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Why I Put My Last $100,000 into Betterment

bettermentlogoI’ve always been a do-it-yourself investor. This habit started around age 19 with a series of ridiculous speculative trades in individual high-tech company stocks. “This stock is sure to go through the roof”, I would think, “because their products are so great.”

This is a terrible way to invest.

But after a few early financial haircuts and the subsequent 20 years of reading an investment book or two every year, I’ve come to appreciate the much more boring and successful strategy of extremely long-term investing in extremely low cost index funds. Nowadays, I don’t just avoid trying to guess the short-term movements of individual stocks. I avoid looking at financial markets and news entirely, for weeks or months at a time.

This is a much better way to invest. In fact, doing just this will not only put you ahead of most average Joes, but you will also beat the vast majority of expensive personal financial advisers and professional investors as well. The reason is simply that you minimize the main sources of potential loss: human error and our flawed boom-bust psychology, fund fees, capital gains taxes, and broker commissions.

If we were to put a wide range of popular investing styles on a spectrum of effectiveness, it might look something like this:

Fig. 1: A few asset types with expected annual return after inflation.

Fig. 1: A few asset types with expected annual return after inflation.

You can see that we’re already up near the top of the chart. You can improve slightly on buy-and-hold-forever investing, but at this point it starts to take some work. To really beat it, you need to be a lifelong business prodigy who devours financial statements and human psychology in equal parts for most of your lifetime. (Note that most of us currently feel like stock geniuses because of the recent 20% annual gains in the overall market, but this all tends to average out over the decades and in reality you’ll do well to get 7% after inflation.)

vanguardFor almost 40 years, Vanguard has been the place* to invest to get these high-on-the-chart results. As a member-owned firm, they have patiently operated with maximum integrity** and zero bullshit salesmanship while most financial firms leveraged, hedged, churned and charged their clients to maximize their own profits. I started my own Vanguard account in 1999 and have never looked back as multiple recessions and crises, booms and dividends have helped my small militia of green employees expand their ranks by hundreds of thousands of dollars.

But in recent years, technology and the latest startup company boom have brought new options for index fund investing. ETFs have delivered even lower expenses, easier transactions, and allowed Vanguard-like options to spread to Canada and European countries. Lightweight wealth managers like Future Advisor, Wealthfront, and Personal Capital deliver their own takes on index investing, with more service than Vanguard in exchange for moderate cost. Then there is Betterment, which appeared on my radar when I discovered some financially savvy friends were entrusting the company with big chunks of their wealth (Jesse Mecham and the Mad Fientist among them).

So Why did I Pick Betterment?

bettermentIn two words, technology and psychology are what attracted me to this company. At the core, Betterment is just a fancy frontend for Vanguard funds – when you invest with Betterment, you end up owning Vanguard funds just like a wise person would already do. But they add value by automating two things that actually allow you to earn and keep more money: automatic portfolio rebalancing, and tax loss harvesting. They do this for a fee that amounts to roughly $150 per $100,000 invested. I expect the benefits to be substantially greater than that, meaning it should prove to be a profitable choice if I have done the homework right.

On top of that, their mobile and web-based interface make contributing and watching your growing ‘stash a lot of fun, which is a big part of the battle. But your interaction with the company remains in the digital realm – no adviser will be making personal calls to offer hand-holding and warm guidance. This works well for my typical engineer’s personality – I answer the phone for my mother, my wife, and a few close pals. The rest of the world can send me an email or put their information on a website. I’ll go read your site if I want your information, thanks very much.

What is Rebalancing and Tax Loss Harvesting Anyway?

Rebalancing means maintaining your original mix of stocks, bonds and other bits of the world economy in a strategic proportion. If one class goes up while another goes down, the system automatically sells a small portion of the winners and/or buys more of the discounted assets. On average this amounts to systematically buying low and selling high, which improves your returns slightly over the years, as explained in my older post on Asset Allocation.

In the normal course of all this rebalancing, Betterment will end up selling some index fund shares for you at a profit, which means capital gains taxes. This can be cleverly offset by selling other funds that have lost money in the same year, but then using that money to buy other funds that still allow you to own those same companies. This is called Tax Loss Harvesting.

You can’t do this trick by just selling and re-buying the same stock in the last week of every December: that is called a “wash sale” and the IRS disallows it. But with today’s wealth of interchangeable funds and within the whole scheme of automatic asset allocation, it is a perfectly valid strategy that Betterment estimates could improve the performance of a non-retirement account by about 0.77% annually, which is again several times the fee they charge.

The Experience of Betterment

Shortly after becoming convinced of the benefits, I had the unexpected good fortune of meeting with a crew of Betterment workers, including co-founder Jon Stein. Over dinner I was pleased to absorb the realness of the company culture – technical and pragmatic, and completely free of the stuffed-shirt hype that has been pervasive in most of my peeks into the financial services industry. They answered every question I could throw at them, and then lent me one of their engineers to handle any follow-up technical questions that might come up in further research.

At last I decided to take the plunge, and I signed up for an account just as any new customer would do. The reassuring simplicity of it was a joy. I did the basic account setup, linked in the checking account, and within a day I was able to transfer the last $100,000 of leftover cash from my recent house sale into productive investments where it should be.

What I Bought

Betterment is designed to make things simple for you, even while they do some pretty sophisticated management in the background. They start with a brief questionnaire on how long until you retire, and your financial goals. In the end, this translates to a ratio of stocks to bonds, and people closer to retirement get more bonds because stability is often preferred over the higher returns of stocks.

However, I retired 10 years ago and I still don’t care at all about stability, because we have sufficient safety margin to allow (and even benefit from) greater volatility. So I overrode the system and selected “90% stocks, 10% bonds”. The portfolio ended up like this:

portfolio

My $100k Betterment portfolio (which has since drifted up to $105k) is balanced across 10 Vanguard funds.

 

A Slew of Educational Emails

An unexpected benefit of the process has been enrollment in what I would call “Betterment University”. Since starting the account I have received no fewer than fifteen emails from the company’s system, nicely timed to be easily digestible in my limited email schedule. Some of them were just status updates: “Congratulations on funding your account / Your pricing plan has been upgraded”, etc. But others were concise tutorials on investing itself: “Explore Betterment’s historical performance / Why market timing is even more dangerous than you think / How we use dividends to keep your tax bill low.”

Vanguard does the same thing to an extent, but they tend to focus on drawn-out webinars and the presentation is less approachable. I look at Betterment as being a service to get started, plunge straight into top-tier investing, and then learn about what you’re doing in the coming months after you’ve already done it. For the typical beginner with no idea where to start, this can be an ideal approach since fear of starting often keeps many of us in savings accounts for far too long.

Where To Go From Here

I’m excited to watch this investment carefully over the coming years. While I’m not expecting magical performance, I do expect Betterment’s simple but worthwhile automated management to outperform my own overly complacent investing style, and to more than pay for the company’s fees. Much like this blog’s Lending Club Experiment (now well past the two year mark), I’ll set up a dedicated page where we can keep track of things in detail and compare Betterment results after fees to my default investment, which would have a two lump-sum purchase of Vanguard’s Total Stock Index(VTSAX) and Total International (VTIAX) funds.

Update: I have now set up this page, and you’ll find it here:
The Betterment Experiment – Results

As always, you are welcome to follow along with your own investment. If you do so with the banner below, this blog will not receive a commission but it will help the company learn how many customers came from this site.

But even if you aren’t ready to invest at this time or need a few more opinions, I would suggest that the service could provide value to almost any US-based Mustachian. Put it onto your list of things to research further – I’m glad I did.

 

Note: To be clear on the background, I did not get paid to write this or any other post, but Betterment does advertise on this site. See the affiliates policy if you’re curious how I handle blog income.

Footnotes:

* in the US, anyway. Luckily they have finally reached Canada – learn more in Mr. Frugal Toque’s article on Canadian Investing. And in the UK, where you can get great education and investing knowledge by reading anything from my friend The Monevator.

** In fact. Vanguard founder John Bogle has done so much in his long career for the individual investor and for business ethics as a whole that he is up for a presidential medal of freedom. I’d say he is a good candidate. You can read more about it in this story on Jim Collins’ site. I also wrote a bit about Mr. Bogle in the article called “Enough”.

 

  • Maury McCoy November 5, 2014, 9:50 am

    Also, in regard to Tax-Loss Harvesting, let’s be clear. You aren’t really avoiding paying taxes, you are just delaying the inevitable… To say Tax-Loss Harvesting adds XX% to your return fails to incorporate the fact that in future years your taxes will be higher negating that benefit.

    There is one out though, and that is if you die, you can pass along those appreciated shares to your heirs at their current cost basis wiping out your original cost basis and any associated gains. Fortuitous for the heir, not so much for the benefactor.

