolling over an old 401(k) as easy as possible, too. While almost every other financial services company requires long phone calls and snail mail to rollover your 401(k) to an IRA, Betterment claims to have the only 60 second, completely paperless rollover.
How Betterment works
Betterment bills itself as the “simplest, smartest way to invest.” We’ll leave “smartest” up for debate, but I don’t see how investing gets much simpler.
Rather than creating an online brokerage account and facing tens of thousands of investment choices, Betterment asks just one question: How much risk do you want in your portfolio?
Betterment then automatically invests your money into index funds, dividing your money between baskets of stocks and bonds based upon your risk tolerance.
For newbie investors, stocks, or equities, have the greatest chance of long-term appreciation, but are risky. The bond market, by contrast, offers more modest returns but less volatility. Smart investors create a portfolio of both stocks and bonds according to their desired risk tolerance. In general, the longer you have to invest before you need your money back, the more risk you can handle.
If that starts to get confusing, don’t worry, Betterment handles it all for you. When you create an account, Betterment also asks about your investment goals and recommends a risk profile. If you’re saving for a car in three years, you’ll get a lower recommended risk level than if you’re starting an IRA that you won’t need for 30 years.
Here’s an example account dashboard, so you can see how truly simple it really is:
What Betterment costs
Unlike brokerages which charge commissions every time you buy or sell a stock, Betterment assesses an annual fee—a percentage of your total portfolio.
You can avoid the $3 a month fee by setting up an auto-deposit of at least $100 a month. Which is fine because you should probably be investing automatically anyways.
Betterment’s fees seem fair, especially for new investors. Consider the fact that Betterment’s fee on a $5,000 portfolio is just $17.50 annually, and the percentage rate drops the more you have invested.
In addition to making it easy to invest your mid-term savings, Betterment also makes it simple to save for retirement. They offer some great tools to help you invest and plan for retirement. If you have an old 401(k) from a former job, or an IRA you’d like to move over to Betterment, they have a quick and easy walkthrough that will allow you to painlessly move over your outside investments.
They also offer tools and calculators that will allow you to see predictions of what your retirement might look like, dollar wise.
“60 second” 401(k) rollovers
Last but not least, Betterment makes rolling over your 401(k) to an IRA as painless as possible. Rather than filling out and mailing paper forms, Betterment gathers the require information using intuitive online questionnaires. In many cases, Betterment will handle the rollover process for you, transferring assets from your old 401(k) to your new Betterment rollover.
Why I like it
Studies show over and over again how miserable humans are at beating market average returns over the really long run. (A lot of people can beat the markets for a couple of years, a few lucky ones do it for five or ten years). Most investors have no business monkeying around with individual stocks and frequent trades. The vast majority of investors should be focusing on finding money to invest and investing it, not worrying about individual investments.
Secondly, Betterment may be an answer to this common question I receive:
Savings account interest rates suck, how can I earn a better return on my mid-term savings?
Although I think you should always have some cash for emergencies that is completely liquid in an FDIC insured savings account (no matter how paltry the interest rate), if you’re really hung up on returns, you might create a conservative Betterment portfolio and see if you can do better than your bank account.
What do you think? Do you like what Betterment’s offering? Would you try it? Do you think it’s too simple? Share your thoughts in a comment.