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:


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.


* 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”.


  • B November 4, 2014, 11:13 am

    All was good until I saw the perhaps politically motivated image of investment effectiveness. Guns and ammo will increase over time at least in pace with inflation. Are they good “investments”, no, of course not. But they should at least be at 0% and above tea leaves.

    • Mr. Money Mustache November 4, 2014, 11:25 am

      Sounds like you know more about the field than me, B. It isn’t politics but rather optimism that makes me occasionally make fun of doomers and preppers.

      But don’t guns (except certain classics) depreciate from their initial purchase price, and then have some basic value which would increase with inflation? Unless manufacturing advances cause the new guns to obsolete the old ones, as it happens in high-tech items.

      “Tea Leaves” refers to looking at patterns in tea leaves to decide which individual stock to buy. Technically it would probably average out to be just a more volatile version of the market as a whole, less any trading fees and taxes :-)

      • B November 4, 2014, 11:44 am

        I suppose you would be correct, guns initially lose value after purchase but over the long term they do keep pace with inflation. It’s a rare area though because guns don’t necessarily become obsolete. New guns don’t replace old guns, and old guns don’t go to the landfill. New guns just fill up the gun safes right next to the old ones for the people who buy them.

        Regardless, good article. I’ll be keeping an eye on your returns with betterment and how they compare to your usual Vanguard investments. I’ll stick with Vanguard in the meantime. I’ve read too many Bogle books espousing the effectiveness of low fees, and betterment goes against that.

        • JB November 4, 2014, 12:22 pm

          Do bullets go up in value?

          • Chris November 4, 2014, 2:55 pm

            When used judiciously, their value increases exponentially.

          • Ishabaka August 29, 2015, 5:31 pm

            After remaining pretty stable for years, .22 long rifle ammunition increased about 300 – 400% this past year.
            By the way – I think you mean cartidges. Bullets are what come out of the barrel of a gun – generally made of metal. Cartridges include the bullet, the gunpowder that propels the bullet, the primer that ignites the gunpowder, and the case that holds the whole shebang together.

      • Joel November 4, 2014, 3:58 pm

        Hey, don’t go knocking tea leaves! Remember the random walk theory! (tongue in cheek)

        On a more personal note, I had some money in GTAT (makers of the Sapphire glass that was supposed to be on the iPhone 6). Took a 30% haircut, but thankfully I sold before the salt came when they filed chapter 11.

        • just call me al November 4, 2014, 10:26 pm

          Uhhh, GTAT. I read about the crazy that then linked over to TCI forum. My condolences—glad it was just a haircut. That’s crazy shit. Fascinating.

      • Dividend Growth Investor November 5, 2014, 11:06 am

        I will be honest, I am always careful to invest in products that show good historical returns on paper, using a simulated computer model. Tax loss harvesting is all the rage these days, but I think that if you do it “daily”, you increase your risk of raising a red flag over at the IRS.

        I mean if you sell VFINX at a loss, and then buy SPY, and then sell SPY at a loss, and buy IVV, only to sell at a loss and buy VTI, the IRS could challenge your activity. Their definition of substantially similar is not set in stone. What is the cost of dealing with the IRS?

        I would be interested in seeing how a portfolio like that does in real time, with real money, rather than hypothetical results using past data that is curve-fitted and optimized. I would venture out now and say it would not be worth the extra fees. The potential for return is uncertain, but the extra fees are a certainty ;-)

        • Boris Khentov November 5, 2014, 12:30 pm

          Hi DGI,

          I work at Betterment. A few months ago, I shared some actual TLH+ performance data with the MadFIentist, which he published here:


          Almost immediately after this post, the market hit some notable volatility, and substantially increased these numbers :)

          • 2l2r November 6, 2014, 8:04 am

            How does what you do in relation to tax harvesting differ from a Vanguard Tax managed fund.

            • Fred Jenkins November 6, 2014, 1:07 pm

              There isn’t really a comparison.

              You’re talking about a Vanguard fund and a service at Betterment. One looks at your whole account for tax harvesting vs a simple fund.

        • Ava June 5, 2017, 5:00 am

          It seems like Betterment raised their rates again :(

          Which begs the question – Why not just invest with Vanguard directly? Then, no need to pay the 0.3 to 0.9% fee at all!

          You don’t have to be a millionaire to invest directly with Vanguard and the people you get when you call Vanguard’s 800 customer service number are very helpful.

          I’ve been investing with Vanguard directly for about 15 years now. They have some 100-plus fund offerings and you can easily narrow down to maybe 5 or so that are most appropriate for you with a handy tool they have on their website.

          That being said, I did peak at this site just now and I suppose there could be value for someone who is really a novice. For someone who is in that category, there could be value in paying the 0.3% to 0.9% fee.

          I think Vanguard’s minimum to open an account is something like $3,000 . Seriously, you can be “a regular guy on main street, usa” and work directly with Vanguard!

          And, as for learning the basics, you can read MMM or buy Personal Finance for Dummies and Mutual Funds for Dummies for maybe $20 each at your local bookstore. Read additional titles if you like but these two are all most people really need.

          Then go to the beach and relax as your balances grow (over the DECADES to come- no short term gambling in and out of funds!)

    • Anonymous November 4, 2014, 9:46 pm

      The chart wasn’t meant to be interpreted literally. Taken literally, perhaps guns and ammo as commodities might actually appreciate over time. However, the chart was cautioning against “guns and ammo because armageddon”, which is not a sound investing strategy at all, any more than any other “because armageddon” strategy. Focus on the “because armageddon” part and treat the rest as hyperbole.

  • Adam November 4, 2014, 11:24 am

    Great write up, I would like to know for full disclosure if you have a financial relationship with this company.

    • Mr. Money Mustache November 4, 2014, 11:32 am

      Adam, as mentioned in the post they have an affiliate program which I signed up for as I do for all companies I like and use myself. Others include Republic Wireless and Geico insurance, but others like Vanguard don’t have such a program and still get the same recommendation.

      The philosophy here is to let the blog make money whenever it’s convenient and goes along with my own values.

      If any readers question the validity of the recommendations and think I may be biased, there’s an easy solution: don’t use the links, and consider not reading the blog at all since biased advice is often worse than no advice at all.

      • JB November 4, 2014, 12:23 pm

        So if Vanguard comes up with a “Betterment” solution, would you just move the money back to Vanguard? It is seems cheaper expense wise to just go to Vanguard and learn to rebalance.

        • Plex November 4, 2014, 12:54 pm

          Wealthfront also offers a Betterment-like service, with arguably better diversification, but generally higher fees (it’s cheaper if your portfolio is very small, though). The automated tax-loss-harvesting is what makes these more appealing that DIY re-balancing at Vanguard (which I agree is easy enough that automate re-balancing only isn’t worth a fee, imho). So only at the $50k or $100k point where you also get tax-loss harvesting would I even consider these.

          Schwab announced a competing service that has no fees at all (presumably they’ll make money by using some Schwab-branded funds), but it won’t be available until Q1 next year. At that point I’ll have to give it a go, assuming the diversification is at least as good as Betterment.

          • Dave M November 4, 2014, 9:24 pm

            My wife and I have been investing with Schwab for 20+ years and we love them! I have a Betterment account now, but I fully intend to transfer that money back to Schwab once “Intelligent Portfolios” go live next year. I also use MarketRiders service to diversify and rebalance our IRA accounts at Schwab. But I would definitely consider Intelligent Portfolio allocation for that money as well if Schwab makes it available for IRA accounts.

      • Steve November 4, 2014, 12:35 pm

        Could you clearly provide a link to where you are tracking your Betterment vs. Vanguard portfolio? I clicked on ‘research’ and ended up at Betterment. Thanks!

        • Dividend Growth Investor November 5, 2014, 11:09 am

          Charlie Munger says, never ask a barber if you need a haircut ;-) I like the disclosures on tax-loss harvesting on Betterment site:

          “Tax loss harvesting is not suitable for all investors – especially those in low income tax brackets. Nothing herein should be interpreted as tax advice, and Betterment does not represent in any manner that the tax consequences described herein will be obtained, or that any Betterment product will result in any particular tax consequence. Please consult your personal tax advisor as to whether TLH+ is a suitable strategy for you, given your particular circumstances. The tax consequences of tax loss harvesting are complex and uncertain and may be challenged by the IRS. You and your tax advisor are responsible for how transactions conducted in your account are reported to the IRS on your personal tax return. Betterment assumes no responsibility for the tax consequences to any client of any transaction.”

          • jeb November 7, 2014, 1:01 am

            I’m glad you pointed that out about low income tax brackets. Although my portfolio is larger than average, this strategy does not give me an edge worth the added cost and risk.

            On the same note, this re-balancing focus by so many investment advisors is either over-used or mis-understood or both. There’re sites out there that have people asking how many times a year they should re-balance their $10k-$100k portfolio. A portfolio that size isn’t large enough to worry about that when it can be balanced well enough with added contributions and not sales which trigger costs, taxes and potential opportunity loss.

            While at it, the balance should be between how much you’ve initially put where and not how much each segment is currently worth. If done the other way, people might mis-understand and chop down a high flyer that still has a good valuation and growth just because it’s been so successful. Killing the goose that lays the gold eggs.

  • Jimbo November 4, 2014, 11:25 am

    I’m no expert as all of my money is in retirement vehicles (and will be until I have maxed them all out), but 0.15% is a very small price to pay for services that aren’t trivial to do on your own, take the worry out of it anyway, and increase your return in non-retirement accounts. If you want to spend your time rebalancing (easy) and tax loss harvesting (not as easy), then go for it.