    There is a good summary on Jonathan’s Blog: http://www.mymoneyblog.com/automated-tax-loss-harvesting-benefits.html

    Reply
    • Boris Khentov November 5, 2014, 12:19 pm

      Maury, I work at Betterment. You clearly understand how harvesting works, and you are generally correct. A couple of points:

      1. Tax deferral is a real benefit, because the savings are reinvested. Paying the exact amount several years later does not entirely negate that benefit, due to time value of money. It does claw some of the benefit back.

      2. The $3,000 ordinary income deduction makes it possible to actually pay less tax, not just defer the tax. See one of my answers elsewhere on this thread for details.

      3. When we calculate annual benefit to your returns, we use IRR and actually do incorporate the future embedded tax. We run 0%, 50% and 100% liquidation scenarios at the end of the period. The .77% figure is the 50% liquidation scenario (at 100%, we calculated .62%). For more on why we picked that, see here:

      https://www.betterment.com/resources/research/tax-loss-harvesting-white-paper/#alpha

      Reply
      • Stuart November 6, 2014, 11:02 am

        Hi Boris, does Betterment allow one to choose a fund focused on higher dividend stocks or on higher yielding bonds for example, as a way of increasing monthly/quarterly yield on capital?

        Reply
        • Boris Khentov November 12, 2014, 6:38 pm

          Stuart,

          We don’t, and here’s why: we focus on expected returns, which can come from dividends, interest or asset appreciation.

          While there are interesting (and complex) distinctions on how these various forms of return are taxed, this has implications on where the assets should be held (taxable vs. IRA). Outside of that context (which we do optimize for) the concept of an “income” or “dividend” portfolio is largely marketing – it implies a higher level of assurance that your assets will provide for you.

          But the truth is, you can sell a share to generate “income” just as that share generates “income” when paying a dividend. In a taxable account, you’d actually rather take the income as long-term capital gain whenever you need it, rather than as a distribution the timing of which you cannot control, and which may not be QDI (in which case, taxed at a higher rate).

          When the value of a share is increasing, your portfolio is growing. When a share pays a dividend, your portfolio is not – that money was already yours. When a company pays a dividend on its stock, the value of that stock drops in proportion to that distribution. The company has fewer assets now, and is worth that much less. There was no “income” generated – just a shift of value from one form to another. The value was actually created when the company made money on its core business. Whether it then decides to distribute that money or hold onto it isn’t the value-generating event.

          Meanwhile, higher yield bonds are just riskier bonds. There is no free lunch. So by getting higher returns, you are taking on tail risk (and volatility). A higher return is desirable if you are able to take on more risk, but the fact that the return comes from a higher coupon on the bond is not the relevant metric.

          A good automated investment service abstracts these distinctions from the investor, managing tax location, and delivering “income” in the form of cash flows. The source of the cash is irrelevant. We offer such a product, by the way:

          https://www.betterment.com/retirement-income/

          Reply
  • CanuckExpat November 5, 2014, 12:29 pm

    For many, many people, I think Betterment is a good choice. For the moderately sophisticated and disciplined DIY investor, I’m not sure it is worth paying the fees (however nice and fun an interface it is).

    After giving it a spin, and deciding that while nice, it wasn’t for me, I was ready to reconsider when they introduced automated tax loss harvesting. However, it seems the promised gains might be slightly over sold, and of course it is only tax deferral:
    http://www.etf.com/sections/blog/23212-inside-robo-advisor-tax-loss-harvesting.html
    http://www.mymoneyblog.com/automated-tax-loss-harvesting-benefits.html

    -Tax-loss harvesting defers your taxes by lowering your cost basis. This means that you’ll have to pay more taxes later when you eventually sell (unless you die or donate it). Data presented by certain robo-advisors do not take this into account

    -Most of the claims rely on theoretical backtested data, not the results of actual client portfolios.

    -Most of the analyses assume that the investor is in the highest tax bracket (35% or higher), which maximizes the tax benefit

    Reply
    • Tom Madison November 8, 2014, 9:03 am

      I agree with this post. With that being said I will probably recommend schwab intelligent once it is out to new investors.

      Reply
    • Boris Khentov November 9, 2014, 1:13 pm

      Dear CE,

      A few points with respect to Betterment specifically:

      1. We do take eventual liquidation into account when calculating results (0%, 50% and 100% liquidation scenarios):

      https://www.betterment.com/resources/research/tax-loss-harvesting-white-paper/#alpha

      2. You can see some preliminary results here. There will definitely be more soon!

      http://www.madfientist.com/moving-my-money-to-betterment/

      3. Our analysis assumes:

      “For tax rates, we assume a single California resident (where Betterment has the most customers) making $100,000/year (federal: 28% on income, 15% on LTCG; state: 9.3%)”

      Reply
  • Frugal Bazooka November 5, 2014, 1:16 pm

    Reading thru the posts it struck me how much time, money and energy we have to waste trying to harness the tax code.
    What a shame that gov’ts have not figured out how to channel human potential in a more positive way – rather than stifling it or redirecting it into fruitless financial tail chasing.
    There was an anti income tax movement a few years ago that emphasized taxing ANYTHING you wanted less of and removing taxes on anything you wanted more of…what a great idea…probably why no gov’t has bothered to consider it.

    Reply
  • John (aka Wish I Were Riding) November 5, 2014, 1:23 pm

    What about Vanguard Personal Advisor Services (VPAS)? Why would a move to using Betterment be better than just leaving money with Vanguard and making use of this upcoming service(s)?

    Reply
  • Ted Leber November 5, 2014, 3:09 pm

    Great Post.
    I want to encourage teachers and others to do more homework as they are often buying 403b investments at a cost of about 2.25% plus the additional costs (often hidden) bringing their costs up to about 3%. To understand the impact of fees, please go to:
    http://www.401Kfee.com/how-much-are-high-fees-costing-you
    The fee calculator is an eye-opener.
    And to understand asset allocation better, see Paul Farrell’s website and various low-cost asset allocations at:
    http://www.marketwatch.com/lazyportfolio

    Reply
  • NewbieInvestor November 5, 2014, 3:14 pm

    I hope I can explain my question/concern well enough to get some help and opinions from wise readers who have more experience than I do. My husband and I JUST started investing in April, and chose Betterment because of Jesse Mecham’s positive comments about it. Not knowing much about investing, this seemed like a good place to start, and at this point we are just maxing out both of our IRA’s. (My husband’s 401K, which we are also maxing out, is all in Vanguard funds.) We have been mostly happy with the ease of the process and the user-friendly interface, but our concern is the fact that over 37% of our money is in the VEA emerging market fund. When I compare the good old VTI (that I have read over and over is a sure place for new investors to invest in- from MMM as well as JL Collins) the VTI FAR outperforms the VEA, and yet only 16.6% of our money is in the VTI, and the majority is in the VEA, among other funds. Can someone please explain to me why this is a good idea? Why would Betterment choose to put the majority of money into VEA, when it has underperformed the VTI over time? And if I am totally missing some detail about investing that will make this make more sense, I would truly appreciate someone enlightening me. Thank you!!

    Reply
    • Mr. Money Mustache November 5, 2014, 4:05 pm

      I like that question Newbie, because I used to look at fund price history the same way when I just started.

      Instead of imagining the stocks as rising-in-value machines, think of them as ownership stakes in businesses, which is what they really are. If you were going to buy a local pizzeria that delivers $40,000 in profit (dividends) to you per year, would you rather buy it for $100k, or for $200k because its price had “performed really well” over the past year?

      This is essentially what has happened in US vs. international stocks recently: ours have shot up and become more expensive (partly because of our central bank deliberately pumping money into the system in hopes of accelerating the recovery from the 2009 crisis), while emerging markets and Europe have remained cheaper. So you get more bang for your buck (including higher dividends) with the non-US stocks. If I were to make a prediction (which nobody does reliably), I’d guess that non-US stocks will outperform US ones at some point in the near future.

      Reply
  • Kevin Knox November 5, 2014, 4:53 pm

    Thanks MMM for the typically excellent blog post, and to everyone on this thread for the great discussion.

    I’ve been looking into Betterment and the other robo-investing services and one thing not mentioned here that really deserves some attention is the part of Betterment’s web site that deals with retirement. They’ve developed a really innovative system for smoothing income/withdrawals during retirement and have also done some original research that debunks the old 4% withdrawal rule much more persuasively than Wade Pfau’s better-known research. Here’s the link to that part of the site:

    https://www.betterment.com/resources/retirement/investment-income-retirement/retirement-income-shouldnt-be-a-guessing-game/

    As a frugal (and worry-inclined) early retiree with a modest nest egg I’m thinking that this service alone is probably worth a goodly part of their .15% fee. It is too bad though that neither Bettermint nor any of the other services offer a fixed (rather than % of assets) fee for larger accounts. If they did, they’d be competitive with the best DFA fund advisors (e.g. Evanson & Associates) where you can spend 2K a year and have access to DFA’s better-than-Vanguard funds but also a level of personal handholding and market insight that aren’t part of the Robo-invest world.

