About Betterment

Ready to jump into the investment world but don’t know where to start? Betterment could be a great option. We dig into the service and tell why or why not.

If you’re thinking of investing money into the stock market, you’re living in the perfect era for it.

Over the past few years, dozens of startups have launched websites and apps that simplify the investment process. They take your money and place it in a mix of funds, stocks and bonds that you can adjust based on how much risk you want to take on. They’re often called “robo-advisors”.

Betterment, founded in 2008, is one of those startups. Their easy-to-use platform invests your money in a “set-it-and-forget-it” kind of way. You deposit cash, they place it in a certain mix of entities (more on that later), that, according to them, can get you an extra 4.3% in returns compared to traditional models of investment.

We wanted to know if Betterment lived up to the hype, so we researched their strategy to find out how it works, fees, what model they use to invest your money, what investment experts are saying about it and our final thoughts on the tool.

Over the next few minutes, we’ll dive into each of the topics.

How does Betterment work?

You can open an account on Betterment without depositing any money, a new trend offered by other investment startups (Wealthfront, LearnVest) who break away from traditional brokerage companies (big firms that require a big deposit to open an account).

The first thing Betterment does when you sign is offer you three goals based on your age, income and retirement status: how much you want to saved up for emergencies (your “safety net”), how much you want to have available per-year when you retire and what kind of general investment strategy you want to adopt.

Once you’ve completed the sign up process, you can adjust these goals by changing how much you want to have for retirement, how much you want in your safety net and how quickly you want your money to grow.

From there, Betterment does all the analysis for you. They even have an “automatic rebalancing” tool that adjusts your portfolio when it starts to stray away from the growth goals you’ve set.

Based on what we’ve seen, we think Betterment offers you a really simple way to invest. They take the stress out of building your portfolio by doing all the work for you.

The Investment Fees You Can Expect

If you deposit less than $100 a month, Betterment charges you $3 in monthly fees. If you enroll in a $100/month auto-deposit, your fees are 0.35% per month, which is significantly better than the 1% management fee investment companies usually charge.

Once your account balance hits $10,000, that fee drops to 0.25% and at $100K it drops to 0.15%.

What’s the investment model they use to invest my money?

Think of Betterment’s model as a car. Every car has its unique set of features and its own engine.

While cool features make the driving experience fun, you’ll get the most benefit out of an efficient engine that converts fuel into serious performance. In the Betterment universe, that engine is what’s known as Modern Portfolio Theory, or MPT. A couple of scientists named Eugene Fama and Kenneth French came up with the ideas that led to MPT.

Basically, Fama and French said that “you’re better off investing your money in two kinds of stocks”:

  • Small cap: smaller companies with relatively high stock prices but not a lot of shares to offer.
  • Value: worth more than their stock price says

Betterment’s team of engineers and experts figure out which companies fall into these categories, and then they invest accordingly into what are known as ETFs, exchange-traded funds. ETFs are a combination of stocks and bonds, rather than just stock in one or two companies. They’re designed to minimize risk and help you get good returns on your money. They choose to put a good chunk of your money into Vanguard funds, a popular choice for companies like Betterment.

We’ll keep our explanation simplemainly because Betterment’s customers use their service for its simplicity simple If you want to learn more, you can check out the specifics of their EFTs on Betterment’s Portfolio page.

In our opinion, Betterment has chosen a pretty solid strategy for investment and certainly one you can feel confident in as you start your investment journey.

But with any company that claims to have discovered a “secret sauce” that will benefit your bank account, we wanted to vet their claims by turning to other sources in the investment world.

What are the experts saying about Betterment?

We took a look at reviews from several popular investment websites and found that Betterment gets high praise from industry experts:

The downside to the app, some of the experts said, is that it’s not the best choice for investors with a lot of money and stock-market expertise. Betterment is designed for beginner and intermediate investors, so they limit the minute details and options an expert investor would normally have.

Our Conclusions About Investing with Betterment

Investing has become one of those areas in life where technology has made it possible for individuals to accomplish something they’d normally have to do through a costly and complex relationship with a middleman.

Though Betterment is a middleman in a certain sense, they cut out all the bulkiness you’d normally experience through a big investment company and make investing pretty simple. You set your goals, deposit your money and Betterment’s team does all the analysis and adjustments on your behalf.

Based on our research, we think Betterment is a great option for new investors who don’t have a lot of knowledge about the stock market and want to depend on a reliable company to crunch the numbers for them.

In general, Betterment gets glowing reviews from industry experts. That carries a lot of weight with us, because it shows the company has chosen credible investments that minimize your risk and help you achieve the savings, retirement or returns goals you have.

Betterment, in our opinion, is a good way to start out in the investment world because it’s so simple. However, there are other investment-website options out there. WealthFront offers a more diverse portfolio, but their minimum deposit is $5,000.

Schwab Intelligent Portfolios (SIPs) is another robo-advisor that’s gained attention. It offers many of the same features as Betterment (rebalancing, ETFs), but experts pointed out that SIPs ETF selection process is a little more complex and, therefore, better suited for investors with more than $100,000 in their account.

If you want a simple way to invest, Betterment is, in our opinion, a good way to start out. If you’re a savvy investor with your own knowledge base and want a more hands-on approach, you may be better off investing on your own.

Read Next: Deciding Who Will Manage Your Financial Future: Advisors, Planers or Robo-Advisors

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