Getting Started With Investing Through Betterment


In this post I want to re-visit How to Get Control of Your Money: Begin Investing to introduce you to what has become my favorite wealth building tool: Betterment. We’ve been using Betterment for the last two years, and I don’t think there’s a simpler way to invest for the long-term. Here are the top reasons why I’ve chosen to do my long-term investing through Betterment:

  1. Index Fund Investing Made Easy: Betterment only offers Index Funds and automatically chooses which funds to invest in and at what percentage based on your chosen Stocks vs. Bonds allocation.
  2. Beautiful Platform: Some brokers remind me of the internet during the late 90’s and early aughts. More was better, so companies added more tabs, banner ads, bells, and other whistles to their sites, making them clunky and user unfriendly. Betterment avoids these mishaps with its beautiful, simplistic web platform design. Everything you need is there and easy to get to (functional and intuitive).
  3. Low, Transparent Fees & Expenses: Betterment charges a flat .25% annual fee. According to their site, this fee “covers everything you need, including transactions, trades, transfers, re-balancing, advice, and account administration, among other things.” Betterment also chooses Index funds with very low expense ratios, and lists the expense ratio for each fund right on the platform along with an average expense ratio for all of your funds.
  4. Re-Balancing Made Easy: “Re-balancing” means getting your allocation of Stocks vs. Bonds back to your target allocation when things get off kilter due to growth or diminished value in one asset class vs. the other. Figuring our how much of your stocks or bonds to sell and buy in order to get back to the intended balance – and then executing those trades – can be a chore. Betterment does the re-balancing automatically for you when your portfolio becomes too “unbalanced.”
  5. Ability To Sync External Accounts: I use Personal Capital to track all of our accounts, but I’ve recently synced our investment accounts into Betterment’s platform as well. Now I can quickly see what our allocations are for each of our external investment accounts, as well as see what our ongoing expenses are.

The above features make for a great user experience, but for me, Betterment’s greatest feature is the fact that it is designed around the 5 considerations everyone should make before investing and keep in mind while continuing to invest. Without going through each of these considerations, you will end up either not knowing why you are investing, panicking when the market begins to drop, taking your money out out of the market prematurely, being over aggressive or too conservative, having an asset allocation that doesn’t match your particular situation, or all of the above. Betterment helps you avoid all of these pitfalls by making each consideration easy to handle in a beautiful platform! Let’s walk through each consideration to see how:

Five Investing Considerations, Made Easy Through Betterment

Determine Your Specific Purposes for Investing – The general purpose for investing is to exponentially grow your money. However, for what? Answering this question leads to your specific purposes for investing. Your specific purposes could be retirement at age 65, or early retirement at age 40, or having enough to pay for you children’s education, or being able to accumulate enough to begin your own business.

Betterment starts the account sign-up processing by asking you for your specific goal in investing. Three options are presented to you: Safety Net (looking to stash away emergency funds), Retirement, and General Investing. Betterment also provides these two additional options: Major Purchase and Education. In short, Betterment provides all of the purposes for which we typically invest, and provides allocations and guidance based on your specific investing purpose.

Here’s a breakdown of stock allocation ranges and characteristics for each goal offered by Betterment:

Determine Your Investment Amount Goal – Now that you know what you are investing for, exactly how much will it take to retire at 65…retire at 40…fully pay for your children’s education…fund that new venture? Put an exact number to your specific purposes as best you can.

Betterment allows you to set a target investment amount which it uses to provide investing advice to help you stay on your intended track.

Determine Your Investment Time Horizon – This simply means determining the amount of time that you have before needing to use your investment gains for your specific purposes. The longer your investment time horizon, the more time that your money will have to work for you and grow exponentially. Knowing your investment time horizon will allow you to see the savings rate (how much money you save as a percentage of your annual income) and annual rate of return needed to get you to your desired money destination. A longer time horizon will mean a lower savings rate and shorter annual rate of return needed to reach your goal, while a shorter time horizon, all else being equal, will mean a higher savings rate and annual rate of return needed to reach your money goal. This point leads to the next consideration – Risk Tolerance.

Betterment also allows you to plug in your time horizon for a better picture of whether or not you are “On track” or “Off track” with meeting your intended target amount.

Determine Your Risk Tolerance – “Risk Tolerance” means how much risk you are willing to take in order to get a desired return on your money. Generally speaking: High Reward = High Risk and Low Reward = Low Risk. Therefore, aiming for higher rates of return generally means taking on more risk. For example, if you want to make 50% on your money in one year, it will call for making some risky investments with the expectation that you could lose much or all of your money. Determining your risk tolerance will help you identify a comfortable rate of return (and therefore, suitable level of risk) and will also help you with the next consideration – Asset Allocation.

Knowing your investment purpose, investment target amount, and time horizon will put you in a great position to determine your risk tolerance. More risk = A heavier allocation towards Stocks. Less Risk = A heavier allocation towards Bonds. Betterment provides a simple tool to help you match your risk tolerance and Stocks/Bonds allocation.

As you slide your risk tolerance to the left or right, Betterment’s Target Allocation tool will tell you whether your risk tolerance is Too Aggressive, Aggressive, Moderate, Conservative, or Too Conservative based on your overall investment goal and time horizon.

Determine Your Asset Allocation – You will be investing in “Assets” or financial instruments that hold value. The four most typical classes of assets which people hold are Cash, Stocks, Bonds, and Real Estate. Cash is the least risky “investment” meaning it also has the lowest return (if any..inflation actually eats away at the purchasing power of your cash over time, meaning $10,000 in 2050 will actually be worth less than $10,000 today). Stocks are historically riskier than bonds, but stocks also historically produce greater annual returns than bonds. Your specific purposes for investing, investment amount goal, time horizon, and risk tolerance will all help you to determine the right mix – or allocation – of investments among these (and other) asset classes.

Betterment will suggest an asset allocation of Stocks/Bonds based on your investment purposes, but you can easily use the above additional tools to update your allocation at will. For example, if your personal circumstances have changed and you’d like to pull back your risk tolerance, you can easily update your target asset allocation with a few clicks. No need to manually calculate how much to sell/buy in order to achieve your new allocation!

Investing made easy through Betterment – If you’re interested in signing up and checking them out, head over to their site and create an account for free. Let me know how your investing through Betterment turns out!

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