Hey guys,
I started reading up a little more on how some are using Betterment for their safety nets. It seems this is kind of a controversial topic where the naysayers wouldn't advise *investing* your savings money whereas proponents advise that it's only as risky as you want (or can tolerate) and in the end shouldn't leave you worrying a whole lot. So what's the consensus? I'm assuming it comes down to how comfortable you are with the risk of "investing emergency money" so maybe I'm just answering my own question.
Any pointers on why I should or shouldn't consider this though? I read somewhere that one person stated (or maybe it was based off of advice from Betterment) he would only go this route if he had $12k in SAVINGS, and anything in excess would be the "safety net" - does that make sense? I'm in a position where I think I could maintain a true savings and put down probably around $50k for a 'safety net' investment. I have much more stashed away in other taxable investments with Fidelity in addition to my non-taxable/retirement funds, so it's not like this is the last leg or anything. The reason Betterment is appealing is because there are fewer restrictions on withdrawals and thus easier access to that money in case it becomes "need it now" or "need it soon" money. As far as the fees go, it seems reasonable to pay the .25% when it seems like they take care of A LOT of things that you'd otherwise be worrying about managing yourself. At this point, I think I'd rather prefer to have a "set and forget" it type of investment in Betterment with this shorter-to-mid term money. In fact, as much as I'd like to call it a "safety net" or "rainy day" funds, I'd probably just leave it open and flexible to even become a home down-payment or car fund. Digression: besides Betterment are there other/better of these "robo" management tools out there? Wealthfront? Learnvest? etc? There's so many of these guys that it's hard keeping up with what it is they are or are even offering!
All that said, if it sounds like stashing this $50k in Betterment might be a good idea, what would you suggest my target allocation be?
Thoughts?
Going back to your original question...
I started out by putting $10,000 using Betterment Safety Net. My original plan was to scale that amount up to use it to cover my emergency fund. The Betterment recommendation is to have 6-12 months of living expenses + 30% in the Safety Net option (to allow for market fluctuation.)
My experience so far is that the Safety Net option is pretty stable. Day-to-day fluctuations are minor, but the balance is below my original deposit (not by a lot). Since the original deposit, however, I have rethought my overall investing strategy. (I will probably either be changing the risk category of that money or removing it from Betterment altogether.)
If you plan to use the 3- or 4- passive index fund strategy for your primary investments, then you can park the bond fund component in your taxable investment account. Use a tax-free (municipal or treasury) bond fund to minimize taxes. Put all your non-immediate emergency funds into that bond fund, and let it do double-duty. All new money goes into the stock index funds only until your overall account is balanced (since this will start you out with an over-sized bond component.)
If an emergency comes up, you can tap the bond fund. This strategy has the following advantages:
- It lets you start your primary investing plan right away. It reduces the lost opportunity cost of having an emergency fund.
- It lets you have an emergency fund "invested" right away.
- If your overall portfolio is large enough, your bond component may already be bigger than your emergency fund. In that case, there is no opportunity cost, and you can fully invest the entire amount per your desired mix.
- The emergency fund is liquid (takes 1-2 days to transfer electronically to your bank account if you need it.)
- The emergency fund is in a taxable account, so there are no penalties for withdrawing it from IRA or Roth early.
- If you tap the emergency fund, you can either re-fund it using new money, or it will be taken care of when you rebalance. Basically, it gives you options.
- The concept of treating all your accounts (taxable and non-taxable) as a single big portfolio will let you concentrate all your bond fund requirements in a single location. This means the funds available to you in an emergency will actually grow over time.
- With your bond component in a taxable account, your limited tax-deferred or tax-free space may be used for the assets with the greatest appreciation potential (stocks.)
By incorporating the emergency fund into the bond component of your overall investments, you're technically investing it right away, but you're investing it into something that is still liquid and less volatile.
Wealthfront, Betterment, and the DIY Vanguard schemes all discussed here are really the same basic strategy. That is passive investment into low-expense index funds, managed in a way to increase returns over long timeframes while minimizing taxes and reduce risk (volatility).
In fact, all the schemes use mostly the same funds to achieve this goal (Vanguard ETFs). The primary difference is in the number of funds used, the balance of how it is done, and extra features (TLH) and fees (.25% or .15% above fund expenses) resulting from using a managed account (WealthFront or Betterment). It's impossible to know which variant provides the most return in the long run. They have the same concept using the same underlying funds, so they'll probably all be in the same ballpark of returns. Betterment has a slight value tilt, a higher international percentage, and a lower bond allocation. Wealthfront has a real estate component for greater diversification. The 3- and 4- fund DIY Vanguard strategies are easier to understand and maintain.
In the end, getting started is the most important part.