    • Brian November 4, 2014, 12:59 pm

      The absolutely #1 reason to use a service like Betterment, or Wealthfront, or one of the other robo-advisors is the tax loss harvesting. It’s a huge financial advantage. Both companies do it well, but Wealthfront does it better (daily versus monthly), but they charge more. So you have to weigh that.

      If you have a very large taxable account, it absolutely makes sense to use a firm to capture the daily tax loss harvesting. And pay the 25 basis points to do it.

      But if you do that, you need to be sure to not invest in the same ETF’s, or frankly any index fund that uses the same indexes. Or you will run into a tax nightmare. But with all the indexes out there, that shouldn’t be hard.

      You can avoid that by giving them your IRAs and Roth’s to manage, but then you lose the primary benefit of tax loss harvesting you were paying for. But they will avoid the wash sale problems. However, it MIGHT degrade performance of your taxable account as they might make fewer trades due to tax loss harvesting problems. It’s all very complicated.

      But I think that robo-advisors are the way of the future, and the fact that they are all based off investing in low cost index funds from Vanguard surely will make the financial world a better place.

      • Mike Reust November 4, 2014, 2:20 pm

        Full-disclosure, I work at Betterment.

        Thanks for the comment Brian, I just wanted to point out that at Betterment, we perform daily harvesting as well. You can see more comments on our website, which includes a comparison to other common approaches, as well as a white-paper which details our methodology and algorithm in more detail.


        • Bill Q November 4, 2014, 6:33 pm

          I’m confused…does the IRS concept of a “wash sale” cross between retirement and non-retirement accounts? I.e. if I sell VGSTX from a brokerage account then the next day use some assets in a rollover IRA to buy VGSTX, is that a wash sale? How can it be since there’s no concept of capital gain or loss in the retirement account?
          If I’m correct, one could use Betterment for non-retirement funds and take advantage of rebalancing and tax loss harvesting, then use the same Vanguard accounts in non-Betterment retirement funds to match Betterment’s rebalancing. This might be a good way to dip your toe into Betterment without committing the entire retirement nest egg. And what might make Betterment even better (Besterment?) would be keeping track of your entire portfolio and making rebalancing recommendations. I would pay for that.

          • Boris Khentov November 5, 2014, 10:40 am

            Hi Bill,

            Boris from Betterment here. The IRS has ruled that repurchasing “substantially identical” securities in your IRA within the wash sale window does result in a wash sale:


            This makes some sense, since you still maintain effective ownership of the security, even though it’s technically “the future you”. However, as you point out, there is no concept of capital gains or losses in an IRA. For that reason, the effect is more severe than a regular wash sale (which simply permits you to take the loss later). The loss is permanently disallowed. It’s unclear if this result is meant to be punitive. It could be that there is simply no way to track basis in your IRA, and there was no way to deny the loss other than to permanently deny it.

            This is a bad outcome, and one we were keenly aware of when designing TLH+. Aside from several tax location optimizations (no munis in the IRA), the best (cheapest, best-tracking) index funds you have in your taxable are often the ones you’d want in your tax-advantaged accounts too.

            We felt that when triggering losses on behalf of our customers, we had a responsibility to avoid permanently disallowed losses at all costs, so we put a lot of work into bulletproofing the algorithms against this.

            The way we handle it is with tertiary tickers in the same asset class that never appear in the taxable portfolio. If a contribution or dividend reinvestment in your IRA would permanently wash a loss realized in your taxable, we automatically direct it into a tertiary ticker within the same asset class. That allows us to maximally harvest customers who have both taxable and IRA accounts, while maintaining perfect allocation in both. This doesn’t happen often, but offers peace of mind.

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

        • Steve November 4, 2014, 6:54 pm

          So if you are moving money frequently for tax-loss harvesting, when an investor eventually sells out (to spend in retirement), they will have a difficult time documenting their cost basis?

        • Mike November 19, 2014, 7:25 pm

          I really like the concept, but can you work around outside investments? The problem is that I’ve got 457b/401k investments that can’t be rolled over. Is it possible to manually enter in the amounts or collect the info like Mint does so that the rebalancing reflects my outside investments?

          Also, I’m a bit worried that I might accidentally trigger wash sales in my 457b. The IRS hasn’t specifically mentioned 401ks, but it seems reasonable enough to assume that it would be disallowed. Is it pretty easy to make sure that my 401k is using different funds than Bettermint?

          Is tax gain harvesting an option? If I end up in a low bracket can I set the algorithm up to fill up my 15% tax bracket with long term capital gains instead the opposite?

          How easy is it to leave Bettermint if the management fees go up? Is there a cost to transfer out? Can it be done without triggering massive capital gains? I’m a bit worried that the current low fee structure won’t always be there, nor will I have the opportunity to leave.

          • Richard December 24, 2014, 3:20 pm

            I asked Betterment about wash sales versus my Fidelity 401ks. Their reply:

            Generally, you will incur a wash sale in your 401(k)s if you transact on any securities within your 401k that track the same indices as the ones in your Betterment TLH+ portfolio.

            I have included a link below which will show you the securities held in our TLH+ portfolio that you can cross reference with your 401(k)s portfolios. Again, you want to ensure these funds in your 401k will not be tracking the same indices. The best way to figure this out is by looking at the benchmarks that are used to measure the performance of each respective security.

            Lastly, generally investing in target date funds are a great workaround as well as not transacting on the securities within your 401k.

  • Mr. FC November 4, 2014, 11:26 am

    Long time reader, first time commenter….MMM you are a huge inspiration (but I can see how some think this post is mildly selling out…no shame in that though)

    I checked out Betterment when I was rebalancing my Fidelity portfolio a few months back to see if it made any sense to move my stuff over. In the end (for me anyway) it seemed like it made more sense to watch Fidelity on my own and do the same thing Betterment would be doing, but avoiding their fees.

    A big part of long-term investing is avoiding the fees that really ding your returns, in all shapes and sizes. That includes Betterment, IMO. But Jesse @ YNAB and MMM are fans, and I kinda get why – it just puts investing on autopilot leaving you more time for other stuff.

    I like JLCollins’ approach more (inspired me to look really hard at VTSAX) but since I’m exceptionally lazy about moving when I don’t have to, I just stuck to my knitting at Fidelity.

    • mary w November 4, 2014, 11:53 am

      I’m with you, Mr. FC, I want to do the rebalancing on my own. I re-balance relatively infrequently (every 18 – 24 months) which minimizes tax consequences and transaction costs. I also want to look at cap gains/losses as part of the big tax picture which a brokerage account can’t do automatically.
      Interestingly I also use Fidelity.

      • Mr.FC November 4, 2014, 1:36 pm

        Yep – one of the benefits/headaches of having to do it yourself is to look at the entire picture and see where all of it sits and then adjust stuff accordingly. We have a 401(k) (some proprietary provider who offers REALLY AWFUL investment options) and 2 rollover IRAs with Fidelity…when I want to rebalance, I look at our whole exposure and just adjust in the rollover IRAs to get the allocation I want. It’s a small PITA but since I only do it once every 18 mos – 2 years it’s fine.

        Sense is that you can’t necessarily do that with the autopilot providers but I could be wrong.

        Also to a point that JLCollins has made in the past, you can achieve basically the same thing as VTSAX with other providers but you have to watch the fees since these funds are essentially loss-leaders for the brokerage…Fidelity has a version of VTSAX called FSTVX which is where the bulk of our $$ goes in the rollover accounts.

        • Debbie M November 4, 2014, 6:39 pm

          I also do it all on my own. I’ve read you get better results when you don’t rebalance super often, so that’s how I like it.

          But I have the advantage that my index fund investments are all in retirement accounts, so I don’t have to worry about tax harvesting. (There are advantages to not being rich enough to max out retirement savings vehicles.)

          And most of my money is in one place (my Roth IRA at Vanguard), so I can just rebalance that and not worry about the extra bits (until I get to roll them over next year).

    • phn344 November 8, 2014, 9:56 am

      It seems to me that a service like Betterment makes most sense if you give 100% of your portfolio to them (including retirement savings). Anything less than that would still require you to manually re-balance; Am I right?

      • TJ February 8, 2015, 11:13 am

        I wouldn’t give Betterment or Wealthfront a penny of my tax-advantaged accounts, nor would I give them a penny of my bond allocation if possible. Their usefulness is entirely in the tax loss harvesting which is irrelevant in a tax-advantaged account and rare for a bond fund.

        Instead, I would put my IRA and 401k exclusively in a reasonably allocated balanced fund to avoid wash sales. Funds such as Vanguard Moderate Growth, Vanguard STAR, or Vanguard Wellington. As i mentioned, I also would prefer to mange my bond portion seperately, so I would do a 100% stock portfolio in betterment. if I had $150,000 to invest and wanted 70/30 between stocks and bonds, I would put $105k in betterment’s 100% stock portfolio and 45k in something like Vanguard Intermediate Term Tax Exempt. It would be a little bit of extra work in determing where to direct new contributions (bond fund or betterment), but I think it’d be worth the fee savings. Others may disagree.

  • Robin November 4, 2014, 11:26 am

    I’ve had about 50k sitting in a savings account for a year. (I know, you are allowed to call me an idiot.) I’m a true beginner in investing and the fear of the unknown is what keeps me there. I’m failing my money. I’ve read a million times on here that you suggest to invest directly through vanguard and I still have yet to do it. Are you now suggesting betterment over vanguard or just betterment for beginners? Or are you still not sure yet until you see how your investment performs?

