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Update: My first $3000 invested with Betterment.
I am a do-it-yourself (DIY) investor. I've read dozens of books, articles, research papers, and blogs on investing, personal finance, budgeting, asset allocation, and the psychology of investing. I even majored in economics in college. I like making investing decisions and choosing how and where I invest my money.
But, I know that not everyone can or has the desire to devote as much time as I have to researching investing options. That's why I recommend Betterment to anyone in the military who isn't a DIY investor like me.
I've spent thousands of hours understanding everything I can about investing and money management for military personnel since I started this blog in 2012. I like picking my own asset allocation and investing automatically into low cost, diversified index funds at Vanguard or in my TSP. Then I track my investment performance across all my accounts inside Personal Capital. I don't try to beat the market: I just try to match its performance.
Even after all that learning I still can't devote all my time and energy to perfecting my portfolio. My day job as an Air Force officer takes up plenty of time in a normal work week. It can be all consuming when I'm deployed or TDY.
That's why I have the following investing principles:
- Low cost
If an investment doesn't meet those four criteria, I skip it and move on to the next one. The TSP is a great example of an investment vehicle I like:
- Simple: Only five funds to choose from and Lifecycle Funds available
- Low cost: $0.29 per $1000 invested per year (in 2014)
- Automatic: money is drawn right from your MyPay paycheck, you only need to make the decision to contribute once
- Diversified: The C and S Funds represent all American publicly traded companies. The F and G fund give you corporate and government bond access. The I fund contains 900+ companies in Europe, Australasia, and the Far East.
Betterment also meets all of these principles:
- Simple: easy to set up, easy to automatically fund, easy to see your performance
- Low cost: $2.50 per $1000 invested per year. 0.25% (25 basis points) for their basic digital service, which is what I use and recommend. 3x what Vanguard charges for their cheapest Admiral shares but with so many features for the non-DIY type it makes it well worth it.
- Automatic: Automatic rebalancing of your investments, tax loss harvesting, auto-deposits, portfolios and assets selected to match your investment goals
- Diversified: 13 ETFs make up the Betterment Portfolio. 6 stock ETFs, representing all the major US domestic publicly traded companies and thousands of international companies. 7 bond ETFs which cover government and commercial bonds both domestic and international.
Simple Investing with Betterment
With Betterment it's easy to set up an account. It took me about 45 seconds. The largest US banks are listed and it's easy to connect your checking account to your Betterment account to get your money moved in. I connected my USAA checking account and moved $500 into a regular taxable investment account to give it a try.
Once you have an account connected, you'll choose your asset allocation. Again, Betterment keeps it simple with portfolios ranging from no stocks and all bonds to 100% stocks and 0% bonds. As an aggressive investor with a long time horizon (as you should be if your investing for financial independence), I selected a 90% stock, 10% bond portfolio. You can see the asset allocation automatically selected for me below:
Just like that I could now own shares of thousands of US and foreign companies and get a small slice of interest paying debt all over the world.
Low Cost: TSP vs. Vanguard vs. Betterment
When it comes to low costs in investing, there is one undisputed king: the TSP. After that Vanguard has consistently been a leader in providing the least expensive index funds to the average consumer. See the table below:
[table caption=”Expense Ratios of TSP, DIY Vanguard, Vanguard Personal Advisor Services, Betterment” align=”center”]
,Expense Ratio,Annual Cost Per $1000 Invested
Vanguard Personal Advisor Services,.30%,$3.00
Betterment offers a comprehensive suite of automatic investing tools for an incredibly low price. At only 0.25% expense ratio, you get features previously reserved for the ultra wealthy at an extremely low price.
Automated Investing with Betterment
With Betterment, you can automate your contributions, rebalancing, and Tax Loss Harvesting. Auto-deposits suck cash out of your checking or savings accounts on a schedule you determine. A pay day 1st and 15th schedule works great for military personnel.
Diversification in the Betterment Portfolio
The Betterment portfolio is built on mostly low cost Vanguard index ETFs. The stock ETFs cover the entire US stock market with a small emphasis on small-cap and value stocks. Based on Nobel-prize winning research by Fama and French into efficient markets, the portfolio also adds developed country international stocks and emerging markets shares to capture growth where ever it can be found all over the world.
The bonds in the Betterment portfolio are selected to manage four categories of risk: “U.S. interest rate risk, U.S. company credit risk, international interest rate risk, and international credit risk.” By mixing corporate, government, and international bonds, risk adjusted performance is increased at all levels.
Cheapest and Easiest Way to Invest if You Are Not DIY Like Me
DIY investing is not for everyone. Even though I've done thousands of hours of study into investments it's still difficult to make the decision of how much money to put into the different funds of the TSP.
How could the average, non-expert be expected to know how to split up their asset allocation in their TSP? That's why the Lifecycle funds are available. They select an automatic asset allocation based on your years until retirement.
Betterment takes a similar approach, adjusting your risk according to your goals. It takes care of asset allocation, tax loss harvesting, diversification, re-balancing, and all the other little minutiae that can make investing intimidating to newcomers.
If you are not a DIY investor or you don't have the discipline to stay the course when market conditions become rough, a low cost automated investing service can keep you on track to reach your financial independence goals.
How Military Members Should Maximize Their Investments
- First, maximize your TSP (probably the Roth option) up to $18,000 in 2015 (+$35,000 more into the Traditional TSP if you receive Combat Zone Tax Exclusion pay while deployed)
- Then, open a Betterment Roth IRA for yourself and your spouse ($5500 each, $11,000 total). Spouse does not need earned income if your married filing jointly to fund an IRA.
- Continue to invest additional income into a Betterment taxable investment account
My recommendations: if you are not a confident investor and want a simple, low cost, automatic, and diversified investment account for your Roth IRA and non-retirement investments, Betterment is the best option available after the TSP.
If you are a confident DIY investor, Vanguard is still king of low cost index funds, but the small additional cost of Betterment may be worth it to gain access to their automating diversification and tax loss harvesting.