    That said I think this disruption of the investing and, especially FA worlds is the most exciting thing in years, and I am recommending Betterment wholeheartedly to many friends who really need a set-it-and-forget it approach.

    Reply
  • KeyLimeFI November 5, 2014, 6:52 pm

    Thanks for the article MMM. Although lots of people honed in on the ins and outs of Tax Loss Harvesting, I believe the main benefit of a robo-advisor like Betterment or any other service would be the “robo” part of it. In other words, taking humans away from making decisions on re-allocating their OWN portfolios would more than make up for any fees. Humans are their own worst enemies when it comes to money and math. Many people left in droves during and at the end of stock market major downturns in the past decade and a half — overriding any allocation plans or best intentions all due to fear and herd mentalities. http://www.fool.com/investing/general/2014/10/24/the-no-1-mistake-investors-make.aspx

    Of course, I’d assume any robo-advisor automatic allocation plan can be overidden too. Those of us humans who have been around a while are like that. I think this strategy would work best with young people just starting or those who can contribute regular amounts for saving.

    Reply
  • JT November 5, 2014, 7:04 pm

    Tax loss harvesting is only free with an investment of $50,000 or more. Would you still recommend this over Vanguard for those of us just starting out? I’d probably be looking to invest 5k-10k a year at this point.

    Reply
    • Forrest L. November 6, 2014, 2:59 pm

      No. Betterment advantage is TLH+ for taxable accounts.

      Reply
  • Sam November 6, 2014, 7:43 am

    MMM, I to have been considering a move to Betterment, but have not pulled the trigger because of potential “wash sale event” conflicts from other accounts. How are you dealing with that? I am assuming you’re not moving all of your families various accounts to Betterment, right?

    If you turn tax-loss harvesting (“TLH+”) on in your Betterment account, you’re exposing yourself to “wash sales” because Betterment has no knowledge of the contents of your wife’s Vanguard IRA, for instance.

    What say you?

    Reply
    • Mr. Money Mustache November 6, 2014, 12:05 pm

      Good point Sam, and Betterment’s system is set up to deliver the same warning to you as well. My solution is that I don’t hold ANY of the same funds Betterment has, anywhere else in my (pretty small and simple) financial world.

      Reply
      • Sam November 6, 2014, 2:50 pm

        Can you elaborate on that? My understanding is that the concern isn’t holding any of the same funds in your own Betterment account and Vanguard IRA, but rather the fact that Betterment may auto-magically purchase funds you also hold in your IRA without you knowing via TLH+, thus triggering a cash-wash. Or are you saying that the rest of your investments outside of Betterment aren’t even securities? Lending Club, your rental houses, etc? If that’s the case, I get it – but am surprised to hear it! If you are exposed to securities anywhere outside of Betterment and turn on TLH+ within Betterment, you have a potential regulatory problem, right?

        Reply
        • B November 6, 2014, 2:54 pm

          Betterment is going to provide you with a list of primary, secondary and tertiary ETFs they will buy. So:

          1) Look at the underlying index that each is based off of.
          2) In ANY other account, IRA, 401k, or taxable, don’t buy any mutual fund or ETF that is based on those underlying indexes.

          If you do this, you won’t have any problems.

          Reply
          • Tom Madison November 8, 2014, 8:45 am

            So their list is pretty small. With First in First out rules will they even be able to post losses as the market grows? Unless their list of etfs grows….

            Reply
      • Geraint November 9, 2014, 7:55 am

        Hi MMM, do you have an updated list of funds that you do hold? I’m sure a lot of folks will have invested in Vanguard Total Stock Market (VTSMNX / VTSAX) which Betterment rightly classifies as substantially identical to the Vanguard Total Stock Market ETF (VTI) they use in their portfolio. This would prevent TLH working while you maintain that outside position. (One solution that Betterment suggests is to ensure no further investment outside Betterment, which primarily means switching off automatic dividend reinvestment etc.)

        Reply
  • Sergey November 6, 2014, 8:00 am

    Vanguard prohibits selling and buying the same fund within, I believe, 3 months period. How does Betterment work in this regard?

    Reply
    • Kenneth November 6, 2014, 9:21 am

      I had a Betterment account (2 of them, actually, see my other comment below). You are free to add funds or withdraw funds at any time. There will of course be government reporting involved at the end of the year.

      Reply
    • David November 16, 2014, 7:19 pm

      To some extent, you can get around this by buying additional Vanguard funds that mimic the original fund you sold. For example, let say the stock market went up so much that you sold out of your Total Stock Market Index fund and put the money in your bond fund, to maintain your asset allocation between stocks and bonds. Now you have a 90 day hold on that stock fund whereby you can’t buy back into it, though you can continue to sell out of it.
      Now, let’s say the stock market drops before the 90 days is up, and now you want to buy stocks, you can choose to buy a Vanguard 500 Index (S&P 500 Index) fund as a substitute.

      Reply
  • Kenneth November 6, 2014, 8:08 am

    I had $150,000+ in Betterment earlier in the year, but moved this money to Vanguard when I became concerned about their 50/50 allocation to US and ex-US stocks and bonds. I even engaged them in discussion about this to no avail. The Vanguard target date retirement funds, e.g. VTXVX, are allocated about 75% US, 25% Foreign. This was much more to my liking and thus I moved my money.

    If you think about it, the US for the intermediate term, like the next 5 years, seems to be in better shape than Europe or Japan for many reasons. Our oil and gas fracking has greatly reduced our dependence on foreign oil. Therefore, our dollar is becoming stronger, and our balance of trade deficit is becoming smaller. Europe and Japan cannot hope to do this. Also, the EU political structure is such that the EU central bank cannot do QE in a similar fashion to the US, buying sovereign bonds of European countries en masse. They are in a funk and will continue to be in a funk, for the forseeable intermediate term, in my opinion. I’m owning several Vanguard funds, VBIAX among others, and my foreign exposure is much smaller than Betterment’s. I even suggested to them that they add another slider to allow choice of mix of US/Foreign (75/25, 90/10, 100/0 come to mind).

    Reply
  • Joe November 6, 2014, 8:10 am

    Your placement of Guns/Ammo is crazy. I have an older friend who just sold his stockpile of guns&ammo. He made a 225% profit in just 10 years, compare that to the 80%ish of the S&P500 and you’ll see your flaw.

    Reply
    • Mr. Money Mustache November 6, 2014, 12:03 pm

      Sure, and we all have friends who made 500% in Tesla stock too, in just TWO years! .. but it doesn’t mean they were good investors – just speculators who got lucky despite following a formula that usually fails (buying a flashy company with negative cashflow because you think you can predict the future).

      Reply
  • juneau10 November 6, 2014, 8:29 am

    Hi all. First-time poster here. My wife and I found MMM website in March while researching how to consolidate our finances after we’d recently gotten married. After we realized that I had been frugal forever (but stupid on the investing front), we both embraced the smart saving and investing while working towards FI. Immediately, we realized that we needed to change our paychecks to max out our retirement savings to reduce taxes. We’re both fortunate to have access to both 401a/403b and 457b, and still manage to take home slightly more than we need to live. I’m new to the investing thing, but have arranged our crappy 401a options as best I could to minimize fees.

    With that introduction, maybe I’m missing something (since I’ve only be learning about investing since March). If one embraces the MMM lifestyle, a couple can easily live comfortably and stay well withing the 15% tax bracket ($72.5k/year). This is especially likely with the ability to crank up tax-deferred salaries to obscene levels, or to already be FI with no/low normal income. My understanding of tax loss harvesting is that it’s basically deferring taxes into the future since it systematically reduces ones cost basis. If one is in the 15% tax bracket though, I’ve come to believe that the best plan is to try to *MAXIMIZE* (long-term) capital gains and qualified dividends every year to fill up to the top of the 15% bracket since they’re taxed at 0% (right now at least) in that bracket. That way you’re getting tax-free increase to your cost basis. Otherwise, when you eventually sell, the tax loss harvesting will have reduced your cost basis and you’ll have more gains to realize.

    Am I missing something?

    Reply
    • Mugwump November 6, 2014, 3:59 pm

      I agree with you. I did a similar thing last year when I sold stocks in my IRA and bought higher-cost shares in my taxable account with some new money. When you sell at a profit and buy the same security on the same day, you don’t have to worry about wash sales, you pay no tax inside the 15% bracket, and you raise your basis for future sales. Win-win-win!

      Reply
  • blackeagle603 November 6, 2014, 10:13 am

    A few honest (unvarnished) impressions re: the OP.