    • B November 4, 2014, 11:47 am

      Betterment is very new so guys like MMM are taking the plunge and coming back to us with their results. You can’t go wrong with either option, just do something, anything with your money instead of letting it sit in a savings account.

    • Nate November 4, 2014, 12:12 pm

      Betterment is so easy to setup and use, I’d highly recommend starting there. I’ve been with them since 2011 and have no complaints. The customer service is great and getting your money in and out is simple and easy. Just take a small % of that 50k and give it a shot. There isn’t much downside.

    • Allen November 4, 2014, 12:20 pm

      I’d recommend MMM’s article on “buying when the stock market is on sale”. Gives a very clear and concise explanation of how P/E can be used to determine if stocks are a good value at the current time. Personally, I’m waiting until this bubble pops before I go dumping a sum of money in to the markets. I’m betting on mid-2015 when interest rates start rising and companies can’t borrow money virtually for free anymore.

      • Robin November 4, 2014, 12:42 pm

        Yeah I’ve read that now is not a great time to buy in due to the market, so that’s another reason I’ve been lazy about it, like I even need another excuse…

        • April November 10, 2014, 8:34 pm

          In years like 2014 where we see it hitting all-time highs, it’s easy to say “I’m buying at peak, so maybe I should wait.” But there could be 200 days in a year where it hits an all-time high! With enough time, it’s just going to keep going higher – there are $14 trillion worth of businesses on the NYSE, all out to make money.

          A correction is only going to help you if you can get your money into an account in time. When the market drops, it tends to see its biggest gains in the days immediately after. So even if you want to try that route, you need to have an account already setup. Betterment and Vanguard both can withdraw from a checking account, but it takes a day or two to process. You could pay wiring fees, and even then, the purchase may not process til the next day. In the middle of it all, you’re probably going to be nervous about whether it’s really the bottom, and probably lose out on a lot of the gains you were waiting so long to try to get in on.

          I’d say pick an amount (even if it’s just $500) and put it in today. It should make you feel uncomfortable, but not so much you can’t sleep. Get used to the service, what it feels like to invest, and what it looks like to see your money go up and down from week to week. I used Betterment before switching to Vanguard, and it is crazy easy to use and a great starter program (the graphs and diagrams are great). I like the control I have

          • Bill January 2, 2016, 2:51 pm

            April – I completely agree. Or to put it another way, trying to time the markets is a fool’s game. Just put your money in, dollar cost average if you want to, but get it to work. Especially since you’re so young, Robin, time is definitely on your side.

      • Kevin November 5, 2014, 6:35 am

        Allen, what you’re doing is essentially market timing. It makes sense emotionally, but it’s generally the wrong strategy. I know people who have been sitting on large sums of money since 2011, because that’s when they thought the market was on the verge of collapsing again. The market will have to have a huge dip for their bet to pay off. That’s what you’re doing — you’re making a bet that you can guess the correct timing for when to invest.

        • Joe November 6, 2014, 11:56 am

          I have a coworker who converted all of his 401k holdings just to money market funds getting little more than 0% a few years ago. He was predicting a market crash. Bummer for him.

    • JB November 4, 2014, 12:26 pm

      There is nothing wrong with keeping money in cash until you are confident you want to put it into the market. If it is a small portion of your money, not a big deal. If you keep it there too long, it will lose value due to inflation. A year isn’t a big deal. There are plenty of websites and podcasts to learn where to put the money. An S&P 500 index fund is a pretty good start. Don’t go into sector funds to chase yield.

      • Robin November 4, 2014, 12:46 pm

        We’ve actually been throwing chunks of money to pay down our mortgage (interest rate is 3.75% so not bad) and we now only owe about $45k. So I’m actually at a crossroads with taking that $50k to pay off the mortgage or invest it, but I hear that right now is not a great time to start investing. I like the idea of a paid off house at the age of 30, but I also like having that money available to me in case I need it in the short term. Any advice?

        • slugline November 4, 2014, 1:28 pm

          I was just listening to a recent episode of “Radical Personal Finance” podcast where the host and arebelspy from the MMM forums are discussing this exact question. The answer isn’t straightforward and depends on things like:
          1) Do you have any other debt? What types of debt are they? Can they be discharged in bankruptcy? Do they let you deduct the interest from your taxable income?
          2) What would you invest the money in instead? How risky is this investment? Can the gains (after taxes) beat the interest paid on the mortgage?
          3) What’s your job/career situation like?
          4) Are you comfortable with the idea of your wealth being tied up in a single illiquid asset versus being diversified in an investment portfolio that you can easily tap for cash at any time?
          5) What will let you sleep better at night?

          • Robin November 4, 2014, 2:22 pm

            Absolutely no other debt besides the mortgage that we owe $45k on, but I do sleep better at night knowing that my money is there tomorrow if i need it. However, it also kills me that I know I’m essentially losing money to inflation.
            Job situation is commission based so the income varies.

            • Oh Yonghao November 4, 2014, 3:41 pm

              Another thing that MMM has pointed out is using a HELOC as the emergency fund. Essentially it’s a line of credit that uses your houses equity as collateral. It doesn’t cost anything as long as you have a $0 balance. If you need money for an emergency you just write a check from that account. In theory you could ask for a $50k line of credit (assuming your house is worth at least $95k, or pay it off first then ask), then pay off the mortgage with your cash, leaving you with $5k, no mortgage, but a checkbook to let you get up to $50k.

              There may be stipulations on the HELOC like you can’t use it to purchase stock in a company, or other risky investment, but it certainly is a way to pay off the house but still have a little bit of liquidity in your house in case of emergency (e.g. doctors bill, car wreck, insurance deductible, etc.) At which point you could then sell other less liquid assets to cover it, or if you are still working, simply pay it back over time.

            • Mike November 5, 2014, 9:14 am

              I paid off my house in full at 30 even though the interest rate was only 4.25%. In hindsight I should have invested all of the money because it was October 2012 when I made the final payment, but who knew the market was going to keep going up and up? I can honestly say not having that monthly payment was the most liberating thing in the world. With your only non-discretionary costs being food, utilities, insurance, property taxes/fees, and gas you suddenly realize you could work at McDonalds and still pay the bills. That opens up a world of possibilities because at that point you are no longer beholden to your employer so you have some actual negotiating power for more pay, better job, different job, etc.

              Full disclosure, I sold the house and put all of the money into investments May 2013 and subsequently quit work a few months ago. However, I still think paying off the house is a good decision since you only have $45k left and $50k you are reluctant to invest. With the monthly payment gone you will quickly build your savings back up plus rather than lump investing $50k you can just dollar cost average what you were paying for the mortgage and that will help lessen the risk of buying in at a high point.

            • jessibru December 12, 2014, 2:11 pm

              Mike, I like your advice, but I’m wondering if paying off a mortgage still makes sense if you are planning on moving in the near future?

        • Schmidtbrewhaus November 4, 2014, 2:27 pm

          Robin, I believe there are several articles regarding this on the blog… but I would go to the bank and pay off the mortgage and at the same time sign up for a HELOC for the emergencies. That is if you don’t put it in the market.

          the market just went through a reset a couple weeks ago. If you enlist the couch potato investing (review portfolio once a year), you may have missed it since the market dropped in 5 days and rebounded 5 days later. I sold my bonds index and went completely into all stock index and am up 8% in 2 weeks. I just need to stay humble and rebalance back to my stock/bond ratio when I do my annual portfolio review in January.

          “Be fearful when others are greedy and be greedy when others are fearful” – Buffett

        • Matt November 4, 2014, 3:30 pm

          What about this?
          1. Pay off the mortgage
          2. Open a HELOC for emergency $$ (and only tap if necessary)
          3. Immediately start an auto-investment program with extra cash
          1. Pay off the mortgage
          2. Split new $$ 50/50 between emergency $$ and an auto-investment program until you build up your emergency fund.

          Just remember that trying to time the market is difficult. Did you invest during the last financial crisis?

          • Robin November 4, 2014, 6:39 pm

            I have not invested anything outside of my home (if that even counts) and my IRA. It’s fear of the unknown because I’m not well versed in investing. I want to know everything about investing before I do, but I know that’s not possible…so I’ve done nothing instead! Great plan huh?

            • DB November 11, 2014, 6:47 pm

              DEBT FREE FIRST. Pay off your mortgage and then start investing in the market – IN SMALL INCREMENTS. Don’t plunk down all the money you’ve got. How would you feel if you invested and the market corrected and it took 7 years to go back to where it is now? You’d be paying that mortgage all those years and if your job was lost you might lose the house as well. DEBT FREE FIRST.

        • Neo November 4, 2014, 4:07 pm

          My advice is keep 20k in cash pay 15k off the mortgage and put 15k into a Vanguard total market fund. As new savings come in , half to the mortgage and half to the Vanguard index fund. Good job on the mortgage for your age!!

        • Catherine Jean Rose November 4, 2014, 4:39 pm

          Robin – I totally understand. I netted $200K on the sale of a rental property in October 2013. I too was leery about investing it in the “inflated” stock market, so much so, that in the end I put my mind at ease and plunked 140K of it down on my mortgage balance. However, I also contributed 11K in my husband’s and my ROTH IRA’s (November 2013) and then another 11K in January 2014. Invested 3K in our kid’s 529 plan (November 2013) and then another 3K in 2014. I opened my first Vanguard brokerage account and funded it with the remaining 30K (admiral shares).

          My advice – go ahead and pay off your mortgage. I think it feels psychologically good and hey – it’s a GUARANTEED return of nearly 4% on your money!

