Betterment - where am I going wrong?!

[LadyMustache]

Hello,

Looking for some advice on our investments from more experienced/savvy Mustachians :)

We currently have $200k sitting in low-interest bank checking accounts. We have maxed out 401k and OH earns $200k so can't invest in Roth IRA. OH and I are cautious about investing, but realize we need to if we're going to get anywhere!

To test the water, and our courage, nine months ago we invested $1000 into a Betterment account and have been adding $100 a month since then. We now have $1904.41! So just $4.41 for nine months of investing. Yes, it's fluctuated over that time, sometimes losing $30, sometimes gaining $30. I realize that the fees are high when you are investing so little, but shouldn't I have made more than that?! The spread is 10% bonds, 90% stocks (I just chose the 'Build Wealth' option when I set it up). Is the spread wrong? Is Betterment just a bit rubbish? Or is it because I'm losing everything in fees?

Where am I going wrong?

Thanks for any and all advice you can offer. Feel free to ask if I haven't given enough info!

Laura

[LadyMustache]

Forgot to add this link - note how well MMM is doing compared to me. I appreciate the effect of compounding and that his investment is 100 times the size of mine, and has lower fees, but still!

http://www.mrmoneymustache.com/betterment-vs-vanguard/

[dandarc]

Read the stock series.  http://jlcollinsnh.com/stock-series/

By investing so little at a place like betterment, you're paying the highest fees they offer.  Which doesn't help.  But you're panicking after only 9 months on less than 1% of your cash invested?  You do need to get more comfortable with investing, because based on that, you're not likely to stay the course, which you have to do to get the returns the market offers.

Investing is a long-term game.  9 months is nothing - your time frame is 10, 20, 30 or more years.  If you had invested in early 2012 rather than 2014, your first 9 months would have looked a lot better.  If you started investing at the end of 2007, that first 9 months would look terrible.  Fact is the market has basically been flat this year.  So your account has basically been flat.  This is what investing in stocks is like - it goes up over time, but it varies a lot from year to year.

And a minor technical point, but you can invest in a Roth IRA, if not regularly, then via the backdoor Roth.

[grettman]

I  don't know anything about betterment but I can tell you that you are doing two things wrong:

1.  You are looking at your account too much.  (by the way, the market has NOT been doing so well lately).  Need to focus on the long term.
2.  Your second reply to this post shows that you are comparing yourself to others.  Stop it.

:)

[FitStash]

FYI, if your 401k allows you to make after-tax contributions, you can roll up to $35k per year into a "Backdoor Roth" even if your income is above the roth limit.

The clearest description I've found on the topic is from the MadFientist.
http://www.madfientist.com/after-tax-contributions/

Though you can do more of your own digging over on BogleHeads or just google "Backdoor Roth."

[Frankies Girl]

Is Betterment just a bit rubbish? Or is it because I'm losing everything in fees?

Where am I going wrong?

Yup. You're paying the a fee just for them to put you into funds you easily could have selected yourself at Vanguard, on top of whatever the expense ratios on the funds themselves charge. And like the others have mentioned, the market hasn't been doing well this year (lots of wobbly volatility seesawing). So it's really obvious right now that you're not earning jack, since the growth margin is so razor thin. Imagine if we were still having pretty great growth in the market... you'd not notice the fees at all for years and lose so much of your money (both to the immediate fee structure, and future growth since the money taken out in fees now isn't there growing and compounding for you).

If possible, just get out of Betterment, open an account over at Vanguard and invest in your 90/10 stock/bond allocation there, and stop worrying over it. Automatic tax loss harvesting is the only marginal advantage to having Betterment, and that goes away (or drops substantially) and is probably not even enough to cover the fees if you even get to do it (not totally clear on what levels they actually do tax loss harvesting at Bettement) if you have a low amount of money invested. If you can't stop looking at it daily/weekly/monthly without anxiety, then you need to read things like Jim Collins' stock series, and get a better understanding about the short term stuff (and not sweating it when it goes down or flat for months). The market trends upwards over the long term, but looking at it in terms of days/weeks/months means you're going to see lots of ups and downs - you can't let that get to you since you aren't investing for that short a time period. You should look at decades, not months...

http://jlcollinsnh.com/stock-series/
^really, read this whole series. You'll feel better once you understand how it all works (and it's well written and entertaining)

http://jlcollinsnh.com/2012/04/19/stocks-part-ii-the-market-always-goes-up/
^this is part of the series (good primer on not looking at the short term)

http://jlcollinsnh.com/2012/05/09/stocks-part-v-keeping-it-simple-considerations-and-tools/
^keep it simple investing advice (or "no, you don't need Betterment")

I'm a bit saddened over MMM's promoting them for any reason - paying an advisory company to do something you can easily do yourself seems so wrong and against his original philosophy - seen here:
http://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/

And read the comments (paying particular attention to poster Dodge in this topic on MMM's main blog:
http://www.mrmoneymustache.com/betterment-vs-vanguard/

http://jlcollinsnh.com/2012/06/06/why-i-dont-like-investment-advisors/
^ investment advisers suck, and Betterment is basically just a training wheels robo-adviser that is encouraged for those that have no clue about investing and don't ever want to have a clue, but you're reading and asking questions so you should just keep learning and do it yourself!