    1) interesting, thanks to overview of Betterment. May point my kids at it

    2) IMAO, the spectrum of investing approaches lacks any reference to good old fashioned boring bad-assery DIY approaches like DRIP’ing into blue chips or the currently incarnation of that, DGI (Dividend Growth Investing).
    http://dripinvesting.org/tools/tools.asp

    3) color me curmudgeonly and cynical but I’ll hold off on Betterment and watch a while. As noble and efficient as Betterment is presented here I smell a new way for financial types to put themselves in the path between me and my stocks (and skim a gatekeepers fee along the way).

    Reply
    • Zac November 6, 2014, 12:56 pm

      Except investing directly in a stock goes against everything MMM wrote about in the article. Investing directly in stocks is the very antitheses of an index fund and is a terrible idea.

      edit: In order to be a little more constructive and less argumentative, please familiarize yourself with Bogle, if you haven’t already.

      http://www.bogleheads.org/wiki/Bogleheads%C2%AE_investment_philosophy

      Reply
      • blackeagle603 November 6, 2014, 3:33 pm

        pfffftttt. Careful there, don’t slip into any personality cults.

        I’ll point out once again for those that may not be aware: on that spectrum of investing styles there is DRIP/ DGI approach that is worth being aware of and understanding. Check out the Dividend Champions spreadsheet at DripInvesting.org. It’s a updated monthly gratis as a tremendous act of public service by Dave Fish.

        Been at this a “little while” myself.There’s a personal psychology to this investing thing. Know thyself.

        I know what sort of holdings I personally sleep well with. Trading certainly isn’t my game and I don’t sleep any better with ETFs or funds. There’s a temptation to trade and and work options with ETFs that has proven problematic for me. So, Mr Bogle doesn’t do it for me. Increasingly I find “devoted” Bogleheads as a general group rather off putting. Sort of like finding yourself stuck in a room with a 5 point Calvinist..

        I hold ~50 stocks and have very little turnover. Not even so much as an annual rebalancing (He’s a WITCH! Burn him!) Most of what little trading I do is adding to my DGI stocks (or picking up another one) as I diversify out of RSU’s, ESOP and ESPP shares. Up or down I hold (and sleep well) as long as the divi continues being paid without being cut, continues increasing, and has adequate earnings to cover.

        I started transitioning to a DGI portfolio after Y2K, stayed all in since then thru 2004, 2008 etc, and sleep well. Coincidentally those boring DGI stocks have had capital apprecation along with the divi growth that I’m quite happy with.

        Reply
      • Cyrus November 7, 2014, 4:40 am

        By the time you accumulate a stache you can retire on, the management fee of even the lowest-cost Vanguard funds becomes substantial, and the one-time transaction fees to have purchased the stocks that the index fund holds are recovered by never paying management fees.

        Reply
  • Tom Madiso November 6, 2014, 10:26 am

    Bettermint while very useful that $150 fees or $1500 for 1mill accounts isn’t worth it for me when I can just track index funds myself and do taxloss harvesting pretty easily. On top of that many brokerages will provide 2500 bonuses when transferring over this amount.

    Robo investing has a ton of appeal…but I have seen the market tank 2-3 times only in the past 8 years over what has been blamed as computer issues. This keeps me of way from any auto investing system.

    Reply
  • Even Steven November 6, 2014, 12:57 pm

    I’m always a little slow to technology and upgrades. I don’t mind using the boring old Vanguard account, you know the old dependable cast iron skillet versus the new *better Teflon skillet as an example. I’m not saying Betterment is good or bad, but I have no plans on using Betterment in the future. Thanks for the review and commentary always good to think about your finances.

    Reply
  • Doug November 6, 2014, 2:33 pm

    There are many ways to achieving financial independence. In years gone by, I didn’t have much luck with picking individual stocks so I went with mutual funds. While better than nothing, or investing in GICs (guaranteed income certificates) which pay only interest, because of the high MER (management expense ratio) of 2 to 2.5% these mutual funds leave much to be desired. From reading books by Derek Foster (www.stopworking.ca) who like MMM also retired in his mid 30s, I saw his strategy is to invest in stocks of companies that produce goods and services everyone uses (such as Proctor and Gamble, Johnson and Johnson, and Enbridge Pipelines) that pay good dividends. Not a bad strategy, but in reading http://www.greaterfool.ca I see another strategy is to buy ETFs rather than individual companies to lower risk. What do you do? I’ve settled on a hybrid model, with some of both and it’s working good so far, much better than those mutual funds. Last but certainly not least, I buy investments that are on sale. Lately oil and gas companies have been on sale, but as I don’t know which companies to buy I’ve bought XEG, iShares Energy Fund (listed on the TSX), as it has many energy companies in its portfolio.

    Reply
  • SteveCW November 6, 2014, 5:03 pm

    I have been catching up on your blog as a first time reader over the last few weeks. I have adjusted my budgeting expectations greatly and am looking at clearing out my wife and I’s student debt over this coming year. I expect to be debt free by the end of 2015.

    That means time for redirecting that money to investments.

    I am already close to maxing out my 401k, so I will do that once our debt is clear. I will also likely open a Roth-IRA and max that out since you can’t contribute much to it anyway and it opens up a lot of cool possibilities for moving money around.

    Depending on how I allocate our excess money I will have anywhere from $500 to $2000 dollars a month to invest in post-tax non-retirement accounts. From reading your blog I was pretty set on a Vanguard index fund of some sort. Vanguard seems to have a great reputation all over the internet. Betterment seems interesting though. However I have one major concern that I think a few other people have also voiced.

    My current 401k is through my employer and it is ran by Fidelity. Is betterment able to avoid getting me into tax trouble by detecting illegal tax harvesting which may be in conflict with my Fidelity ran 401k. Obviously it would be easy if they had control over that investment too but I don’t think I can move a work based 401k.

    I read somewhere that Fidelity recently purchased Betterment or something to that effect so it would seem likely that they should be able to avoid conflicts with my current investments.

    Reply
  • Jim Plamondon November 6, 2014, 5:36 pm

    Obviously, Vanguard should acquire Betterment.

    Reply
  • Dan November 6, 2014, 6:02 pm

    This sounds like a fine service, but I will stick to my own investing strategy;
    1. Educate myself thoroughly about finance and investing ( reading tons of books, talking to successful investors, reading Mmm etc).
    2. Picking a basket of large cap stocks that are market leaders in their field,have a competitive advantage, sustainable earnings growth and pay fat dividends and reinvest those dividends using a drip and let the power of time return sizeable gains all the while minimizing fee/commissions and learning a shit ton! A post would not be complete without a proper buffet quote ” the market is not there to inform you, it is there to serve you!”

    Mmm thank you for writing kick ass articles but i must say this one is a basement dweller for me…

    Cheers

    Reply
  • Christoph November 7, 2014, 3:25 am

    One question I struggle with MMM; This site, and others similar, don’t just promote index investing, but also a set of values about life and the protection of the planet we live on, for example.
    Now, with index investing, these green little workers that you say you put to work while you do other, valuable stuff, might just be working for values that are completely contrary to the ones you promote on this site. They are working for companies like Monsanto and Halliburton, to name only two.
    How do you reconcile this? What about (ethical) index investing of sorts, i.e. minus these guys that I’d think we really don’t want to have our little green people doing work for? I can’t see that Betterment does anything considering ethical principles of investing. I don’t give a toss about a few tax dollars saved, when at the same time my dollars support the wrong cause.

    Reply
    • B November 7, 2014, 6:45 am

      Monsanto? Someone must have watched Food, Inc. again.

      Reply
      • B November 7, 2014, 8:11 am

        There are almost no companies that do 100% “bad” things. Most do mostly good things. I think that it’s best to invest in the whole market via index funds, but then SPEND your money to further your goals both at the store and via selected donations. Those will have a bigger impact than you not only 1/10,000,000th of a company that doesn’t even really care about there shareholders to start with.

        Reply
        • Christoph November 9, 2014, 1:47 am

          I don’t agree with that notion of my share being sooo small that it doesn’t make a difference, hence I might as well support …. companies like Halliburton and others who act completely contrary to my values.
          a) as a group Index investors would make quite a significant difference if they decided to put their cash not merely in an index fund but into one that also considers ethical investing criteria and
          b) the money I can donate is also very small. What’s the point of having my green workers doing harm and then donating from the profit they make to remedy this a tiny bit?
          I.e. putting all my cash into companies who’s only value is to ‘maximise profit”, who act completely contrary to mustachian values and my values (where they overlap), and then make up with a bit of extra donation here and there?
          That’s hardly the path to a better planet! What do others think ?

          Reply
          • B November 9, 2014, 8:17 am

            Ok, invest in your social/ethical indexes and enjoy the lower returns. Or choose a few individual companies you are happy with and take on that focused risk.

            The entire reason I’m investing my money is to grow it for retirement. I’m not going to let my “feelings” get in the way of that growth. If these companies are doing anything truly unethical or illegal, the market will show it and/or law enforcement will get involved.

