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Betterment Review: A Simple Investing Solution

Betterment is an investing platform that makes investing decisions blisteringly easy: Choose a desired mix of stocks/bonds, your goal, and you’re done.

I’m a fan of simple investing.

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 a new investing platform that takes index investing  and actually makes it simple. When Betterment launched a few years ago, the idea was so novel that I opened an account, which I still contribute to. Full disclosure: I also became an affiliate of Betterment, meaning if this concept intrigues you and you open an account, I get a few dollars in my online tip jar. If you choose to support our free content in that way, thanks!

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 what my Betterment account dashboard looks just minutes after opening an account:

Betterment provides simple investing as a great alternative to online brokers.

Note that my initial deposit hasn’t cleared yet, but I did get a $25 account-opening bonus (see below). The dashboard is showing the aggressive 90% stocks/10% bonds portfolio I selected.

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. For example, Betterment’s fee is 0.35% for portfolios less than $10,000 (a full schedule is below). This is in line with what low-cost mutual funds charge.

The catch is that you either need to set up an automatic investment of at least $100 a month or maintain a combined $10,000 account balance to avoid a $3 a month fee. (But of course, you should be automatically investing at least $100 a month anyway.)

Betterment pricing starts at 0.35% per year and drops to 0.15% per year with a $100,000 balance.

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.

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.

Free months for new accounts

Betterment offers a few months of free investing based on how much you deposit:

  • $1 – $4,999: 1 month free
  • $5,000 – $24,999: 3 months free
  • $25,000 – $99,999: 4 months free
  • $100,000 and above: 6 months free

Learn more or open a Betterment account now

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.

About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. I like the idea, but I am wondering what makes this better than a target date retirement fund, which also automatically rebalances and automatically shifts to a more conservative allocation as you near retirement.

    Betterment’s expense ratio, while in general pretty good, is still much higher than, for example, Vanguard’s target date funds (which range between 0.16% and 0.19% with just a $3,000 minimum)

  2. Anybody out there know if there are additional hidden fees: any other fees from buying/selling the stocks and bonds included in the 0.3-0.9% fee or no?

  3. More specifically, don’t all the ETFs they invest in (below) also have expense ratios? If so, are those expense ratios included in their fees or additional?

    Stocks

    * 20% Vanguard Total Stock Market (VTI)
    * 20% iShares S&P 500 Value Index (IVE)
    * 20% iShares S&P 1000 Value Index (IWD)
    * 15% iShares Russell 2000 Value Index (IWN)
    * 15% iShares Russell Midcap Value Index (IWS)
    * 10% DIAMONDS Trust Series 1 (DIA)

    Bonds

    * 50% iShares Barclays TIPS Bond Fund (TIP)
    * 50% iShares Barclays 1-3 Year Treasury Bond Fund (SHY)

    • David Weliver says:

      I suspect that you’re onto something—you’re still paying the expense ratios for the ETFs they invest in plus Betterment’s fee, which amounts to a management fee. The difference between investing in the same ETFs on your own is they handle rebalancing for you.

      • If you are at the point in your life where you are reading this blog and paying attention to your money, you don’t need someone to rebalance for you. I agree with Brian above, my wife and I started investing with Vanguard right about the time the market bottomed out, and since then my 401k at work has also been switched to them. Very happy with their products, and I am too much of a control freak to leave someone else in charge.

        • I beg to differ Adam. I am young and just starting out with stocks, but don’t have any time for asset allocation adjustments and knowledge. This is a great way for me and others to get our feet wet. Even though there are many interested, there are many whom still haven’t taken the plunge.

  4. I am wondering how easy it is to pull money out once it is invested…anybody have an idea?

    • It’s as simple as typing in the amount you want withdrawn and clicking submit. Try out the demo version and you’ll see.

  5. Nathalie P says:

    This sounds like a great idea for a newblet such as myself. I was going to try ShareBuilder first only because I am an ING Customer, but I like the laid-back style of this a lot. I haven’t invested yet, so I think this’ll be a good start.

