Betterment: Let Robo-Advising Do the Heavy Lifting for Your Finances

by Luke Lareau

How Allocating $100 a Month in Betterment Can Create over $100,000 in Value over 30 Years

We live in a time where we have access to so many resources, tools, people and technology that we can be invested in real estate, corporations, or even start ups, all with only a few clicks of the mouse. Never before in history were so many people able to profit and succeed on a global level like today. Our economies are so specialized that almost everyone has a unique skill in their industry. The beautiful thing with investing is it allows you to be invested in other industries that you yourself can’t or don’t want to work in. Wanted to have your hands in the restaurant industry? Allocate funds in the restaurant space. Dreamed of being an engineer for lead tech companies like Tesla or help defend a nation by investing in U.S. aerospace companies? There is a stock or fund for that too.

If you, like many others, do not want to put your money into one or two companies and want your assets to be distributed across hundreds of companies in the U.S. and abroad, Betterment does just that for you. There is no reason to be worried about re-adjusting your riskier funds to lower risk investments as you get older. Betterment has you covered there as well. Remember all of the industries that were mentioned above? Well, with Betterment, your money is diversified in thousands of companies. Basically, even if a hand full of companies flop (go out of business), your portfolio is so spread out across the global economy that your funds won’t even recognize it happened.

The great thing with this platform is that depending on your risk tolerance, you can adjust the percentage of money you have in stocks (riskier) or bonds (low risk). So, if you are young and do not plan on retiring in the next 5 years, you may want to commit fully to stocks, which Betterment will automatically do based on the risk tolerance you enter along with your age. Inversely, if you are nearing retirement, Betterment will automatically allocate your funds in a way that reduces your risk, even during economic stagnation.

Here is a list of the funds that your money is invested in when you participate with Betterment. Since there are two separate categories in Betterment, stocks and bonds, I will break down each segment independently. Just remember, you do not have to choose either of these funds to be invested in when you invest through Betterment, your money is allocated in each and every one of these investments for a combined-small advisory fee of 0.25%, or $25 for every $10,000 invested.

Stocks — “The most important quality for an investor is temperament, not intellect.” Warren Buffet

  1. VTI (Vanguard Total Stock Market ETF) — A percentage of your money is invested in this fund. The name speaks for itself. You are literally invested in nearly the entire market. There are currently over 3,500 companies that you are invested in within this allocation. This ETF (Exchange Traded Fund) has seen an average annual return of 13.54% over the last 10 years.
  2. VTV (Vanguard Value ETF) — Think of the largest (large-cap) corporations in America that operate in the U.S. and across the world. This fund is diversified, yet concentrated, in over 300 of those companies. Each of these companies are valued at over $10 billion. This fund has seen an average annual return of 12.36% over the last 10 years.
  3. VOE (Vanguard Mid-Cap Value ETF) — Mid-cap is a term that is used for companies that are worth between $2 and $10 billion. This fund has selected roughly 200 companies that fit those parameters and has seen an average annual return of 12.47% over the last 10 years.
  4. VBR (Vanguard Small-Cap Value ETF) — Small-cap is a term for companies that are worth anywhere between $300 million and $2 billion. So, when you hear the word small, these are still relatively large companies that are operating in the U.S. and more than likely across the world. This fund is invested in over 800 companies that fit those specifications and has seen an average annual return of 11.83% over the last 10 years.
  5. VEA (Vanguard International Developed Markets ETF) — This fund is invested in large-cap, mid-cap, and small-cap companies across the world. So that you have a visual, think of markets like the United Kingdom, Japan and the nations that make up the European Union. This fund is invested in over 3,900 companies outside of the U.S. and has seen an average return of 5.53% over the last 10 years.
  6. VWO (Vanguard International Emerging Markets ETF) — This fund is diversified in companies that are in countries that are still considered “developing”, in global standards. Think of companies in nations like Taiwan, India, Brazil, Thailand and even China. There are over 4,000 companies in this fund and has had an average annual return of 3.55% over the last 10 years.

This is to create a birds-eye view on where and how your money is allocated. When I can visualize where my money will be operating and how it is being diversified, it becomes that much easier to invest. Looking at the long-term, unless the world’s market completely crashes and we all are forced to go back to bartering for our goods, these companies will continue to add value to society and pay you healthy dividends along the way.

Before I break down the next segment, it is pretty crucial to understand what a bond is. It is simply a lending-term that is set between the borrower (typically a government or corporation) and the lender (you, the investor). The interest rates are set by the borrower and adjusts based on supply and demand. If giving your money for the stated return is worth your time, then you lend your money for the entire portion of the bond’s term, or you can sell your stake before the term is over.

Bonds — “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” John Bogle

  1. VTIP (Vanguard Short-Term Inflation-Protected Securities ETF) — These are bonds that are issued by the U.S. Treasury with the sole purpose of ensuring that your money rises with inflation.
  2. AGG (iShares Core U.S. Aggregate Bond ETF) — These are U.S. investment grade bonds that have over 8,000 holdings. Meaning, you are diversified in many, many bonds with different maturity dates. The average return over the last 10 years is 3.60%.
  3. SHV (iShares Short Treasury Bond ETF) — This diversified fund of bonds is extremely low risk. They are U.S. Short Term Treasury Bonds with a maturity between one month and one year. Because of the extremely low risk, that brings an extremely low return. It has had an average return of 0.54% over the last 10 years.
  4. MUB (iShares National Muni Bond ETF) — Think of this as a portfolio of bonds that are issued by regional governing bodies and local municipalities. If they have capital expenditures for projects like infrastructure, this is one of the ways they raise capital. This fund has seen an average annual return of 3.91% over the last 10 years.
  5. NEAR (iShares Short Maturity Bond ETF) — This is a diversified group of bonds that are issued by corporations or governments with a maturity of less than three years. This fund has approximately 400 holdings and has seen an average annual return of 1.75% over the last 5 years.
  6. BNDX (Vanguard Total International Bond ETF) — The term international says it all for this fund. In this, your money is allocated across bonds issued by non-U.S. governing bodies and companies. Your money is diversified in over 5,000 bonds, so even if a handful of companies or government agencies were to default, your portfolio would not be impacted. This fund has seen an average annual return of 3.61% over the last 5 years.
  7. EMB (iShares JP Morgan USD Emerging Markets Bond ETF) — This fund is similar to the one mentioned above, but is geared towards markets that are still considered “emerging”. That may bring additional risk, but it is diversified over 400 holdings and is issued by corporations and government agencies with a high credit quality and rating.

As you can probably conclude by the average returns, the higher risk by investing in stocks has been rewarded with a much higher return. You will definitely have to stomach fluctuations in the prices more than you would with bonds, but the goal is to purchase an investment and hold onto it. If you do not want to hold onto an investment with a long-term outlook, then you may want to maintain a higher percentage of your money in bonds.

As stock prices and dividends fluctuate, which they will, just remember we live in a global economy where the world never sleeps. People are always consuming, producing, inventing, creating and building all across the globe at every second of the day. People in cities all across the U.S. and world are either sleeping, commuting, working, eating, traveling and more. All of those things require services, buildings, products, food, clothing, vehicles, access to water, electricity and the list goes on and on. For each of those products and services, there is a company and governing body present to help facilitate that the needs of the local neighborhoods and the global community are met. With that in mind, investing doesn’t seem so risky.

 

*This is not financial advice. For educational purposes only.

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