            Reply
          • SteveCW November 11, 2014, 10:18 am

            Like B said there are indexs made specifically of companies that qualify as “green” or well meaning as defined by the parameters of each index. You can look at their past performance and see if there is enough to build a portfolio on.

            The problem of course is that it is limiting the scope of your index based on a parameter that may have little to do with future growth or financial success, you will likely not reap the full benefit of a more standard, proven index. But at least you will be able to sleep at night.

            You may even still beat out people trying to pick winners :)

            Reply
            • TP December 15, 2014, 3:22 pm

              This is one reason I use Personal Capitol. They ask what you want to avoid. My PC portfolio is very well diversified and they did not and will not invest my money in my off-limit area.

              Reply
  • Chris November 7, 2014, 8:10 am

    I understand the benefit of TLH, but that benefit is minimized by low turnover funds – which is what any mustachean should be investing in. I’d like to see that 0.77% recalculated next to a low turnover vanguard fund and not a TYPICAL BETTERMENT FUND as noted on the website.

    Not saying it’s bunk. I’d just like a little less sugar in the Kool-Aid.

    Reply
    • Tom Madison November 8, 2014, 8:42 am

      Also one thing to note the whitepaper .77% is based on the person being in the highest tax rate. Also they calculated it with CA capital gains tax included.

      Reply
      • Boris Khentov November 9, 2014, 1:23 pm

        Chris – the baseline Betterment portfolio is a bunch of (mostly) Vanguard ETFs. There is no “Betterment Fund” – there’s only a Betterment portfolio.

        Tom – that’s not entirely correct. CA yes, highest no. We base the .77% figure on the following:

        “For tax rates, we assume a single California resident (where Betterment has the most customers) making $100,000/year (federal: 28% on income, 15% on LTCG; state: 9.3%)”

        https://www.betterment.com/resources/research/tax-loss-harvesting-white-paper/#alpha

        Reply
        • Chris November 10, 2014, 6:42 am

          Thanks for the response Boris.

          I guess what I would like to see is the same chart vs. the typical indexes such as the Russell and the S&P.

          Reply
        • Daniel Davenport November 12, 2014, 3:15 pm

          Boris, do you work for Betterment? I am ready to take the plunge, but wouldn’t it be better to wait for the stock market to fall a little from these current unprecedented highs, and therefore “buy low.” Please explain why this either does, or does not make sense. Thanks

          Reply
  • Kayla November 7, 2014, 8:26 am

    One thing I’m proud of when it comes to my finances is that I didn’t delay investing for retirement. I started investing in my 401K from my very first paycheck, and I made sure to invest enough to get my full employer match. Thank you for trying to raise awareness that people need to invest for retirement and giving suggestions to those who are not overly familiar with what types of fund to invest in.

    Reply
    • Antonius Momac December 23, 2014, 12:59 pm

      Hi Kayla,

      I think a lot of people might have different opinions, but if your plan offers a vanguard target date retirement plan, then I think that might not be a bad option. One of the lowest fees around. I think they do a good job on the split/allocation if you’re young.

      if you want to get fancy. Tony Robbins has a new book, Money master the Game. It’s really interesting. I think all financials do a funny thing with that expected average return a year and having that as a factor, but he talks about fees a lot and how that can eat up your retirement. Also, I think the book echo’s MMM’s idea of making money to live on, you just have to determine what that means to you. It’s not about spending or making more. the Money game is about knowing what you need and setting yourself up for success.

      Anyway, I like what I’ve read so far and Tony R says that all the proceeds are going to feed people that are hungry. Seems like a win win win.

      Reply
  • Ravi November 7, 2014, 9:19 am

    Interestingly, I also just registered for a Betterment account in the past week, although I’m probably only going to end up with 1k/mo as opposed to a 100k deposit.

    I do hope to get to the 50k amount to see how the tax loss harvesting functions and if the site overall does a decent job, but even if it doesn’t I’ll happily sell it out and reinvest elsewhere.

    I suppose there are more expensive ways to experiment with my money. A site that charges 0.35 to 0.25% fees is hardly putting me on the street when I pay $7+ per trade for most stocks.

    Hope it turns out well! I wish it had more history. I think Future Advisor may be a better alternative, as it’s a more wholistic service that reviews ALL your assets and can invest them all for your, or just a portion that you give to them while considering your overall portfolio. However, the fee is also considerably higher at 0.5%. I hope these work out well. It’s probably best for most people to leave things on relative auto-pilot to remove some of the emotion from investing our hard earned dollars.

    Reply
  • Mel November 7, 2014, 9:21 am

    I’m just now embarking on my career after many years of professional school and am so excited to be throwing money at my ridiculous pile of student loans. At the same time I would like to increase my retirement savings. AND at the same time I would like to be saving a down payment for a house (I’m currently living in half a duplex that I was lucky enough to have the help of my dad to purchase. I manage renting the other unit and have been doing construction projects on it in exchange for lower living costs).

    My main question is…would it be ridiculous to use betterment in part as a savings account for a down payment? I will be saving at a rate that I should have the amount within three years. It seems silly for me to keep thousands of dollars in a savings account earning basically nothing for years, and betterment makes it sound like the fluidity of the account would make it easy for me to access it when I need to. I know investments are more predictable over long term, but are there any big reasons why I should use a regular savings account instead?

    Thanks for any help or input you have!!!

    Reply
    • Dan December 10, 2014, 3:24 pm

      Mel, that’s exactly what we did. You’ll likely want an allocation heavy on bonds.

      Reply
  • Patrick November 7, 2014, 2:02 pm

    I’ve been looking at the Canadian robo-advisors in particular
    Nest Wealth http://nestwealth.com
    Wealth Simple https://www.wealthsimple.com
    would really appreciate hearing from any Canadians out there using them?

    Reply
  • AC November 7, 2014, 3:52 pm

    Here is a white paper offering a critique on betterment and wealth front. Michael Edesess is an economist and mathematician. http://www.advisorperspectives.com/newsletters14/The_Tax_Harvesting_Mirage.php

    Here are his thoughts from an ethical and legal perspective…

    “I mentioned that the intent of the wash rule was to prevent investors from taking artificial losses solely for the purpose of tax avoidance. The tax-loss harvesting strategies are clearly efforts to take artificial losses solely for the purpose of tax avoidance. In Kurt Eichenwald’s excellent book on the rise and fall of Enron, Conspiracy of Fools, he writes, “Ultimately, it was Enron’s tragedy to be filled with people smart enough to know how to maneuver around the rules, but not wise enough to understand why the rules had been written in the first place.”

    Something should be said about the ethics of going to such lengths to get around the IRS rules that were written for a reason. This is a clear case of regulatory arbitrage for the sole purpose of rent-seeking.

    Rent-seeking is the practice of effecting wealth or income redistribution, often by manipulation of the rules or regulatory arbitrage, in order to benefit one set of individuals or entities at the expense of another, but without increasing the total amount of wealth. It is difficult to see how artificial tax-loss harvesting, in contempt of the reasons why the wash rule was written, will increase the total amount of wealth for everyone. It will only redistribute the tax burden from those in a position to practice daily tax-loss harvesting due to having a substantial investment portfolio to others who are not so positioned.

    While this may not be the measure by which the behavior should be judged, it is particularly petty to engage in such dedicated rent-seeking behavior merely for so trivial a benefit.”

    Reply
    • Joel November 7, 2014, 4:38 pm

      I’ve heard it said somewhere that the way the rich get and stay rich has a lot to do with tax planning. Case in point, Warren Buffett’s famous comment that he had a lower effective tax rate than his secretary.

      The very wealthy even go so far as to contribute to lobbyists to keep or improve their tax “loopholes.” While I can definitely see the argument that both of these are unethical, for the meantime I will put myself in the “If you can’t beat ’em…” camp when I can take advantate of TLH.

      Reply
      • AC November 7, 2014, 6:44 pm

        Joel,

        You need to read the white paper. Not only is it unethical and possibly illegal; but the claims of TLH are greatly exaggerated. For example, the advertised “alpha” assumes one is in the highest possible federal and California tax bracket. I doubt many people on this site are in the 56.7% tax bracket used in the Betterment assumptions. Edesess estimates tax benefits that are likely equal to the fee being charged over time. No net benefit, and a potential tax liability should the IRS deem TLH fall under the wash sale rule. Not to mention the joy of inputting all of the trades into turbo tax at year end.

        Reply
        • Boris Khentov November 7, 2014, 7:25 pm

          Hi AC,

          Boris from Betterment here. We obviously disagree on some things, but in the interest of letting people make up their own minds:

          1. Here is our response to Edesess:

          http://www.advisorperspectives.com/newsletters14/The_Tax_Harvesting_Oasis.php

          2. If you do, in fact, read our white paper, you would see that the tax alpha we advertise is based on the following assumption:

          “For tax rates, we assume a single California resident (where Betterment has the most customers) making $100,000/year (federal: 28% on income, 15% on LTCG; state: 9.3%).”

          https://www.betterment.com/resources/research/tax-loss-harvesting-white-paper/#alpha

          We subsequently demonstrate the effect of the max tax rate as well, but that is not the number we advertise. We also integrate with TurboTax seamlessly.

