I know that by now the personal finance sector of the web is saturated with reviews for Betterment: so I just had to write my own!
I have been using Betterment for almost 16 months at this point. I have a toal of 3 accounts with them: a Roth IRA, a Traditional IRA and a taxable account.
Before deciding to invest with Betterment, I spent some time researching the growing number of robo-investing platforms, including Personal Capital and Wealthfront. Even larger investment firms like Vanguard and Charles Schwab have started to add their own robo-investing type services to compete with the exceptional and popular platform Betterment has almost perfected.
Betterment has taken the lead among these startup services, with more than 200,000 clients and $7 billion in assets under management. Betterment is also super popular among millennials, and so I decided to go with them. I started with only a $500 deposit to begin with last year, but I have now opened more accounts with them, rolled over my USAA investment accounts to them and set-up bi-weekly deposits to both my Roth IRA and taxable accounts.
I plan to continue using them for the long-term.
Betterment is an easy to use platform that helps investors get started with as little as $1 (there’s no minimum deposit for the digital tier). To begin with, Betterment asks you a series of questions to get to know you better by asking about your age, annual income, risk tolerance, and financial goals. It’s perfect for millennials looking to start investing, but don’t know where to start.
There are a number of account options available, but for most new investors (especially millennials) I would highly recommend setting up a Roth IRA (individual retirement account). A Roth IRA is a tax-advantaged account (this means your money grows tax-free) that is often used to save money for retirement. If you want to focus on long-term savings and building wealth, then opening up a Roth IRA is a no-brainer. But, if you also want to save for something else besides retirement (such as a house, wedding, your child’s college tuition) then opening up a general taxable investment account with Betterment makes more sense. And, you can also open and fund both (like I do).
Related Post: Retirement: Roth vs. Traditional IRA.
Betterment will recommend an asset allocation mix between stocks and bonds based on your age, tolerance for risk, and financial goals. Your asset allocation is essentially your tolerance for risk. Are you a conservation investor or an aggressive, high-risk investor? Historically, stocks are the most risky type of investment, but also have the biggest potential for gains. Bonds are a more conservative investment avenue and have less volatility, but usually lower rates of returns.
Your asset allocation is the most important decision you will make in your Betterment investment account since it will determine your overall investment returns. If you are a millennial (under the age of 35) and you have a long-term investment timeline (10+ years), then you shouldn’t be putting a lot of money in bonds. This will significantly decrease your potential investment returns over time. Stocks are your best bet to grow your wealth.
For most millennials, you should have between 85%-100% in stocks. One of the nice features of using Betterment is that they let you self adjust your asset allocation if you decide you want to change it at any time. However, one of the key principles for successful investing is that you shouldn’t adjust or change your asset allocation very often (maybe once a year at most).
The overall experience of using Betterment’s investing platform is quite phenomenal – it is super easy to use, intuitive, and has a ton of great features that give you a detailed look at your investment portfolio. Their mobile app is also easy to use and has a bunch of useful features.
My recommendation though, which is often shared by many top financial experts, is to not look at your portfolio too often. It is very common for new investors who haven’t experienced the volatility of the stock market to freak out when they lose money. But, there is always going to be market volatility. However, as millennials, we are in a sweet spot where we have the advantage of time on our side. Overall, you are better off investing over the long-term. There is a strong chance (based off past market performance) that if you invest over the long-term, your investments (when in a low-cost index fund driven portfolio like those built by Betterment) will give you the best returns and grow your wealth.
Some of the critics of Betterment are quick to point out that you can’t choose the specific funds to invest your money in. You can only choose your asset allocation, but this actually is what makes this type of investing a lot easier for novice investors because choosing funds can be difficult and overwhelming for new investors. Betterment does all the work for you and picks a mix of low-cost index funds from reputable companies like Vanguard, Charles Schwab and others to invest your money in. It takes the all the stress and guess-work out of the equation for you. This is why I love Betterment! Set it and forget it!
Betterment uses exchange traded funds (ETFs) that represent up to 12 asset classes, depending on your risk tolerance and financial goals. They automatically rebalance your portfolio when money flows in or out — in the form of dividends, contributions or withdrawals — or when the allocation to a particular asset class drifts more than 3% from its target level. They automatic rebalancing is another great feature and value to using their robo-investing platform. It saves you the time and hassle of having to it yourself.
Betterment has revamped its pricing this year and added two new services that offer its investors access to financial advisors. They now have a total of three service plan options: Digital, Plus and Premium. Betterment Digital, its original and legacy offering, doesn’t have an account minimum and charges only 0.25%. Now there’s Betterment Plus and Betterment Premium that provide tiered access to financial advisors in exchange for higher fees (up to 0.50%) and account minimums ($100,000 for both Plus and Premium).
Betterment Digital’s 0.25% management fee is still relatively inexpensive compared to many other robo-advisors, though investors who benefited from the service’s original tiered pricing — which charged just 0.15% on balances of $100,000 or more — might not like the new changes.
Tax loss harvesting (TLH), which is the practice of selling stocks at a loss and using that loss to offset taxes, is available to everyone using Betterment. This can be valuable, but not to everyone. By my understanding and research, TLH is much more beneficial for high-income earners who are in a high income tax bracket and who are investing in a taxable account. But, if you have an IRA and/or you are in a lower tax bracket, then TLH won’t be beneficial to you.
Similar to the popular app, Digit, this optional feature withdraws and invests unneeded, extra cash out of your checking account and puts it to work for you. with this feature, you set a maximum amount you need in your checking account and Smart Deposit will monitor your account weekly and pull out any excess money and invest it. You can also set the maximum amount you want Betterment to take out at any one time, and you can opt to skip or cancel any Smart Deposit before it happens. This is all in addition to any automatic deposits you’ve set up.
As more Millennial investors are looking to start investing, the team at Betterment (who are millennials themselves) have done an exceptional job marketing their company to millennials and young adults. I am not the only one who enjoys and uses their investment platform. A number of top financial bloggers also use the platform themselves, including Mr. Money Mustache. In conclusion, Betterment is a solid investment choice for new investors who are looking for an easy and simple way to start investing, as well as any investor who just wants the added convenience of robo-investing.
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