          Then – invest that ‘would be’ monthly mortgage payment into your Vanguard brokerage every month. You’ll now be participating in dollar cost averaging and smoothing out your risk. You could also do what I did and immediately put 11K into your and your spouse’s 2014 Roth and then another 11K after the new year (2015 contribution).

          Good luck whatever you do!

        • Joe B November 5, 2014, 2:46 pm

          Pay off the mortgage! You have a lifetime to build your savings back up. Pay off any and all debt!

          • Bob. Frugal+as+dirt. May 21, 2016, 7:40 pm

            Hindsight is 20/20.

            As it turns out JoeB was right – market returns now 18 months later have been pretty flat. The best option was to pay off the mortgage with the 3.5% interest rate.

            Fun to revisit these old discussions!

        • Fred Jenkins November 6, 2014, 1:15 pm

          I wouldn’t pay off the mortgage early. At 3.75% interest, if you’re in the 25% tax bracket at least that’ll come out to less than inflation.

          Being young you’ve got access to many more years to compound that $50k. The lost opportunity cost is probably relatively high for early repayment.

          Either of those by themselves should trigger a person to invest rather than pay off, both combined should make the decision easy.

          But… it comes down to personal preference and what makes it easier for you to sleep at night.

        • Dan November 7, 2014, 12:23 pm

          I used to pay off an extra $500 per month on our 2.75% ARM mortgage. It took me a while to realize how foolish this was. While better than a savings account, that 2.75% interest rate is substantially lower than the 9.8% long term, with dividends reinvested, return of the SP500 index. Therefore, I recommend stop paying extra on your mortgage each month, and start dollar cost averaging into an index fund. Over the long term, your returns will be high.

    • Mikki November 4, 2014, 12:42 pm

      If it makes you feel better we have had $274,000 sitting in a savings account for over 2 years because were not 100% sure if we were buying rentals or not. We finally just quit looking. I just recently moved $20,000 to Vanguard and plan to keep moving small amounts. No matter how much I try to learn I swear I am reading Greek. I’ve got our retirement accounts in index and target date funds. Doesn’t seem as real too me as we have never seen that $. The money in the bank is different.

      I think Betterment might be a great place for me to put some more money.

      On the mortgage ~ assuming you have a separate emergency fund I would pay it off. There is a lot of peace being debt free. I thought it was thrilling at 42. At 30 it is amazing!

      • Robin November 4, 2014, 2:18 pm

        Haha, that does make me feel better, but that’s still a great situation to be in. Congrats!

        We don’t have a separate emergency fund, which is why I haven’t thrown the whole chunk at it yet. Once we do have it paid off, that’s all of our debt, but i don’t want to liquidate the whole thing now and then not have any emergency fund, even though we wouldn’t have any more debt.

        • Mikki November 4, 2014, 2:35 pm

          Smart move! An EF is pretty important in my book. I dont know what MM suggests for that but I wouldnt invest anything that would be part of a bare bones 6 month EF.

          • Robin November 4, 2014, 3:20 pm

            I’m pretty sure he would say this: you don’t need an EF in a savings account because you should treat your investment as an EF.
            I think that since he can access his investments within a few days, he would put an emergency on a credit card and then cash out some investment funds to pay off the credit card before the bill was due to avoid paying interest.
            Like how I talk about him and put words in his mouth like he’s NOT HERE? :)

            • Mikki November 6, 2014, 2:11 pm

              I totally get where that makes sense. I just cant do it though. I know the market has done astounding things since 2008 but wow 2008 made both of us a bit more risk adverse.

        • Sam November 4, 2014, 3:34 pm

          How about paying off your mortgage for the guarantied 3.5% return, then open a home equity line of credit for emergencies? As recommended by MMM: http://www.mrmoneymustache.com/2011/04/22/springy-debt-instead-of-a-cash-cushion/

          And of course open your Vanguard or Betterment account for future contributions once you pass this debt milestone.

      • Big Guy Money November 4, 2014, 3:31 pm


        Is it the fact that it’s such a large amount that spooks you, or would a much smaller amount (say $2k) also spook you? From the looks of it, you’ve got the $50k earmarked to be invested. For all the talk about how the market is overvalued at this point, there’s a chance that we’ll never see the S&P below 2000 again in our lifetime. Likely? Probably not. Possible? Sure.

        The math says there’s no better day than today to invest it, and if not today, then tomorrow. For me, $50k will always be a load of money. With an amount of money like that (especially being a new investor), you could commit to investing.. say… $2k on the 1st of each month for the next 25 months. Ignore the valuations, ignore the press…

        Also, if you’re looking for a really easy “Intro to Investing”-type read, take a look at the Bogleheads Investing Philosophy page. They have the how and why of all basic tenants of quality investing.

        • Robin November 4, 2014, 6:47 pm

          It’s the large amount that spooks me. I could handle $2k. It feels pretty awesome knowing that I could pretty much pay the mortgage off now at 30, but if i invest the money instead, there’s risk involved, and I risk the chance of not being able to pay off my mortgage now.

      • Ex-Sgt Pepper November 4, 2014, 3:40 pm

        slugline makes some great points, I mean I’m sure it’s complex, but in my gut I’m with Mikki on this one. Not only the tremendous feeling of being debt-free, but in reality if I had a place where I was guaranteed 3.75% over the next few years, I’d gladly throw my savings account cash there. I’m also really struggling with putting my extra savings into the market for the past few months; it just feels so incredibly counter-intuitive to invest it there when a 10-40% drop is so very likely to be around the corner… even when I read MMM’s and Jim Collins’ advice and I know it makes sense… it’s hard to do.

    • DK November 4, 2014, 5:25 pm

      It’s not what I would do….but I would recommend:

      – Pay off the mortgage
      – Open HELOC just in case (although 5K is still a nice chunk of change)
      – Take mortgage payment monthly savings, and build a a few month EF
      – After EF built up, start dollar cost averaging into vanguard VTSAX


      – Stock market is not ‘on sale’ or even ‘average price’ so guaranteed 3.75% is not that bad.
      – You can completely pay off mtg, so as soon as you do that, your cash flow increases every month. If say you just put a big chunk against it but didn’t pay it off and something happened, now your cash flow is lower plus you have a lot less money in the bank.
      – You seem apprehensive in investing in the market

      • Robin November 4, 2014, 6:57 pm

        I am absolutely apprehensive about it for these reasons– It’s my nest egg that I want to protect, and I have a husband who does not care about our finances. I’ve basically become the financial decision maker in the house, so the decision is all mine and it’s scary.

        • Gina November 4, 2014, 9:17 pm

          I totally understand that statement about being the financial decision maker and it being scary…that ‘a me too. My husband could care less…he wants to eat out all the time, spend spend spend, never looks at bank balances, etc, but he doesn’t want to work forever. So, I took the reigns. I rolled over my IRA to Betterment 2 weeks ago as suggested by. Jesse Meecham (YNAB). I’m also trying to pay off our mortgage but it won’t be gone for a few years. Good luck.

        • Mr. Frugal Toque November 5, 2014, 5:31 am

          That must be unnerving.
          While I do take a slightly larger responsibility for our financial decisions as far as researching goes, I always make sure Mrs. Toque is on board with our general financial tack – i.e. RRSPs are full first, kill the mortgage with everything else, then invest in TFSAs.
          But we’re both on board with frugality and can rarely stand going to restaurants for food we can usually make better at home.
          That was our choice, and “not having mortgage payments” is really, really nice.
          You can have a HELOC if an emergency comes up, though setting one up costs money, so see if you can get a line of credit without paying for a house appraisal. Besides, you’ll have extra money piling up in your bank account once the mortgage payments are gone.

          • Robin November 5, 2014, 7:44 am

            It is very unnerving indeed! I don’t make any big financial decisions without his knowledge, but I know he doesn’t really care. He’s actually asked me before (with an eye roll I might add) what would Mr. Money Mustache do? Ha!
            Thank you for the advice. It seems paying off the mortgage and using a heloc for the EF is the thing to do!

            • Matt November 5, 2014, 11:30 am

              Yes. And start investing any new money right away. Or half to investments and half to EF if you’d like. Do not wait or try to time the market. You can divvy up your new investments 70/30 stocks/bonds if that makes you feel better.

            • The Roamer November 7, 2014, 8:33 am

              Hi Robin
              It sounds like he might be a bit interested since he asked you the question.

              I realized that it is a bit( or a lot) unnerving to be talking about someone so much. My husband has asked me the same thing. What would MMM do?

              I read into it and realized it was bothering him that this stranger was having such an influence on me and therefore our household. It makes perfect sense I was like Mr money mustache this, MMM that. MMM wouldn’t do that. When I realized this I just stopped mentioning him the ideas were what was important. Plus by that time I had started reading other PF blogs.

              I totally understand I would have felt the same way if it was reversed. Now it doesn’t bother him at all, well it been 8 months since I started reading.

              Consider maybe if its the source of the info that is making him less engaged. Oh and check out the madfientist article called the unexpected guest post.

              As for the investing I would say start with vanguard and the 5 k difference now and wait for the new year to pay off house.
              Why? Because it sounds like you have cushion in your monthly earnings so you will build the extra up again and since you will simultaneously be paying you mortgage still you will reduce how much you’ll need so with arbitrary number let say you can save the 5k , you should be back to 50k by Jan. Let’s say you also reduce your mortgage by 5k . now you have 50k and only need 40k to be done. You can do that and still have a 10k emergency fund. Which is a healthy amount.