          Reply
          • AC November 7, 2014, 7:51 pm

            Boris,

            Thanks for the reply. My link includes your entire exchange with Edesess. I would encourage everyone to read all three papers and make their own fully informed decision.

            Reply
  • just call me al November 7, 2014, 11:59 pm

    It’s all very interesting and I can see the appeal, especially for individuals just starting to invest. But, I like reading Tim McAleenan and I bow to Bogle. So when Tim McAleenan wrote about how Bogle never rebalances, well, this whole conversation, to me, became…dead. http://theconservativeincomeinvestor.com/2014/11/07/john-bogle-doesnt-rebalance-his-portfolio/

    Reply
    • AC November 8, 2014, 6:59 am

      Al,

      You are right to be skeptical on rebalancing. Michael Edesess has written a white paper on that topic as well.

      http://www.advisorperspectives.com/newsletters14/Does_Rebalancing_Really_Pay_Off.php

      “My conclusion is that while the subject is interesting enough to warrant further research – certainly much more than has been done heretofore, given how much rebalancing is advocated by nearly all practitioners of the investment advice profession – no evidence has as yet presented itself to confirm that there is a rebalancing bonus.”

      Reply
      • just call me al November 9, 2014, 10:05 pm

        “My conclusion is that while the subject is interesting enough to warrant further research – certainly much more than has been done heretofore, given how much rebalancing is advocated by nearly all practitioners of the investment advice profession – no evidence has as yet presented itself to confirm that there is a rebalancing bonus.”

        That is an eloquent quote explaining the question. And I think the evidence speaks for itself (as the Master, Bogle, has). If Bogle doesn’t do it, and Buffet doesn’t do it—why would you, I, or Bettermint do it? If you have Michael Jordon on your team, and he’s doing too well (I paraphrase), why cut him? As a conservative investor, I buy quality and hold. I watch, but I hold. And I’m certainly not going to pay someone to treat me like I have billions (at a price) when I just have (or expect to have) a million. Good reference, Sir, thank you.

        Reply
  • Keith November 8, 2014, 6:54 am

    This is just terrible. It is one thing to discuss a series of low cost firms that perform this service(s) and quite something else to shill for one company. There is absolutely no reason that and individual with a portfolio of $5 million should pay more for this service than an individual with a portfolio of $2 million. There are flat fee advisors that really do charge a flat fee, based on the amount of time necessary to manage the account. It doesn’t take any longer to manage a $5 million account than it does a $2 million account.

    Daily tax-loss harvesting – WTF – for the long term investor?

    Mr. Money Mustache – like your site but recommend you read some of your earlier articles and return to your roots

    Keith

    Reply
  • GK November 8, 2014, 5:37 pm

    It was my understanding that the purpose of rebalancing is to dampen the volatility of one’s portfolio; not to increase returns. I think the research has shown that, since in the long term stocks grow at a much faster rate than bonds, a portfolio that is never rebalanced will usually do better in the long run than a portfolio that regularly removes money from appreciating stocks and puts them into bonds.

    Reply
  • Diane C November 8, 2014, 11:23 pm

    I realize that my comment, coming in at #256 or so, is going to be a needle in a haystack, but I’ve got to get this off my chest. I’ve been a reader since the very early days. I’d be horrified if I translated the time I spend on the forum into real time hours. I am a long-time, ardent fan, plain and simple. What absolutely stumps me is this headline:

    “Why I Put My Last $100,000 into Betterment”

    The truth of the matter is this is nowhere near MMM’s “Last $100,000”. It’s just an amount of money he had left after the sale of his previous residence. It is, in fact, play money. He has clearly demonstrated that he has enough to live on comfortably and has done so for a decade thus far. He doesn’t need this money, so he can afford this experiment.
    I absolutely agree that it’s his prerogative to do whatever he wants with his money and his blog. I just can’t understand why he would imply that this is his “Last $100,000”. Based on every post leading up to this one, MMM could lose every penny of this money and happily go on living an unchanged life.

    So could I. I am also sitting on considerable proceeds from the recent sale of my previous home. I’m considering options, as I do not need it for the purposes of funding my retirement. Thanks to Pete and others like him, plus my own frugal habits that were rooted before he was born (aaaaacckk!), I have enough to handle my day-to-day living expenses for well beyond my life expectancy. NOT bragging, just want to be clear that I stand on somewhat level ground.

    From my perspective, this headline is grossly misleading. As I have always had complete faith in MMM’s clarity and integrity, I am left to wonder why the hell he would come at this from such an odd angle? Perhaps there is much to be concerned about. Could it be that our Pete has been captured by aliens? Ones that look like really smart guys who come from a planet called Betterment? I am worried, very worried indeed.

    Reply
    • 9 O'Clock Shadow November 11, 2014, 8:59 am

      I think he meant his last $100K, similar to one of us putting our last paycheque into the stock market, not our final paycheque.

      Reply
    • Disastronomical November 11, 2014, 11:49 am

      He just meant it was his most recent, or latest $100k. For example, the last meal I ate was some scrambled eggs and English muffins. While it is correct to say that’s the last meal I ate, I am hoping that it is not the last meal I ever eat. I want to live through lunch.

      Reply
      • Diane C November 12, 2014, 11:16 pm

        Sorry guys, I’m not buying it. In support of my position, I’ll point out that this article does not even mention where the money came from. The reader only knows that if they’ve been following MMM’s progress on the house. Since this is the first time Betterment has been mentioned, I suspect that the headline was constructed with search optimization in mind. I’m not saying that it’s grammatically incorrect, I am saying it is misleading.

        Reply
        • Aaron November 13, 2014, 8:25 am

          Under the section “The Experience of Betterment” he states:

          “I did the basic account setup, linked in the checking account, and within a day I was able to transfer the last $100,000 of leftover cash from my recent house sale into productive investments where it should be.”

          Which provides a link to the article “We Sold the House! Here’s How I’m Investing the $400,000.” So I took the title of this article to imply “Of the $400,000, this is how I’m investing the last $100,000.” Which is most likely the intent.

          I think it’s just misinterpretation, but yeah, I can see how it can be taken different ways.

          Reply
          • Diane C November 22, 2014, 9:39 pm

            I can see your point, to an extent, but I finally put my finger on part two of what bugs me about this. If MMM put 100k into Betterment, I’d speculate that at most this represents 5% of his NW. This is money he can afford to lose. He is also in a high enough income bracket that the tax loss harvesting is probably worthwhile. For many people who are in lower tax brackets or have other ways of minimizing their tax bite, the payoff just isn’t there.

            Reply
  • Greg November 9, 2014, 6:13 am

    Not all of your Betterment portfolio is in Vanguard funds. MUB, for example, is an iShares product. Just sayin’ for the record. I think this is a great concept and I have a lump of my own with Wealthfront. Love your blog.

    Reply
  • SteveCW November 9, 2014, 11:03 am

    I think the words, “investing in retirement” are an ugly bunch for most Americans. Most people with high enough pay know its a necessity but many in their 20’s feel like its robbing their lives now to pay for stuff when they no longer are able to enjoy it.

    I think we should recoin that phrase to “buying your freedom”. That is the number one take away I have gotten from reading up on MMM’s blog. You are not saving money and investing to “retire” in the traditional American work force sense. You are building up investments and money and controlling your consumption to buy your freedom. Because no matter how much you like your job, if you do not have to the option to quite or you are forced to only hold high earning jobs then you are essentially a glorified servant.

    I wish I had listened to advice like this when I was 7 years ago when I was fresh out of college.

    Reply
  • dave November 9, 2014, 5:15 pm

    I only buy index funds and I hold and almost never re balance. Why? Because even re balancing is fraught with human error as you mentioned in your article. Just buy and hold and let the dividends roll in. And I keep all my investments in my retirement account which is tax free so I don’t have to worry about capital gains.

    Reply
  • S.G. November 9, 2014, 5:48 pm

    Very interesting post. I must admit, Mr. MM got a lot of flak for this post. Although I wasn’t first very happy about bunch of Betterment guys hanging around, I have to admit, it was the best way to do it. This kind of post always attracts tons of questions. MMM could either go back to Betterment himself and do research (and waste tons of time and risk inaccuracies), he invited the pros to answer the questions. And they did it well. Since everything was done with proper disclaimers, there is really no way to fault him. Plus, MMM does put his own money into the game. While Betterment probably does give him some benefit, it would probably not be worth $100k and potential loss of audience on this blog.