  6. Doesn’t look like it could hurt to give it a try. I’m all about set-it and forget-it investments.

  7. So is it better to do this or invest in an IRA?

    • In general, I recommend 1.) saving an emergency fund in CASH “just in case” 2) saving for retirement via a workplace plan and/or an IRA and 3) investing for other goals.

      Since Betterment falls into #3, I would start with the IRA. If you’re contributing $5,000 to an IRA and have more to invest, that’s when it’s time to look at something like this.

      • Thank you David that’s what I was thinking but Betterment looked so cool I was tempted to forget about IRA’s haha. That may have been a newbie question but I am just a college student trying to make better financial decisions than the previous generation. Good thing I stumbled upon moneyunder30! Keep the great articles coming!

  8. Never heard of Betterment, seems like a good service though.

    I personally use Vanguard and TRP, but may also start something with them (I don’t want to have all of my money with one MF company- you never know what might happen to them)

  9. Betterment is great but don’t be fooled by the $25 bonus marketing ploy! You can’t actually withdraw it from your betterment acct to your bank acct. These bonuses are just meant to sit in your betterment acct and bump up your returns by a fraction of a cent by increasing your principal investment. However betterment is still very innovative and great! And gotta give them credit for that marketing ploy b/c that’s pretty much the only reason I invested ha!

  10. I see that this post is from May…now that it has been a few months, are you still using Betterment? I just signed up with them almost two months ago, and I have to say I am really impressed with the simplicity. I referred a bunch of friends who also seem to like it. I see it more as a savings account, and I am getting a better return than I am with my bank (although I still have some cash stashed in a traditional savings account). I also like how you can save different for different goals. I have a few goals going right now.

    • David Weliver says:

      Keith I’m still a fan so far. Of course I opened my account and put some money in right before all the market turmoil this summer which stinks, but knowing that this is about steady long-term savings that’s fine…like you, I’m looking at this as a compliment to my savings account. I’m always going to keep some money in an FDIC insured bank account that I can access anytime for emergencies, but may start putting more of my savings into Betterment because I can take advantage of long-term upside without spending time picking investments.

  11. I’m (soon to be) a first time investor with no real knowledge of this kind of thing. Betterment is attractive to me because I don’t need to go though all the research involved with picking out which companies to invest in and how to allocate my assets. I like the idea of just telling them how much risk I want to take and letting them divy it up. I’ve gone crazy over the last few weeks trying to educate myself on asset allocation and seeing the vast difference in everyone’s opinion. I think this may be a good way to just get started as David suggests. My question is this…..David you mentioned in an earlier comment that this would be something you would use as an additional investment after getting an IRA. Betterment offers both IRA’s and Roth IRA’s correct? Am I missing something?

  12. David, judging by one of the comments made, it is really easy to withdraw money from your Betterment account if you need it. What are your thoughts on using a heavily weighted bond account with Betterment in lieu of a traditional savings account? Then for mid-term savings (if your savvy enough) you could invest directly through Vanguard or whomever and avoid the extra fee going through Betterment. Thoughts?

    • David Weliver says:

      Honestly not a bad idea. You could do at least slightly better than sub-1% savings accounts with a mostly-bond Betterment account and access the money fairly quickly when you need it. Of course even relatively safe bonds involve risk and are not FDIC insured like the savings account, but this is definitely an option for somebody who just can’t see their savings fail to even keep pace with inflation.

  13. How much are you getting paid when people sign up for betterment? That link to the betterment site is interesting…

  14. Hey there,

    silly question – can I roll over my existing 401K from a job I just finished into a Betterment account? if so, I suspect I wouldn’t be able to withdraw from it the way you are suggesting others who put their own money (not pre-tax retirement funds) into this account would do.
    If that is the case, what would happen if I added funds from my own account? Would it differentiate the two?
    Or am I simply not able to roll a 401K and I should stick with using this as an alternative to my savings account?

    Thanks,
    Anisa

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