              Maybe my time line is to compressed and it will take until march to reach that scenario but really it’s still good you get to start investing, you have an emergency fund and you paid off your house. Plus now you have all the money from rent to invest more and build up your safety net if you think you need to.

            • ezra November 7, 2014, 9:40 am

              Robin, you are acting like paying off the mortgage is some sort of final deal….but guess what? it will take about 2 seconds to get another mortgage if you don’t like being debt free.

              The decision isn’t as final as you think it is. pay off the mortgage, see how it feels.

              I paid off my mortgage about 9 months ago (@31 yrs old). I have yet to go “mortgage shopping”.

        • Aaron November 12, 2014, 9:24 am

          While some have been suggesting you pay off the mortgage first, then use your extra money to then invest, I’d like to point out a possible flaw:

          You can contribute $5,500 (per person) into an IRA (Roth or traditional) per year. You have until tax day in April to contribute for the prior year. This is a per year limit. So while a paid off house is very freeing and the mortgage payments can now go towards investment, only a small amount can go towards tax-sheltered accounts. This can make a huge difference in your investment earnings.

          For the purposes of emergency fund keep in mind that the principal (but not the earnings) invested in a Roth IRA can be taken out at any time (they just can’t go back in). So I would say that even if you are worried about investing, even if you don’t know what to do, at the very least set $22,000 aside for Roth accounts. I say this amount because $5,500 x 2 (you and husband) x 2 (2014 and 2015). This money does NOT have to be invested into the stock market if you don’t want it to be. It can go in a CD. Some can go into a CD. It can stay in a savings account. It can go to Vanguard/Betterment/Fidelity/etc. You can even take it out, at some later point, and pay off the house. The important part is that you characterize it as your Roth contribution for the year. If you don’t mark it for Roth contributions before the time is up, then you never can (but you can for future money in future years).

          You’ll still have time to decide exactly what you want to do with the money. Personally I would invest it, in just some low fee broad market index fund. I know this because that’s what I’m doing. I’m taking the cheap mortgage loan the bank has given me, and with the extra money I could be using to pay it off, I am instead investing in the market. Even if the market goes down, I’m still making money (because I’m not selling at a loss, and I’m still getting the dividends). But that’s my own risk tolerance. I see my Roth principal as my emergency fund (for anything I can’t immediately handle) my HSA account as another emergency fund (very good choice if the emergency is a medical expense). Once you learn more about investing I think you may be upset if you don’t maximize tax-advantaged accounts like the Roth. But ultimately what you want to do is up to you.

        • Nearlydawn November 17, 2014, 12:35 am


          I am in a similar situation. I decided to do something slightly different than is being recommended. I whipped out my spreadsheet tool and I broke the problem down into comfortable chunks.

          – I wanted a small liquid emergency fund – I chose 3 times Monthly expenses. I then subtracted that from my “savings” amount. It is sitting in cash.
          – I then peeled off $15,000 to put into investments
          – I’m putting $2K in Betterment
          – $3K in a non-qualified account at Schwab.
          – And I’ve earmarked $10K for VTSAX fund I’m setting up.
          – The remainder is going to the mortgage payoff. Husband and I agreed to pump $ into paying off the rest quickly. IF we have some issue come up and can’t finish the payoff, no worries, we’ll just pay the low monthly amount due until the situation improves.

          I chose this route so that I am starting to invest somewhere OTHER than my 401K/IRA. I hadn’t realized, until I started reading about FI, that to quit working I’ll need to be able to pull from non-401K accounts before I retire, so I MUST start investing in these or I’ll pay big penalties to quit.

          Along with starting to invest – I will also setup direct deposits to help me keep investing. When it’s automated I’m more consistent. Heh.

          I’m a noob at all this FI stuff, and I don’t feel very confident about it, but I’ve simplified the possible paths in a way that seems to be D. All of the above. That seems to make me happy.

          • David May 2, 2015, 12:40 pm

            If you retire early there are options to access your tax sheltered accounts without penalty. You should always max out investments in tax sheltered options. Many invest outside of tax sheltered accounts because they are hitting the limits.

        • Susan November 20, 2014, 3:50 pm

          Don’t be scared. It’s much scarier to have someone who doesn’t know much or care much doing stuff with your money. :)

          People have given lots of good reasons to pay off the mortgage and get into the market, but I’m doing the opposite. To me, paying off a mortgage carries a huge liquidity risk. I have known too many people pay off mortgages or pay for homes with cash, then need cash for something else unexpected. It’s not nearly as easy, cheap, or deductible to borrow money for other purposes. Home mortgages are an incredibly favorable form of leverage right now. It would be another story if rates were 9, 10, or 12 per cent, but to me, at 4 or 5 per cent it’s a no-brainer to use other people’s money to finance my home, get my tax deduction, and keep the liquidity for likely-higher-returning investments.

          And I can’t bring myself to put new money into the market right now. I know everyone says you can’t time the market, but I’ve held cash through 2 frothy markets (3 counting this one) and then bought after big corrections twice so far in the last 15 years. Shiller’s P/E is 26.7, 60% above the historical mean, implies future return of 0.5%.

  • Beric01 November 4, 2014, 11:28 am

    First MadFientist sold out to Betterment, now it’s Mr Money Mustache. And complete with referral links (which will certainly cover the $150 annual fee for MMM)! I might have trusted the post even a slight bit more if it didn’t come with the referral links.

    Betterment does not let you adjust your type of asset allocation based on the funds you have in your tax-advantaged account. I can only conclude that MMM has a completely balanced portfolio in his tax-advantaged account, and has an identical balanced portfolio in his Betterment account. This is not very good tax-wise, as bonds have much worse taxes than stocks. You want to put all of your bonds in your tax-advantaged account! In addition, while I do not have a low-cost domestic total stock market fund in my 401(k), I do have an international one. But I can’t select only domestic stocks in Betterment!

    Betterment is fundamentally a bad option for me based on the offerings in my 401(k), as well as the funds available in my 401(k) (and maximizing the amount of money I put in those accounts). And I can’t be the only person who is optimizing their taxes by placing high-taxed funds in tax-deferred accounts. When I FIRE I will be paying no capital gains and dividends taxes due to my low tax bracket, so I need to optimize my taxes for now.

    I’m a Boglehead through and through, and will NOT allow other companies’ fees to be added on top. And since my taxes will be almost zero in retirement, and you can’t put your 401(k) in Betterment, the service offers no benefit to me.

    • Mr. FC November 4, 2014, 11:35 am

      Betterment’s not really meant for 401(k) investing….not sure if you can even invest your 401(k) in Betterment…

      If you’re maxing out your 401(k) every year and want to invest more, or if you have a rollover IRA that you can move from another brokerage, then you need other options. Betterment is just seeing an opportunity in the market to let you set it and forget it. Nothing wrong with that, but obviously this isn’t your cup o’ tea. :)

      • Beric01 November 4, 2014, 11:44 am

        The thing about a taxable account at Vanguard is that I can set its asset allocation individually based on my 401(k) asset allocation. Since all my bonds and international stock are in my 401(k), I want pure domestic stock in my taxable account. Betterment won’t let me do that. The tax losses on not being optimized will make up for no tax loss harvesting.

        • Mr. FC November 4, 2014, 2:09 pm

          Yep…sounds like then the right thing to do is stick w/ Vanguard. I was in a similar situation when I rebalanced as well…Betterment just seemed to take away too much control for my control-freak tendencies.

          I like the idea behind Betterment, though. My guess is that if you’re on MMM or any other PF blog you’re probably nerding out on this more than the usual Betterment customer anyway. :)

          • Jone November 6, 2014, 8:07 am

            I agree that sticking with Vanguard is a good idea for people with substantial assets in company 401k plans/TSP and/or other brokerages like Vanguard or, perhaps, Fidelity. Betterment would do me no good as it cannot re balance across my TSP, Vanguard Roth, and Vanguard taxable accounts even though I could provide my desired asset allocation.

            Further – Vanguard offers life-cycle/time based funds that automatically rebalance (or hold) a desired asset allocation. How is Betterment “better” than these funds and how do the costs compare?

            MMM – PLEASE say you aren’t sliding slowly towards some kind of techno-consumer acculturation! Honestly, I became concerned with the e-bike. Now you are apparently paying others to do something as simple as adjusting your asset allocation? Across several different mutual funds? Seriously? How much longer until we see reviews of a fully optioned Chevy Volt? (Keeps you dry and warm!) and/or opening an account with full service broker? ( Now we just open the envelops!)

            • The Roamer November 7, 2014, 9:07 am

              Who cares if his priorities are changing. People change.

              His recommendations and advice still stand. They are just getting more focal instead of broad. This is why I recommend people start at the beginning, his advice there is very broad and almost anyone can apply it.

              For example aquaponics that was an awesome article but definitely more focal. I can say I won’t even have the option until maybe 5 yrs . why? Because I have to buy a home first.

              I know people idolize his character ( he plays it up too with the whole cult thing) but if does choose to change paths it doesn’t really matter. You don’t have to follow and in all reality you choose what applies and what doesn’t and it really won’t affect you anyway what he does.

              My 2 cents

            • Mr. FC November 7, 2014, 12:18 pm

              Wait a minute…I have a Volt and it’s fantastic! Does that make me less of a Mustachian? Or maybe just a Mustachian in transition? ;)

              In all seriousness there are many ways to get “there”…wherever “there” happens to be for you. While I’d love to give up the car and walk / bike to work and follow the MMM lifestyle to a T , for the moment we can’t / won’t. But there’s still much value in paring back where we can and adopting what works for us now, with a goal to lead a lifestyle that’s easier on the planet, our conscious and our wallets.