    But my major contribution is something else. I am personally shocked how much brouhaha has tax loss harvesting caused lately. It’s like the “must do it” thing in investing now. I have two major objections.
    1. Whether you like it or not, doing extensive tax harvesting it statistically more likely to get you attention from IRS. That does not say, there is something wrong with Betterment, or the strategy. It’s just that if IRS sees accounts that do very active tax harvesting, these are potential targets. Also more harvesting you do, more likely you violate the wash sale rules by some of these “investigators”. Even if you don’t violate anything and IRS salutes you at the end of the day, is it really worth extra 0.5% (based on the MMM chart above)? In 100k portfolio, we are talking $500 per year. So after fees etc….
    2. But my major objection is fundamental. I find the entire philosophy to increase your performance by 0.5% by harvesting taxes… odd. It’s like saying that you invest into real estate to deduct mortgage interests…. That’s not the goal, the goal is to MAKE MONEY first, than to minimize taxes. I am probably unusual Mustachian because I am active, direct into stocks, investor. Don’t get me wrong, I have Vanguard index funds, in my 403b. I also have real estate and Lending club account. But I started investing in stocks when I was 19, became FI by 25, finished medical school and got a great academic job with tons of research. This gives me freedom to “not go into private practice to make money”. I believe that every position in your portfolio should be there for a reason, Not just a random decision by a computer, switched around to harvest a few buck. My first investment was ~$3000 position into a single company I researched. I bought for 80, two days later, the stock went slowly down to 70 and stayed +/- there for 2 years. I made some money in the mean time with other smaller positions, but didn’t sell this one. Every tax harvester would advise me to sell, to minimize my taxes from smaller gains. After two years, I watched the stock to climb to 1200 over 4 years. And finally sold. What I am trying to say is that the purpose of the investment should be investing, not saving on taxes. And investing directly into stocks is not a fools errand. The things is, it actually really takes hard work to research the balance sheet, put emotions aside and not go for the “hot” companies than CNBC talks about :).
    One book that should be reviewed here (if it hasn’t been) is Peter Lynch’s classic, Beating the Street.

    Reply
  • Cotton Eye Joe November 10, 2014, 2:08 am

    I like reading your blog and the great advice it gives, but sometimes, with all this advice about Mustachianism & Badassity mixed with examples of playing it safe like saving in index funds forever, I’m a bit confused.

    How is it badass to play it safe?

    I agree with your view on personal financial advisers. I think they don’t know what they’re doing and are just their to take your money to give vague, generalized, useless “advise”.

    Why not take a chance instead, and use the savings to start that business that you(the reader) always wanted to start. If you fail, at least you took a shot at it. Instead of waiting to regret in old age.

    I’m only saying this because, unlike Mr Money Mustache (who’s obviously light years ahead of everyone, which he proved by retiring at 30), some others reading this blog are in their late 20’s to early 30’s and that’s an age where you should swing for the fences and risk it all, or at least risk a part of it.

    Reply
    • Mr. Money Mustache November 10, 2014, 1:57 pm

      I like the bold attitude, Cotton Eye. In fact, I did the same thing in my early 30s: starting an expensive business right after retirement that lost me $200,000. It was a good lesson.

      Suggestion for starting a business: find a way to make it profitable right from the beginning, by starting small and building as profit allows. It shouldn’t cost much, if you understand positive cashflow up front.

      Reply
  • Michael November 10, 2014, 4:34 pm

    Fee-only investment advisor here. First, I agree with your assessment that index funds are the way to go as far as investment funds. I also agree that advisors who only try to beat the market are not worth it. However, Vanguard itself released a study showing investment advisors add about 3% value to the average client. The full study can be found here: https://pressroom.vanguard.com/content/press_release/Vanguard_Research_Quantifies_the_Value_of_Advice_3.10.2014.html

    Summarily, good advisors do more than try and beat the market. We talk to our clients about tax efficiency, social security benefits, budgeting,mortgages, you name it. Additionally, as you know, during a market crash, the average investor gets spooked; by definition, the most selling takes place at the very bottom. When my clients get nervous, they call me and therefore have a much better chance of staying in the market. Same thing when they get excited about a bull market: they get resistance if they try to change their allocation based on emotion. If they get spooked with a service like Betterment, they can pull out their money or get more aggressive with no push-back. I think that Betterment is a n interesting idea and services like it are probably the way of the future. I am not sure it’s there yet since it only provides investment advice and cannot talk someone out of changing their allocation based on emotion.

    Reply
  • Coral November 11, 2014, 5:53 am

    INTERNATIONAL POST

    Hello all,

    There have been a few questions about what the options are for similar products for those of us outside the US, I’d love to get input from anyone who knows of or who has had experience with any such products?

    In Canada, there is WealthSimple
    In the UK: Nutmeg (though a less than positive comment was made about that one).

    What other options are there?
    Australia?
    Europe?
    Other?

    Full disclosure here – I’m an Australian living in Angola with access to set up something financially in either of those two countries or in Portugal… and completely lost in trying to understand what our options are…

    Would love to hear from the rest of the non-US followers!

    Reply
  • Satyam Patel November 11, 2014, 9:47 pm

    By the way you have drawn the investment spectrum, you should actually have put your last 100k into BRK.B. ;)

    Reply
  • SteveCW November 12, 2014, 10:25 am

    MMM, is it just me or do you have a pretty heavy weighting toward emerging markets? I am guessing this probably make sense when put into context with your other investments?

    Reply
  • Joe November 12, 2014, 8:37 pm

    For the record, Futureadvisor has tax loss harvesting and uses low cost funds for diversification.

    Reply
  • Nearlydawn November 15, 2014, 12:53 am

    Thanks for this write-up. I’ve decided to put a few pieces of advice into action today – I’ve used your writings to help me describe for myself what a good plan for FI looks like. I’ve thought through a lot of my personal drivers, and what kinds of things motivate me to save. I’m working on a plan…

    Today I put Excel to good use and did some FI models for myself. As a result, I:
    – Opened a Lending Club account $1000
    – Opened a Betterment account $2000
    – Decided how much of my cash to save for emergencies and what $ to put into a non-qualified account I already own
    – Read up a bunch on the Vanguard VTSAX (budgeting $ to open an account soon)
    – Pushed my hubby to freakin’ decide already if are going to pay of our 2nd mtg or invest the $. I’m personally on the “pay it off” bandwagon. Removing the 2nd makes our house about the same as rent on an apartment in our town. Having our house pmt lower will allow us some flexibility re: work if one of us loses a job. This = less stress
    – Lastly, I finally convinced hubby that my steady diet of mustachianism has lead to some cool ideas like:
    We should drive our current cars at least another 4 years, so we can put huge $ aside for retiring. I was considering buying a flashy car just last year, because I “could afford it”. Now I realize I’d have to work years longer just to have that car. I guess that’s FINE if I know it and still decide to do it, but I was TOTALLY unaware of the trade-off until I saw your write-up re: the true cost of buying a car. FTW, I did the math myself, just to be sure I didn’t go blindly following silly info. Which translates to – I’m reading, thinking for myself, and coming up with a FI plan that works for me. I’m loving it too.
    – Working on my FI… It’s like chasing down free money that’s just blowing in the wind. I have to work a little, but the payoff is fun.

    Reply
  • Dave November 21, 2014, 12:03 am

    Hey MMM!

    Thanks for taking the time to write some excellent articles with good, sound advice! I used to be an individual stock investor (some may call it speculation) but more recently I gave myself a financial makeover and and trying to make things a little more simple in life… I moved both mine (27) and my wife’s (26) Roth IRA’s from USAA mutual funds over to Vanguard. The combined value is ~$32K with a 80/20 ($25k/$7k) allocation of VTSAX/VGTSX. I’m excited to watch it grow with the low ERs! I sold my individual shares of stock that were at a profit in order to pay off some debt and now all that we have left is our mortgage and a small car loan. I will soon be getting a promotion (I’m a military officer) and will thus make more per month. Between my wife and I, we were able to save/invest ~$15k this past year and I am expecting to be able to save/invest closer to $20-$25k this year. We have an emergency nest egg saved with 3-4 months covered. Still working on getting our yearly expenses down as she is not a MMM reader!

    Before getting to the bottom line, I want to give you a more clear picture. I plan on leaving the military in 2yrs 10months when my commitment is up. At this time both myself and my wife will have to find new jobs. We plan on moving back East and selling the house we currently live in. Neither of us have jobs lined up yet but I do not expect that to be too much of an issue. I have an engineering background and will have completed my MBA (entrepreneurial focus) by then and she is a very seasoned event planner.

    So my question….. what do you deem to be an appropriate AA for saving for a house downpayment? I just don’t enjoy the idea of renting (although I am open to it for a short-term option). I have looked into Betterment and like their goal-based investing function with projections, but I’ve read articles that recommend just saving for it in a regular savings account – I also don’t enjoy the idea of my “little slaves” not working for me either. That being said I would like to use a vehicle to help me grow that downpayment faster with the expectation that I’ll be using it in the next 4-5 years. Would you recommend using a Vanguard fund to do this, or Betterment, or play on the safe side an leave it in the bank earning nothing? (But not losing anything either).

