My previous article gave a brief description of robo-advisors and explained why I consider them a smart vehicle for investment. I’m now going to go over why I use the robo-advisor that I use: Betterment.
I consider Betterment (and comparable robo-advisors) to be an excellent “set it and forget it” investment. There are plenty of articles on the benefits of buying and holding stocks and bonds for long periods of time (I’ll be writing one myself in the future). With Betterment, you get these advantages and then some.
This is what I specifically considered when I decided to invest in Betterment:
Diversification: Betterment invests your money into several ETFs or buckets of stocks and bonds. This gives you a wide exposure to investments of all types. Instead of one stock or bond that may rise or fall, you are invested in literally hundreds of vehicles. This decreases volatility (the ups and downs) yet still gives you the opportunity to grow. Betterment’s “Retirement Guide” will suggest a split of stocks and bonds for your account. For myself, I have time so I have decided to take on more risk; I have 90% invested in stocks and 10% in bonds even though Betterment suggested a more cautious 80% stock/20% bond allocation.
Trading Costs: Betterment does not charge to invest or withdraw money from your account. This is a great advantage for someone starting with limited funds. I started my account with $100 and have watched it build up over the last two years. This benefit alone pays for its small fee (see below). A normal broker may charge anywhere from $5 to $15 or more for each trade. I invest 12 times each year ($100 once a month) at a cost of $0 per trade.
Fees: Betterment charges 0.35% per year for an account that has less than $10,000. On an account with $5,000 that amounts to $17.50 a year for their service. Compare that to the traditional cost of trading stock with a regular broker and it is a steal. The only caveat is that you need to set up a $100 recurring monthly deposit or it will cost you $3 a month (which you don’t want). I highly suggest taking this road as it also gives you the benefit of dollar cost averaging (see below). Unless you have $10,000 to invest up front in which case your rate actually drops to 0.25% per year. If you’re interested you can check out their fee structure here; it is very straight forward.
Dollar Cost Averaging: Dollar cost averaging is the process of investing set amounts of money on a set schedule (ex. $100 once a month on the first). This allows the investor to take advantage of buying when the market is down without having to time the market. It also allows you to invest when the market is up so you can capture gains as a market continues to move up instead of waiting for a drop and potentially missing out if that drop doesn’t come. Investing the same amount each month at the same time removes the stress of trying to figure out when to invest while lowering your overall share costs (buying low) giving you more opportunity for gains.
Tax Loss Harvesting: Even when you “lose” with Betterment you can win. Tax loss harvesting is the process of selling stocks that are down and purchasing very similar stocks (which are also down) at their lower price. Functionally you still own almost the exact same thing but when you file your taxes you will show a loss that you can then claim against your gains for the year. So far in 2016 my Betterment account has harvested over $60 of tax losses which will save me around $30 on my taxes but I still own almost the exact same thing. That “new” purchase Betterment made has recovered in price so I have made money in my Betterment account plus gotten the additional money from the reported tax losses.
Automatic Rebalancing: “Buy low, sell high” is common sense but hard to do in practice. Betterment does this for you automatically. Typically stocks go up and down a lot. Bonds tend to be more stable. Betterment rebalances your portfolio if it moves over 3% in one direction. So if stocks go down and your account now has too much in bonds, it will sell some and buy the now lower stocks. In the same way it will capture profits if the stock market soars by selling some of your winning stock to buy more stable bonds. Keeping your portfolio in balance can increase your portfolio stability and take advantage of corrections in the market. Dividends are also reinvested to correct the portfolio balance further keeping everything right where it should be.
Accessibility: Lastly I’d like to talk about accessibility. Betterment is completely online 24/7 and even has an app if you’d like to check your balance on your phone. Prior to the internet the only way to trade stock was to talk to a broker on the phone, often after paying large trading fees and other advisor fees. The stock market was for the well-to-do only. Now with the convenience of everything being online, anyone with a computer or smart phone can get instant access to services like Betterment to start working their way to financial freedom.
These are the reasons why I use Betterment as an investing service. That said, the popular services each have their own unique advantages that may or may not be of interest to you as an investor. Before investing money into anything, do some more reading to make sure you have a solid understanding of what you are investing in and how. When it comes to investing and finances in general knowledge really is power.