Trust me, if I can do it anyone can... I knew NOTHING just a few years ago, and now I am 100% confident in my investing choices and even manage my mother's accounts for her (with her blessing). Read Collins' series and keep asking questions until it makes perfect sense to you. You can do this! :)

[Kaspian]

...Fact is the market has basically been flat this year.  So your account has basically been flat. 

^^ This! 

2.  Your second reply to this post shows that you are comparing yourself to others.  Stop it.

^^ And this!

Ignore the noise.  Set it and forget it.  Go in maybe annually to rebalance if you need to.  The ones with the greatest chance of succeeding are the ones who don't fret and tinker around with their established plan.

[NorCal]

The stock market hasn't done much this year.  Some years it goes up, some years it goes down, other years it doesn't move much.  Heck, sometimes it does all three in one year.

You're doing the right things.  Don't expect a whole lot of movement (in dollar terms) on an investment that size.

There are plenty of differing opinions here on whether robo-investing is worth it.  I personally think it depends on the individual.  If you really want to learn about investing, you can avoid some fees by going elsewhere.  If you're just starting out, I think they can be a great service.  They do offer better diversification and more scientific re-balancing for a small fee.  I personally think that the value will most likely offset the cost over the long run.  However, the final difference between robo-advising and straight Vanguard indexing over the long term will be determined more by unpredictable random variations in the market more than whether one is truly a "better" approach.

Others may disagree, but I think all will agree that in the big picture, you're doing the right things, and are on the right track.  The difference to your portfolio between being in Betterment vs. Vanguard, vs. whomever's favorite brokerage is so small to be nearly meaningless at this point in your investing career.  Stay in the market, continue to add funds.

Betterment's fees at your account size are 0.35%, which equates to $3.5/yr on a $1,000 account.  This is the amount you could save by doing it yourself with Vanguard.

For me personally, I do a lot of manual investing myself.  However, I am giving the Schwab Intelligent Portfolio a try with one of my IRA's to see how it works and what the algorithm does.

[neil]

Forgot to add this link - note how well MMM is doing compared to me.

You have to realize also that not everyone is going to get the same exact experience.  With your investment horizon so short, you are very susceptible to starting at a low point or a high point.  Look at a VTI chart.

- Nine months ago is ~11/14.  If this was toward the end of November, returns have been pretty flat from there.
- The market has been stubbornly flat, but there are still peaks and valleys on the way.  You can be getting unlucky with your $100 purchases since starting.

The short term impact of your early purchase points can really affect your early returns.  With the randomness of the market, this can be positive or negative.  As your asset grows, those short term fluctuations will become muted and your returns will closer match the market.

You might want to think about what an appropriate asset allocation is for you.  If you are going to compare your investment returns to your bank account, 90/10 is probably not good for you.  If that was your allocation in 2008, you will see approximately a 40% drawdown, and the drawdowns are much more noticeable if you are checking every day.  The reason you need stock exposure for FIRE is because bonds simply don't cut it for very long retirements, but going to something like 70/30 or 60/40 will reduce drawdown extensively.  You might need to consider a number for cash if you go all in.

Long story short, keep reading, keep adding, and you will eventually become comfortable.

[wenchsenior]

To test the water, and our courage, nine months ago we invested $1000 into a Betterment account and have been adding $100 a month since then. We now have $1904.41! So just $4.41 for nine months of investing.

I can't speak to Betterment, since I use Vanguard myself, but most accounts are fairly flat this year. I've seen a little growth in our 3 figure 401K account, but our 2 figure taxable accounts? Not much action in either direction. And this year's gains could be easily wiped out by a late-year correction. It's just how it goes.

One issue is that you are just starting your buying after a multi-year run of fairly robust stock market returns, so you have to kind of expect that returns will be flat or down at some point relatively soon (no one can really know exactly when or how much the market will drop, but it definitely will after such a run). But as long as you KEEP BUYING when the market is down, as well as when it's up, you are doing the right thing if you plan to invest for a multi year time period.


 Look at it this way.... when the market is down, you are buying 'cheaper'. Eventually over a period of years, you will see big benefits from this method. 

[rmendpara]

Stocks go up and down on a daily basis. Many years are negative, so investing (whether Betterment guided, or on your own) carries risk.

You need to accept that first and foremost.

Second, educate yourself on investing and risk/return. Also, only invest long term (i.e. retirement). Anything short term is a gamble since no one can predict what the market will do over a certain (short) time period.

Once you accept risk, then you can decide whether you should do Betterment, WEalthfront, another option, or to invest on your own. Until you educate yourself, it won't matter much which option you choose. My guess is you would sell everything and close the account if the market turned south and showed losses?