    FYI I am an aggressive investor and as mentioned earlier I have 100% stocks in my portfolio now. I’m not adverse to bonds for near-term investing since it limits my downside.

    Thanks for all the help!
    – Dave

    Reply
    • Diane C November 22, 2014, 8:23 pm

      Hey Dave,
      Your story would make a great case study over on the MMM Forum. If you’d like answers from a lot of Mustachians, you might hop on over there and start reading how to start your own journal. Not saying that it’s the same as a direct answer from Pete, but since the Forum is supported by many, you get fast answers and back-and-forth discussion, with specific answers to your questions. Obviously, I highly recommend it!

      Reply
  • Andrew November 23, 2014, 10:24 am

    After reading your post (and doing my own homework of course), I decided to sign up for Betterment At 24 years old with minimal experience in investing and only some money in the pot, I’m probably they’re target audience.

    While I still plan on stuffing a 401k with my company, and some in a Roth IRA, Betterment is what I need in the mix. While IRA and 401ks are good, I think I have the same concern as many my generation- I’m not able to touch it until I’m, like old, like 55-60 old. That’s way far off, and I’m not a fan.

    With Betterment, it’s nice to know I can take it out anytime. 10 years is what I’m shooting for.

    Reply
  • jkub November 26, 2014, 9:00 pm

    I just signed up for a Betterment account (haven’t funded anything) and was looking at their performance page. It currently shows that SPY is outperforming by a huge amount no matter what Betterment stock balance approach you take. Is this a glitch or is it really more efficient to just buy a pile of SPY instead of playing around with all this? Anyone else seeing this?

    MMM would you move your entire portfolio over to this strategy or are you going to keep the 100k in there only?

    Reply
    • Mr. Money Mustache November 28, 2014, 11:58 am

      Yeah, I would be comfortable with an all-Betterment portfolio, but I’m not sure when/if I’ll do it because of tax consequences if I sell everything else.

      The thing is, SPY is just large US stocks which happen to have had a big run-up. Betterment’s allocation is global and balanced, which should be WAY more stable in the next crash and keep up or beat SPY as market conditions vary. I will definitely write more about this on my full-time Betterment page.

      Reply
  • Antonius Momac November 28, 2014, 10:09 am

    Hi Y’all

    I wanted to share my experiment after reading an article on betterment about how target date retirement was obsolete.

    Here’s the breakdown:

    For Betterment, Sept 2013 – Oct 3, 2014 with a withdraw on that date. I received 2.8 % return, as per their site performance calculation.
    During that year I moved a few times between 50/50 portfolio and an 80/20 for a year. So I defiantly did something wrong.
    It was about 20K in total, but I think I started small, then ramped up, and then settled in with a weekly addition of 40-60 dollars. I figure I’d do that dollar cost average deal and try out their tools.

    But certainly, timing could have been a big factor.

    I also have a vanguard account (IRA) with everything in a 2045 target date retirement fund.
    for a similar time period:

    Sept 2013 starting balance was 28,511.85
    Sept 2014 ending balance was 33,189.72 (and this was a losing month)

    No money was added by me in this time period to the Vanguard account (STUPID ME!)

    the difference is 4,677.87 or about 16.41 %

    Not sure what the fees are, but betterment invest in funds with fees, plus adds their fees on top.

    I must have done something wrong. But since the potential to be wrong by more than 13% is out there, I went back to put it all in Vanguard.

    I know betterment has an article about how Target Date retirement isn’t good enough.

    But my experience above says didn’t turn out to good for me.

    What do you you guys think? Maybe betterment people can explain what went wrong.

    Triple-M; please let us know if you have a similar 13% (which is 13k in your case) difference in performance. Obviously past performance (and my poor performance) doesn’t mean you’ll have an issue, but please do a monthly status update like with your Lending Club Experiment.

    Many thanks and keep up the good work.

    Reply
  • littlestache November 28, 2014, 9:20 pm

    About a year before this post, I got a good punch in the face so to speak after reading folks discussions in the forums. Why was I not being more proactive about my cash? I have never been a big investor type. But holding small pile of cash in a savings account was stupid. Plane and simple. I save reasonablely well now, though started much latter than most here. The prospect of retiring early means that you need to tap your cash. Not the IRA. Not the 457. (you name your tax advantaged account of choice). You need to have cash. Cold hard cash on hand that you can spend at 50 (or 30!) rather than 62. If you are not saving past your tax advantaged accounts, you are not likely retiring early.

    So, I looked around. Asked for some advice. Got some pros and cons on betterment. Did a little research and went with Betterment. It was supper simple. I have adjusted it once or twice to add in short-term goal without a hitch. If I have a question, someone emails me back in about a day. The tax loss harvesting, is a something I would never, ever in a million years be doing on my own. But the most important thing at the end of the day is that I made switch to being WAY more proactive than I was before and the ease and simplicity of it all helped. Is if for everyone, no. If you are an investing maven, can do tax loss harvesting, routine rebalancing and reinvestment of dividend income, more power to you!

    Reply
  • Jaime November 30, 2014, 4:22 am

    Dear Mr MMM,
    What do you think of getting a loan to buy a property for rent?

    Reply
  • Frank Frugal December 6, 2014, 9:45 pm

    From another forum.

    What do you think about this statement?

    Betterment has gone through the extraordinary measure of creating a broker dealer and self-custodying assets. If you invest with an investment advisor, the advisor generally doesn’t take your money and then tell you what it’s worth at the end of the day. They generally put it with a custodian – a bank or broker dealer such as Schwaab, Fidelity, JP Morgan, Pershing – and the custodian provides a layer of double checks on where your money is invested and how much it is worth. Call Betterment and ask them where your funds are, and I doubt the answer is satisfactory.

    Indeed, this is something that the SEC has been concerned about. In the wake of Madoff, they originally toyed with the idea of not allowing advisors to self-custody, but then they cut back and issued a warning saying that they “encourage the use of custodians independent of the adviser to maintain client assets as a best practice whenever feasible.”

    Why is this important? You have no level of double checks on your funds, and this could be more risky than any investment strategy.

    – See more at: http://cashcowcouple.com/service-reviews/betterment-review/#sthash.A5tLerKw.dpuf

    Reply
    • Boris Khentov December 8, 2014, 9:35 am

      Hi Frank,

      I work at Betterment.

      This is an important point and I’m happy to address it. Betterment was built from the ground up to introduce efficiencies down the entire asset management stack. This is necessary to get extraordinary results. For example, it allows us to support fractional shares (and therefore no cash drag, and no minimum balances) as well as more efficient trading, netting out orders from different customers before going to market.

      Here’s more on that:

      https://www.betterment.com/resources/inside-betterment/our-story/vertical-integration-better-business-better-returns/

      The statement you quoted implies that the SEC took no action in the wake of Madoff. In fact, the SEC passed an amendment, effective in 2010, that applies to investment advisers who custody their clients’ assets, or who use a related party to do so: http://www.sec.gov/rules/final/2009/ia-2968.pdf

      We are the latter case. Betterment Securities is the custodian and is a related party to the investment adviser (Betterment LLC).

      Under Investment Advisers Act rule 206(4)-2, the investment adviser must be subject to an annual surprise exam from an independent public accountant. We don’t know when the surprise exam will happen. They just show up in the office one day.

      The auditors verify the internal books and records of the custodian. They reconcile every share, and every dollar we say we have, against our holdings at our clearing broker. They spot check several hundred random customer accounts. They contact customers directly and verify that the account statements we issue to them match our internal records for these accounts. They ask questions when something doesn’t reconcile by even a penny.

      Friedman LLP, founded in 1924, performs our annual surprise exam. They then issue a report to summarize their findings, and this report must be filed with the SEC. You can see our two most recent reports here:

      http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx

      The independent findings can be seen under “View Report”.

      This is on top of cycle exams done both by FINRA and the SEC, independently. Those regulatory bodies review our custody records very carefully, looking for any irregularities. More on that here:

      https://www.betterment.com/resources/inside-betterment/our-story/investment-safety-and-security-at-betterment/

      So in short, we are subject to the same scrutiny as Schwab, Fidelity, JP Morgan and Pershing, but we are far more cost-effective. Building Betterment this way allowed us to innovate every step of the process, which is what allows us to have such low fees.

      Reply
      • Frank Frugal December 9, 2014, 4:40 pm

        Boris,

        I’m very impressed that Betterment reaches out to many forums. I have read posts from several people directly involved with the firm.

        I read the elsewhere that the maximum insurance provided through Betterment is 500,000. Is that correct? If so, is this typical for other firms like Schwab, Fidelity, JP Morgan and Pershing?

        Thanks a lot,

        Frank

        Reply

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