REVIEW: Betterment

Have you checked the interest rate on your savings account recently?  I'll save you the time and just tell you - it's a miserable number.  In the next 5 minutes, I will share with you one of my favorite investment brokerages that has a HIGH likelihood of giving you more back than what you can earn from the banks:

What is Betterment?

Betterment is one of several new automated portfolio managers (Robo-advisors) who are looking to take on the traditional financial advising/management industry.  The concept is simple: if individual investors consistently underperform the market on average, let's take the individual out of it (as much as you can without discouraging customers).  The keywords that describe Betterment are "passive", "long-term", and "low maintenance".  Let's dig in!

What types of investment products does Betterment offer?

Betterment currently offers traditional taxed investment accounts and tax-advantaged IRA accounts (both Traditional and ROTH).

How does Betterment work?

Betterment operates like a regular broker - with a twist.  When you deposit money into your account, it's automatically invested into either the Stock Exchange Traded Funds (ETF) portfolio and/or the Bond ETF portfolio.  Think of these like an ETF of ETFs.  You maintain a level of control in deciding what percentage of your deposit goes into the Stock ETF portfolio vs. the Bond ETF portfolio.

You can read more about how Betterment selects the ETFs included in their Stock vs. Bond ETFs here.  But the basic idea is that they select a group of ETFs that are diversified, low-cost and tracks a certain index.  Their current selection includes the following: 

Stock ETF Portfolio:        

  • US Total Stock Market Vanguard U.S. Total Stock Market Index ETF (VTI)
  • US Large-Cap Value Stocks Vanguard US Large-Cap Value Index ETF (VTV)
  • US Mid-Cap Value Stocks Vanguard US Mid-Cap Value Index ETF (VOE)
  • US Small-Cap Value Stocks Vanguard US Small-Cap Value Index ETF (VBR)
  • International Developed Stocks Vanguard FTSE Developed Market Index ETF (VEA)
  • Emerging Market Stocks Vanguard FTSE Emerging Index ETF (VWO)

Bond ETF Portfolio:

  • Short-Term Treasuries iShares Short-Term Treasury Bond Index ETF (SHV)
  • Inflation Protected Bonds Vanguard Short-term Inflation-Protected Treasury Bond Index ETF (VTIP)
  • US High Quality Bonds (IRA accounts) Vanguard US Total Bond Market Index ETF (BND)
  • National Municipal Bonds (Taxable accounts) iShares National AMT-Free Muni Bond Index ETF (MUB)
  • US Corporate Bonds iShares Corporate Bond Index ETF (LQD)
  • International Developed Bonds Vanguard Total International Bond Index ETF (BNDX)
  • Emerging Market Bonds Vanguard Emerging Markets Government Bond Index ETF (VWOB)

How much does Betterment cost? 

*Once your account balance reaches the threshold for the next lower tier of fees, Betterment will automatically decrease your fees.  But if your account balance then falls below that threshold, you still get to keep the lower fees.

*Once your account balance reaches the threshold for the next lower tier of fees, Betterment will automatically decrease your fees.  But if your account balance then falls below that threshold, you still get to keep the lower fees.

My personal experience with Betterment

I started my Betterment account in January of 2013 with a paltry deposit of $250.  I don't even remember how I first heard about it but I was intrigued by the concept of an automatic index-tracking robo-advisor.  I set a goal of $10,000 for an Emergency Fund and a 100% Stock ETF allocation.  I set-up a $100 monthly deposit initially so I can avoid the $3 maintenance fee.  The sign-up and set-up process was very straightforward and hassle-free.  Since then I've continued to make deposits on a monthly basis, occasionally adjusting my contribution and Stocks/Bonds distribution depending on my income situation and risk tolerance.  And my results are shown below:

Note that Betterment displays 2 types of earnings:

  1. The "Earnings %" is calculated by dividing your investment earnings over the principal that was put in.  In my case, $667.86 divided by $9,835 comes out to 6.8% earnings.  It doesn't sound like much if you consider that the S&P 500 has gained a whopping 47.38% in that same time period.  Which is the reason why Betterment also displays the following:
  2. The "Time-weighted return" describes your gain if you had invested all of your principal at the time you opened your account.  For example, if I had invested all of the $9,835 in January of 2013 instead of steadily over 2 years, I would have gained 34% earnings.  Betterment considers this a more fair comparison and I'm inclined to agree.

Pros and Cons

  • Pros - the main benefits of using Betterment have already been addressed: automatic, index-tracking, low-cost, and hassle-free.  I want to also mention one additional benefit - Tax Loss Harvesting+.  Without going into too much detail, it's a way of offsetting your capital-gains with your capital-losses.  And I must say that Betterment has done a commendable job on my account for the last 2 years.  For 2013 and 2014, I had capital gains of $0.78 and $0.81 respectively.
  • Cons - there's really one main negative that I want to address and that is Betterment has not been tested by a historical recession like the one we experienced in the late 2000s.  The last 4 years have seen an incredible sustained uptrend for the market and everyone agrees that a correction is coming.  The million $ question is when that happens, how will Betterment's portfolio of ETFs do?  Unfortunately no-one knows the answer to that question.

Conclusion and Sign-up Bonus

If you are a busy professional like me; if you don't want to spend the time and effort to learn about the details of investing; if you believe that over the long run the market will trend up (FACT); if you like the simplicity of set-up-once-and-forget-it investing; and if you think you can stomach the inevitable market correction that will come and not panic like so many did in 2008-2010, then you should give Betterment a consideration.

Sign-up Bonus: If you decide to set up a Betterment account, you can get up to 6 months free using this link

Full disclosure: will receive referral credit if you sign up through the link above.  Thank you for your support!

Further Reading: 

Future Proof, MD

Dr. Bo Liu is an aspiring radiologist-in-training and the founder and editor of the White Coat Money Blog.  He has an interest in interventional radiology and helping his medical colleagues get ahead in this mad world of medicine and money.  When he's not crushing the list at the PACS station or typing up your next favorite blog post, you can usually find him at the local badminton club, movie theater or the most recently opened restaurant.