[LadyMustache]

Just wanted to say a huge thank you for all the replies and feedback. Great advice and a lot of food for thought.

I'm going to immerse myself in reading the Collins series so I can make better-informed choices, plus take a look at the back-door IRA, and stop obsessing over Betterment returns in the meantime! Information is power!

Thanks again,

LM

[tj]

Investing $1k out of $200k seems very very risk averse.

[Scandium]

My 401k is up about 2% this year and my taxable barely 1%. I just figure I'm getting more shares for less for the inevitable bump. Which might be in 1 month, 1 year or 10.. And there might be drop before then. Just keep investing and don't look at it. 

You can also do a back-door Roth since you make above the limit. I just did for this year and it's super easy. Do that before a taxable account. If you have kids, retirement accounts are also not counted for parent's contribution for tuition while taxable accounts are (at 5.75% per year I believe).

[LadyMustache]

It's not so much that we're risk averse as we are trying to work out where it's best to put our money. We could have thrown the whole $200k at Betterment, but $100k of it is in the UK (where we emigrated from) and the exchange rate is not good at the moment - as soon as it picks up, I'll be transferring it, as we pay US tax on our UK tax-free investments! So we have $100k in the US and want to keep around $50k easily accessible in case DH loses his job/can't take it any more. Either option highly likely, as he's in a high-stress, high-volatility job. So that really gives us $50k or thereabouts.

We've been toying with the idea of buying a couple of rental properties (with mortgages), but we're not quite ready to take the plunge as we're still getting a feel for the market here. Then there's our own $375k mortgage to think about...We need to be able to pay that if DH loses his job. We thought about throwing the money at that instead, but our rate is low (3.5 on a 30yr), and we already overpay by $600 a month. General indecision led to me to throw $1k at Betterment and see what happened. I was secretly hoping it would rocket so I could persuade DH that was the way to go! Searching around for solutions, I guess.

What we really need is a regular source of passive income so DH can leave his 9-9 job and get something lower paid but more life-enhancing.

We do have kids (6yrs and 3yrs) and baby no.3 on the way :) I have just opened up 529s for them. Was that the right thing to do tax-wise? Our tax bill nearly floored us this year! I only invest $100 a month each for them, but can increase to $200 a month (as I have child trust funds in the UK that I still pay into for them).

Def going to look at the back-door Roth. Still trying to get my head around the taxation system here, which is v. complex to us.

I'm tempted to post a case study, but not sure if I can take the face-punching. We are in a great situation as we have a high income, but feel very much trapped by the high income as DH is unhappy and feels he can't continue. I totally get it and want to help, but not sure how.

[BarkyardBQ]

Just another reply to tell you to stop looking at your accounts. We started last year and by the end of this year will have contributed 10% of our 10 year FIRE goal and we're down ~$800 right now in 100% stocks. The value is irrelevant until you want to FIRE. Determine your asset allocation and invest until you are done working.

[boarder42]

nothing wrong with looking at your accounts.  one day YAY i made a bunch... next day YAY the market went down so now i'm buying cheaper.   glass is always half full... then you retire and its always full

[fb132]

Like many have said, this year, the stock market hasn't been fantastic, so it's normal that you haven't realized any big gains, but remember you are investing for the long haul. Plus you are investing 90% equities, so you will get alot of big fluctuations... you have to see the big picture, just look at this image http://www.ritholtz.com/blog/wp-content/uploads/2013/07/s-and-p1.png . You will see alot of ups and downs, but in the long run, it has a tendancy of going upwards.

[Scandium]

It's not so much that we're risk averse as we are trying to work out where it's best to put our money. We could have thrown the whole $200k at Betterment, but $100k of it is in the UK (where we emigrated from) and the exchange rate is not good at the moment - as soon as it picks up, I'll be transferring it

This can only be decided with certainty with a crystal ball. Best place to put your money is everything in Netflix stock at their IPO.. Second best is diversified, low cost index funds today.

I had the same currency exchange debate here (home country currency dropped, wait for rebound?) It's just market timing. How do you know the rate will improve, rather then get worse? If/when the fed raise rates a flood into dollars is predicted, which would drive it even higher. In the end I just the transfer.

Btw for international transfer I saved a bit by using transferwise.com. If you're skeptical I heard of it in the fine UK publication the Economist :)

[I'm a red panda]

One mistake you are making is looking at a long term investment and measuring it with short term gains.

(I'd say using Bettermint at all is a mistake too. No need to pay those fees. Especially not on $1,000.)

We just opened a Vanguard account, as we wanted lower fees than our other accounts had.  Right now the only growth it has had in the past 4 months has been the bi-weekly deposits we put into it- and that's on a good day. Most days it is down.

The hope is that in 10-15, or 20-30 years it is up.

[tj]

The hope is that in 10-15, or 20-30 years it is up.

The hope, and I would say, expectation, is that it will be A LOT up.