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:
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’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
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.