Picking stocks or even mutual funds that will show growth is tough. Even professional stock pickers can make huge mistakes. If you want a quick lesson in this pick five of the better-known stocks like GE, Johnson & Johnson and General Mills. Make a list of them and then check out their performance over the past year. We’d be surprised if you didn’t see a lot of ups and downs and that maybe even the stock prices of a big, blue-ribbon company ended up down for the past 12 months.
If you have enough money to warrant hiring a financial advisor that would certainly be an option. Unfortunately, there is a downside to this as well. Some financial advisors have a hard time differentiating between what’s best for their customers and what’s best for them. When this is the case the financial advisor might steer a client into a riskier investment because he or she would earn a larger commission. And if you’re a novice investor it would be hard to know when the financial advisor was looking out for your best interest and not his or hers. Finally, hiring a financial advisor means paying a fee, which currently averages 1.45% on an investment up to $50,000 and 1.30% on $50,000 to $100,000. And, of course, what these fees do is reduce the amount of money you have in your investment account. These are all reasons why many people are now letting a robot in the form of the website Betterment handle their investing for them.
So what’s Betterment?
Betterment is what’s now called a robo-advisor. You deposit money with it and then it puts its philosophy of investing to work, which means it picks ETF’s from 12 asset classes based on your goals and tolerance for risk. It will even automatically rebalance your portfolio as cash flows in or out or if the allocation to a specific asset class moves 3% or more from its target level.
As noted above, Betterment invests only in ETFs (Exchange-Traded Funds). These include short-term Treasuries, Treasury securities protected from inflation, US and international stocks and emerging markets bonds and stocks as well as corporate, municipal and international bonds.
Getting started with Betterment
If you decide to go with Betterment the process, you will go through includes an exercise in goal setting. The system will also ask your annual income and your age. Given your answers to these questions Betterment will then suggest a number of goals and will ballpark an emergency fund of 3 to 6 months of your living expenses, an overall investing goal and a savings target for your retirement. Betterment will suggest a recommended target for each of your goals and an asset allocation both of which are adjustable. In addition to this, you can add your own goals to tell Betterment how to invest your money and the types of accounts you want to invest in. You can also set up automatic deposits into any of your goals you choose.
Why goal setting is so important
The reasons why goal setting is critical in Betterment is because there is research showing that people more often can achieve specific goals. As an example of this it’s generally easier for people to save $40,000 to buy a house then to save $40,000 for no specific reason. In addition, Betterment uses your goals to decide how to allocate your assets and will even provide advice as to how much you should save each month.
Betterment’s safety net goal
As noted above, one of Betterment’s most important goals is what it calls a safety net (emergency fund) goal. It suggests you fund it by investing 60% in bonds and 40% in stocks. Conventional wisdom suggests that money in an emergency fund probably shouldn’t be invested period. That’s because you might need to access the money very fast. However, tests run by Betterment have shown that allocating 60% in bonds and 40% in stocks is a good alternate to cash. Of course, you will need to decide how comfortable you are investing your emergency fund as many people choose to have at least a portion of this money in a regular savings account and, thus, instantly accessible.
A really neat option — Smart Deposit
This is a really neat option where Betterment automatically withdraws unneeded money out of your checking account and invests it for you. How much you will allow Betterment to take out will be based on an amount you set in your checking account – generally enough for several months of your living expenses and a buffer. Smart Deposit will then check your account each week and take out any excess.
Costs less than a financial advisor
Because Betterment uses algorithms to help you establish your goals and choose your investments its fees are much lower then those you would pay a financial advisor. Its fees are based on your account balance and if you invest $100,000 or more you’ll be rewarded with one of the lowest fees available of just 0.15%. Since Betterment requires no minimum investment you could actually invest less than $10,000 and your management fee would be 0.35% or $3 a month if you don’t use automatic deposit. Invest $70,000 and your fee would be 0.25% and if you have $150,000 to invest it would drop to 0.15%.
If you’re a novice investor or don’t want to pay the fees of a financial advisor than Betterment could be a good choice. It’s currently number one in Robo-advisors as it’s now managing more than $3.9 billion in assets. One of its most powerful features is the $0 account minimum. But investors are also moving to the service because of the powerful combination it offers of goal-based tools and affordable management fees – especially for accounts over $100,000. Also, like the other robo-advisors Betterment uses exchange-traded funds so it’s clients pay no transaction fees or commissions.
In the final analysis Betterment adds value in two words, technology and psychology. At its core, Betterment is just a fancy front end for Vanguard funds – when you invest with Betterment, you end up owning Vanguard funds. But Betterment can actually help you keep more of your money and isn’t that what investing’s all about?