              A more succinct way of putting it: maybe being a Mustachian is more about the journey than the destination.

            • Jone November 8, 2014, 3:38 pm

              Oh, I totally agree that MMM’s advice (and presentation style) is generally good – I owe him a deep debt of gratitude myself.

              I’m just surprised that he would pay someone $13 per month to reblance $100k portfolio. $13 x 12 months = $156/year. Rebalancing takes what….10 minutes twice a year?

              Mr Bogle states rebalancing is oversold anyway (see last paragraph): http://www.morningstar.com/cover/videocenter.aspx?id=397705

      • JB November 4, 2014, 12:27 pm

        Betterment isn’t for a 401K, but I thought you can input your information and it would suggest allocations to rebalance?

    • Don November 4, 2014, 11:43 am

      Do you have any investments beyond your 401k? I’ve been maxing out my 401k contributions for years and have plenty of money after that to invest. I opened an account with Betterment with $100k at the beginning of the year and have been very pleased with it. It’s incredibly easy and the returns have been solid. Yes, there are fees, but they’re minuscule.

    • Naners November 4, 2014, 3:43 pm

      Betterment peoples, any response to this? I’m in a similar situation, so this would be a dealbreaker for me. Not asking whether you can invest your 401K in Betterment (clearly not), but why can’t you pick your asset allocation in your Betterment account? Unless you can run some analyses to show us that the benefits of the tax loss harvesting outweigh the costs of having bonds outside of your tax-advantaged accounts.

      • Daniel Egan November 4, 2014, 5:14 pm

        Hi all, Dan from Betterment here.

        TL/DR: This is possible, and we already achieve many of these objectives in our existing service. And you can ‘Better-hack’ this pretty easily.

        For background, this approach is generally called ‘tax location’, and doing it right is actually more complicated than the cliche ‘bonds in IRAs, stocks in taxables’. Correct tax location aims to minimize the percentage of total returns you are giving up due to taxes, across your total portfolio. We know that, and it’s not that we don’t let you do it- we just do it for you.

        1. Tax-Exempt Bonds in Taxable accounts: Our taxable allocations have a strong tilt to tax-exempt Municipal bonds rather than taxable bonds. Municipal bonds have an even better after-tax profile than putting taxable bonds in a Traditional IRA, where you have to pay ordinary income tax rate on distributions. So you aren’t getting taxed on the vast majority of your bond exposure in your taxable account with us. We do continue to hold some international bond exposure for diversification purposes though… and the after-tax yield is worth it.

        2. The tax-location decision is actually about after-tax yield. Right now, due to relatively low yields the conventional strategy is particularly sub-optimal. BND currently has a yield-to-maturity of 2%. Avoiding 30% tax on a 2% yield has netted you 60bps of tax benefit. Now substitute holding a non-QDI foreign stock asset yielding 3.5% in your IRA, and you get 105bps. Obviously, this is something we’re thinking about carefully… ;)

        All that said, you *can* control your asset allocation inside each account at Betterment.. and in such a away as to execute a ‘tax location’ strategy. Lets say you have $100k in both an IRA and a taxable account, and want to be at 80% stocks overall. Simply put your taxable account at 100% stocks, and your IRA at 60% stocks, and voila, you have an 80% stock allocation with 100% of your bonds in your IRA.

        Happy to answer any questions you have about this: dan@betterment.com

        Daniel Egan
        Director of Investing

  • Stephen November 4, 2014, 11:39 am

    Enjoyed the betterment write up. I too was able to meet a bunch of their crew in new orleans and I like the premises on which they have built their platform. I think they are basically and extension of basic index investing philosophies. I will be doing financial planning full time in the coming months and we will probably integrate most of the concepts betterment uses. In addition, I think tax planning will be the new frontier of both early retirement and traditional retirement planning as many individuals now are looking to index their investment (instead of chasing active funds). I’ll be interested to follow along and see how their strategies compare to our current approach.

  • Tawcan November 4, 2014, 11:43 am

    What an interesting service. Here in Canada I came across a similar company called Wealthsimple. It’s really neat to see such companies popping up. Hopefully this is a warning to all those bad financial advisers out there.

    • Beric01 November 4, 2014, 11:52 am

      Actually, the only reason these companies even need exist is because the US tax code is so complicated. Betterment now has a vested interest in keeping the US tax code as complicated as possible such that they can sell their service. The entire point of the service is that the common investor can’t tax loss harvest.

    • CheapMom November 4, 2014, 1:46 pm

      Thanks for the Canadian link. I’m investing with my bank now, but it I like to check out new possibilities for when our mortgage is paid off.

    • Leslie November 4, 2014, 2:09 pm

      Have you heard much about Wealthsimple? We are considering moving our portfolio to them and would love to get some feedback. I know they are very new. Is anyone aware of other similar Canadian companies that they would be able to comment on? Thanks~

      • Huda December 22, 2014, 12:27 pm

        Hi Leslie!

        My name is Huda and I’m the Director of Design at Wealthsimple. I’m glad to hear you’re considering moving your portfolio over. Have you had a chance to set up an account yet? If not, I’d love to put you in touch with Mike, our CEO, so he can answer any questions you have. Reach out to us any time at support[at]wealthsimple[dot]com.

  • Financial Fairway November 4, 2014, 11:51 am

    Good write up about a company that will help tons of investors who will only be touched by the high commission brokers.

    In terms of where returns come from and how markets work, have you heard of the Fama/French 3 factor Model? Fama won the Nobel Prize last year for his Efficient Markets Hypothesis and the 3 factor model is an extension of it.

    He demonstrated that Small Cap and Value stocks offer a premium over Large Cap & Growth respectively and therefore are dimensions of the market with higher expected return.

    I invests like you do (total market/index), except with 30% additional tilts towards Small/Value factors to enhance expected return.

  • Gumbles November 4, 2014, 11:55 am

    Ok, I have a very basic question…how do you know this is not a scam? I am by no means insinuating that it is in any way, but I’m just curious how one would differentiate this from a fraudster who collects funds for some stated purpose like this and then absconds with the whole thing. Is there any investor protection for this sort of thing? Again sorry if this is very basic, I’m just curious how this would work and what you look at when assessing the trustworthiness of an investment group.

    • Mr. Money Mustache November 4, 2014, 1:00 pm

      That’s a good question and one of the reasons I look into these things for a while before investing. As with all real investment companies, the money is always in your ownership and kept separate from Betterment’s own. If they go out of business, the return of your money is built into their legal structure. They’re regulated by the US Securities and Exchange commission. Nothing is foolproof in life, but you can start by reading all the questions and answers at http://support.betterment.com/

    • Boris Khentov November 4, 2014, 4:17 pm

      Hi Gumbles,

      My name is Boris, and I help run operations and compliance at Betterment. We’ve been around going on five years now, and while it feels like forever to us, we can appreciate that in the context of the financial industry, that feels fresh.

      So your question is a common one, and we’ve tried to answer it here:


      There is a tremendous amount of investor protection built into the regulatory framework that we operate in. It would be hard to convey the full extent of scrutiny and oversight we receive from overlapping regulators and auditors. This is a good thing!

      We are also continuously vetted by highly sophisticated third parties who are very interested in our long-term success and viability. We raised several rounds of funding from top venture capital firms. More recently, we entered into a partnership with Fidelity:


      So the short answer is: we are here to stay!

  • jlcollinsnh November 4, 2014, 11:59 am

    Thanks Mr. MM…

    For linking to my site at the end of your post with the **

    Mr. Bogle is indeed up for the Presidential Medal of Honor and IMHO few have deserved it more.

    But it will take a push for it to happen. I hope the Mustachians chose to get behind the idea as I described in that post and thanks in advance to those who do!

  • Cory November 4, 2014, 12:03 pm

    I was really glad to see this post and that you’ve taken the plunge into Betterment, as I just came to the same conclusion and moved all of my Roth and IRAs over here, with the exact same allocation :) Cheers.

  • James November 4, 2014, 12:10 pm

    Does Betterment play nice with other investments from an allocation point of view? Much like Mad Fientist, I’m interested in Betterment but strictly for my non-tax-advantaged accounts (fee doesn’t seem worth it for IRA, Roth, etc.) (Perhaps Betterment could waive the fee for tax-advantaged accounts as long as there was a minimum taxable account balance??… just sayin’.)

    If I DID decide to move all taxable investments over to Betterment, would their re-balancing feature consider the other investments I already have or would this cause issues, from both a basic functionality perspective and optimizing overall performance?

    Secondly, the Tax Loss Harvesting maxes out at $3,000 per year, so having more than $2M in Betterment is, by my rough estimates, when the TLH service isn’t worth it (0.15% fee of $2M = $3,000 = max TLH benefits). The good news, however, is that the maximum benefits of Betterment’s TLH service are acheived at much lower portfolio values (~$400,000, albiet, still very large in its own right). Here is a quick graph I did to illustrate:


    • Scott November 4, 2014, 12:52 pm

      Very interesting James……it seems to me that this makes the most sense for beginning investors who need the help and discipline to build a taxable investment account and then put it on autopilot. In fact, I see this as a huge advantage for some beginning investors who don’t diversify across asset classes and manage risk according to age or their risk profile. I have been with Vanguard longer than MMM and now that I am retired most of my investments are in tax advantaged accounts where the tax harvesting feature is moot for me. I do my re-balancing once a year. I have learned that one thing you can control in the investing process is the compounding of costs. If we look at a $500,000 portfolio with a Betterment expense of .15% is only $63 per year. However, $63 compounded monthly at 7% will accrue to over $50,000 in 25 years! Now for those who have not set up a direct account taxable with a low cost provider of index funds…….well, they will be way ahead of the game if this gets them started and they avoid the active management merry go round. Betterment service could be a true value add for them.

      I read with interest on how Betterment re-balances and reduces the friction of cost from the taxman. I for one will be watching with keen interest if MMM posts a follow up and compares directly between his Betterment account and a similar configured tax advantaged Vanguard account.

      • Brendan November 7, 2014, 5:04 pm

        500,000 × .0015 = 750
        The same as the maximum amount you can save TLH in the 25% bracket.
        So what is the maximum amount you should invest with betterment?

      • Jonah January 4, 2015, 1:45 pm

        Just to clarify… If we invest $63 per year at 7%, it would turn into $2,582.72 after 25 years.

        Source: http://www.globalrph.com/invcomp.cgi

    • James November 4, 2014, 1:03 pm

      Actually, upon second glance, it appears that the ideal TLH strategy would be to invest a maximum of about $400,000 taxable dollars with Betterment, and then anything above and beyond that goes into some other low-cost, self-managed account (ex: Vanguard). This obviously doesn’t take into account some other potentially valuable features such as strategic, tax-advantaged withdrawals /sales. Plus most true Mustachians probably won’t have need for too much more than $400,000 in taxable investments anyway.

    • Rob November 4, 2014, 3:01 pm

      That doesn’t take into account the tax bracket. If you’re in the 25% tax bracket, the $3,000 deductible would save you $750 a year in taxes. With an additional 0.15 ER, you hit break even at $500,000. With an additional 0.25 ER the break even point is $300,000. With an additional 0.35 ER the break even point is $214,285…etc.

      Unfortunately many 401K’s don’t have too many low cost options which would avoid a wash sale, so it is likely that your 401k ER would also increase, because you’ll need to avoid holding the same stocks in your 401k that are in your Betterment account, otherwise you will lose the benefit of Tax Loss Harvesting. For me that might push the 0.25 ER Betterment charges me, up to 0.35.

      When you consider that once you are retired you’ll likely be in the 0% capital gains tax bracket, it makes even less sense. Why pay an extra fee for tax loss harvesting, when you’re paying 0 taxes?? If you end up in the 15% tax bracket in retirement, Tax Loss Harvesting only saves you $450 a year, which puts the break even point at a point so low, you can’t be retired.

      Tax loss harvesting seems like a bad reason to pay a higher ER for the rest of your life, and go through all the hassle of avoiding the wash rule, making sure Betterment doesn’t start making bad decisions with your money over the next 50+ years…etc, to get a benefit that breaks even at such a low amount. Especially for someone who will be FIRE soon, and paying significantly less taxes.

      • Rob November 4, 2014, 5:17 pm

        To clarify, after you pass the break-even point, the extra fees imposed on your portfolio are greater than the maximum benefit. So if you’re in the 25% tax bracket, and your extra fees are now an additional 0.35% higher (from a higher 401k ER to avoid wash sales, a higher ER in the portfolio Betterment gives you, the Betterment fee…etc), once you have more than $214,285 saved up you will be paying more in extra fees than you’ll be getting back in tax loss harvesting.

        Considering this website is based on early retirement, the goal is to have more retired years in front of us, than non-retired years, right? If so, why would you choose to pay a higher ER for the rest of your life, when the majority of those years will be spent with your portfolio past the break even point where tax loss harvesting provides a benefit?

        Looking at the “Brief History of the ‘Stash”


        Mr. Money Mustache himself would have passed this breakeven point between year 6 and year 8, depending on the math. The numbers just don’t add up. If you want someone to handle the rebalancing for you, a LifeStrategy Fund makes much more sense.

        • James November 4, 2014, 7:47 pm

          Ah, completely biffed on the tax bracket side of the equation. Thanks for the response Rob.

        • Brendan November 7, 2014, 5:09 pm

          Thanks for saving me the trouble writing this. I hate when people waste over $1 to save $1 in taxes. Which is all to common.

    • Jason G November 4, 2014, 4:52 pm


      My understanding is that the $3,000 loss you are referring to is the carry forward amount for tax years where losses exceed gains. This $3,000 amount only becomes relevant when your losses exceed capital gains. The $3,000 can then be used to offset future gains in other filing years. Being able to max out this carry forward amount might be a secondary goal of tax loss harvesting.

      It appears that a successful tax loss harvesting program can potentially offset all of a persons capital gains in a given year even if the gains exceed $3,000. For example, a person who only has two funds that result in $53,000 of losses on one fund and $50,000 of gains on another fund, could sell both and report no gains in that tax year. He would then have the $3,000 loss to carry forward into the next year. So a person with a $10,000,000 portfolio could benefit from Betterment, because gains and offsetting losses could be in the hundreds of thousands each year.

      Correct me if I am wrong, but the goal behind tax harvesting appears to be to sell appreciated stocks so that you buy similar stocks back without recognizing the gains on the initial sale. The losses have already happened so you might as well use them to your benefit. Because the person is selling appreciated assets his basis in these stocks would be stepped up and he would not have to recognize the gains later down the road. If I got something wrong please feel free to educate me as this is a topic I want to learn more thoroughly.

      • James November 4, 2014, 7:56 pm

        Jason, I’m by no means an expert on the intricacies of tax loss harvesting or the finer points of investing. My knowledge basically stops at efficient asset allocation and low expense ratios… I was just trying to formulate what I understood the cost/benefits of TLH to be at Betterment. My main point was that the additional 0.15% expense ratio that Betterment charges eventually eclipses the tax benefits, although I did the calculations wrong. As Rob pointed out, the costs eclipse the benefits at even lower portfolio values and perhaps aren’t important at all for the early retiree crowd that (stereo)typically lives a pretty frugal lifestyle, hence wouldn’t be in a high tax bracket to begin with.

        • Jason G November 5, 2014, 1:48 am

          After some reflection I realized that the overall basis of the stocks, for a person who uses tax loss harvesting, would likely decrease overtime to the extent of any realized losses that exceed capital gains. For some reason I was focused on the stepped up basis of the appreciated stock that was sold and then repurchased, and I totally ignored the loss side of the equation. The significance of this is that you were probably right that a lot of the value of tax loss harvesting appears to be in the $3,000 that can be used to offset income.

          For that reason, it would be interesting to find out if Betterment is able to pull out $3,000 of losses consistently each year in excess of any gains recognized in the process of rebalancing a customers portfolio. This would have an impact on your analysis and the value that they can bring to their clients.

          Based on what I have read it appears like Betterment’s main purpose is to rebalance portfolios and the tax loss harvesting component is a secondary feature. If what I read is correct and the portfolio is only rebalanced when there is a 5% discrepancy then it is entirely possible that tax loss harvesting will only occur frequently when the market is volatile. If this is the case then I see why many people would just balance their portfolio themselves.

  • Joel November 4, 2014, 12:17 pm

    Folks … wealthfront.com vs betterment.com? They both seem to do the same thing and I was hoping MMM or someone in the comments would be able to discuss the pros and cons of each.

    • Dan November 4, 2014, 2:42 pm

      For what it’s worth…here’s an article with the companies’ respective CEOs duking it out. Good sales-y overview, at least :)


    • Mike Reust November 4, 2014, 3:13 pm

      Hi Joel! Thanks for the question. Full-disclosure, I work at Betterment.

      I encourage you to look at all your options closely, and see which platform makes sense for you. For us, a major differentiator is our vertical integration, that allows us to innovate at a lower-level than most of our competitors. Here’s a page we put together to help people compare us to other platforms, including Wealthfront, that would help you get started in your comparison.


    • CanuckExpat November 5, 2014, 1:43 pm

      There’s a relatively comprehensive comparison of the different options from ETF.com (it’s the last of a seven part series):

    • Robert December 2, 2014, 11:46 pm

      I personally am a Wealthfront customer. I liked their asset allocation better than Betterment as it has a higher percent of international stock.

      They recently changed so that they can do Tax-loss harvesting on all account sizes rather than just those over $100k, but I don’t think they coordinate well with other accounts which it sounds like Betterment has worked out (as long as you keep everything with them). I personally have Tax-loss harvesting turned off since I have other accounts outside Wealthfront and would probably hit a wash sale.

      Random fun fact with Wealthfront, you can use your referral to refer a spouse. Both accounts get the $5k referral bonus which gives you $30k combined managed for free. This was recommended to me by their support staff actually since you can’t have IRA accounts for two people under the same login anyways. This plus a few other referrals and I’ve not had to pay fees yet (getting close though).

  • Nathan Friedly November 4, 2014, 12:19 pm

    For what it’s worth, Vanguard does offer a few funds that are automatically rebalanced – the “Life Strategy” funds give a basic stock/bond split with automatic rebalancing: https://investor.vanguard.com/mutual-funds/lifestrategy/#/

    And then the “Target Retirement” funds do the same thing except that they all start at 90% stocks and gradually shift to be more bond heavy as you near retirement age: https://investor.vanguard.com/mutual-funds/target-retirement/#/

    • JB November 4, 2014, 12:32 pm

      The thing with the life balanced funds is that you need to be 100% into just those funds. Once you buy other funds, what is the point in having a life cycle fund?

      • Nathan Friedly November 4, 2014, 12:58 pm

        Exactly – I wanted a simple “one stop shopping” fund, so I dumped everything into a Target Retirement fund, set up automatic investments from my paycheck, and then completely forgot about it until I read this post. It’s doing quite well :)

    • Dodge November 4, 2014, 3:15 pm

      Agreed. If someone doesn’t want to rebalance, a life strategy fund is much better than paying a higher ER for the rest of your life.

    • George November 4, 2014, 11:00 pm

      Good point Nathan about Vanguard’s Lifestrategy funds. This is what I am investing in right now. I picked it because it is nice that they even do the annual rebalancing for you, thus it is complete automatic.

      I invest in the LifeStrategy Growth Fund, because it seems to be the closest one to what a mustachian would need for early retirement and the only one aggressive enough to support a safe withdraw rate and get you ready for retirement in 10 years or less.

      My only complaint with this is that I think their international stock allocation amount is a bit high, but then again it is hard to say whether the United States or International stocks will do better in the future.

  • Ton November 4, 2014, 12:19 pm

    Sounds good. Being a resident and tax payer in Germany, is Vanguard or Betterment an option for me at all? Or did you just consider the US resident audience, MMM? Thank you anyway for the inspiration.

    • An November 4, 2014, 1:36 pm

      • Coral November 11, 2014, 5:30 am

        Does anyone know of similar options available outside US/Canada?

        • An November 12, 2014, 1:14 am

          I don’t think there are similar options, but maybe you will find something interesting here: http://www.bogleheads.org/wiki/EU_investing

          I’m still investigating ways to purchase ETFs in EU. ETFs currently seem like the way to go – mutual funds have high fees and are not profitable enough at the moment.

    • Johannes Seitz November 12, 2014, 6:02 am

      There’s a German start-up called “Vaamo” that does basically the same thing. Unfortunately they do not offer tax-loss harvesting yet. But I’ve heard it’s in the works. I’ve been using it for a few months now and it’s pretty neat.

  • Mark November 4, 2014, 12:23 pm

    Interesting article and good timing for my family and me as we are about to finish our chapter on getting out of debt (except for the the mortgage). Does it make sense for us to start putting money into Beterment once all our debts are paid off or plug away at the mortgage?

    • Timmmy November 5, 2014, 1:39 pm

      Mark –

      Hop on over to the forums and do a search on this topic. It’s been discussed in depth and is far more complicated than an answer I could give you here.

  • Big Guy Money November 4, 2014, 12:28 pm

    Hey MMM,

    I noticed in the screenshot that your stock allocation is around 43% Domestic/47.5% International. I’m assuming this allocation also has a default and override setting? If you’ve overridden, care to comment on the split having a larger portion of International exposure? I suppose it could go various ways but I’m curious to see what you say.

    • Leigh November 4, 2014, 1:04 pm

      I personally do 50/50 US/International. I try to match close to the overall world stock market allocation and not worry about currency risk, plus 50/50 is the easiest allocation to remember :)

      If you look at the Vanguard Total World Stock Market Index fund’s allocations, it is 54.20% to North America: https://personal.vanguard.com/us/funds/snapshot?FundId=0628&FundIntExt=INT

    • Mr. Money Mustache November 4, 2014, 1:08 pm

      Hey BG – that is the default. I have yet to find out about override options within the stock segment itself (anyone else know?), but part of this experiment is that I want to find out what the default performance ends up giving me. Betterment is all about making default, easy, and excellent all mean the same thing, which is useful for many lazy investors – myself among them.

      • Big Guy Money November 4, 2014, 2:23 pm

        Absolutely – completely agree with simple is better with investing and I look forward to watching the results over time. What’s interesting is how they came to the default that includes International funds being slightly over-weighted. Most everything I’ve seen is 50/50 like Leigh mentions, or slightly over-weighted to domestic rather than international.

        What would REALLY be interesting to watch is if they somehow built in the default algorithm some way to fluctuate automatically between asset classes that may be over and/or undervalued based on various valuation models. (As in, I’d like to watch, but wouldn’t do it myself!)

      • Dan November 4, 2014, 2:28 pm

        Currently you can only adjust the stock/bond allocation, which comes with Betterment’s default segmentation. I doubt they will enable that functionality – they really try to keep it simple!

        Perhaps they enable it for certain high balance clients, or intend to in the future?

  • Peter November 4, 2014, 12:36 pm

    It sounds like a really good idea and I’m on board with automation in general, but I agree with Berico1 that in practice, Betterment is currently not set up to do two valuable things:

    1. Allocate assets efficiently between taxable and tax-free accounts, putting more bonds into the latter
    2. Rebalance within tax-free accounts only (no capital gain concerns)

    Automated rebalancing and tax-loss harvesting are really awesome, but until they can do these two things, I think I’m better off doing these things manually, even though I’m not perfectly efficient. If they got these two features in a later version (or they do and I missed it), I’m sold.

    • Dan November 4, 2014, 2:22 pm

      Hey Peter, I’ve been using Betterment for a couple of months now, and I think they address both of your concerns.

      1, You can control the allocation in each account.

      For instance, you could set your IRA and Roth to 100% Bonds if that sub-allocation is needed for your overall portfolio allocation. You could then set your taxable accounts to 100% stocks. They even have a gauge that reflects your total Betterment account allocation. You can also set up “Goals”, which act like individual taxable accounts, with their own allocations. The TLH applies daily across all goals, taxable and non-taxable (to avoid permanently disallowed wash sales), and they are working on linking spouses’ accounts to further maximize the TLH.

      As MMM mentioned about changing the actual weighting of the specific funds (international vs. domestic, etc), there is no way to do so within Betterment.

      2. Betterment does not rebalance in any account until the allocation in that particular account or goal becomes skewed more than 5%.

      When it does, they sell the tax lots with short-term losses first, then long-term losses, then long-term gains. They will not rebalance if it causes short-term gains. This is also accounted for in the TLH.

      Moreover, they take cash dividend payments from both stock and bond funds (per account or goal) and reinvest it in the most skewed asset class. For instance, VEA has been taking a beating lately – it is most likely underweight and would receive all of the dividends for reinvestment. Usually bonds are left behind…the dividends would be reinvested in those to “top them off”.

      Lastly, Betterment uses deposits and withdrawals to rebalance in taxable and non-taxable.

      Other thoughts:
      – They generate a PDF report for every transaction (deposit, withdrawal, dividend reinvestment, etc.) to show down to the penny which funds were purchased or sold and how many.

      – The customer service is stellar. Hell even the CEO responded to an email I sent.

      – I agree with MMM…this is for the lazy investor. I am a strong proponent of the efficient market theory, meaning, over the long haul, the best any “average” investor can do is match the global market’s performance. Every dollar is automatically invested in line with this.

      – I can be a bit…obsessive…with my money matters (just ask my wife!). This service really helps me take a step back and not succumb to an oft powerful, yet false, sense of “control”.

      -You can also set up trusts within Betterment (have not explored that yet).

      -And if anyone was wondering, Betterment is not an investment itself. They are a custodian and broker in one. A service provider.

      I hope this helps!

  • DrFunk November 4, 2014, 12:37 pm

    By rule, tax-loss harvesting can only take place in a taxable account. You do not report losses or gains in 401ks or IRAs. So, there would be no reason to have one of these types of accounts with Betterment. Ultimately, this is a set it and forget it type of service for the high (taxable) net worth investor. You could easily do this yourself, and it would take you about 10-20 minutes per year if you have all your taxable funds with 1 broker. Sadly, Betterment does seem to go against MMM’s philosophy of do it yourself, found in his Pawn Shop Debacle post: http://www.mrmoneymustache.com/2013/02/19/the-pawn-shop-debacle/

    “Let this be a lesson to me. I must not start getting all high and mighty with that “my time is too valuable to spend fixing my own shit” nonsense. As explained in the article about the value of your time, these equations only favor the lazy in the case that you have near-infinite wages in your day job, or already-infinite knowledge of everything and thus you cannot benefit from the learning experience of fixing your own stuff. At least give it a try.”

    We should also remember how valuable our time really is (http://www.mrmoneymustache.com/2012/10/18/why-your-time-is-worth-way-more-than-25-per-hour/). Is it worth it to *give* our hard earned dollar workers to any company for something that we could learn how to do with a few hours of research and 10-20 minutes per year?

    • Mr. Money Mustache November 4, 2014, 1:13 pm

      Excellent work, Dr. Funk, turning Mr. Money Mustache’s words against him!

      I agree with you too – a more badass version of me would already be deep into Warren Buffett investing territory. I should become more adept at more fields, and I do spend as much of my waking time as I can working on that. But I still suck at most things, and there is no shame in admitting limitations as long as you’re still hard at work improving yourself.

      I could get a lot more stuff like this done if I were willing to reclaim all the time I spend writing on this damned blog, for example.

      For tax loss harvesting, I’d argue that you get better results doing it constantly and on an automated basis than once per year.

      • DrFunk November 4, 2014, 3:32 pm

        What is striking and admirable, is that ER bloggers are so gracious.

        Thank you, MMM for your efforts. We all could be a bit more badass.

        In a shameless effort to hijack your post, what are your thoughts on the plummeting price of oil? Good investment or good riddance?

        • sobezen November 4, 2014, 4:48 pm

          Great write up. Thank you!

          MMM, After your positive review of PC I was hoping you’d go with them over Betterment. Wondering what factors made you choose Betterment over PersonalCapital? MadFIentist commented the fees are higher with PC, but asides from that they appear to offer the same services such as tax harvesting. Can you share more about your analysis? Thank you for sharing!

          • Mr. Money Mustache November 5, 2014, 7:03 pm

            I was considering using this exact chunk of money for a Personal Capital experiment as well. In the end I decided to go for Betterment because of my own personality type.

            PC is hands-on and reassuring in their style, with phone calls and follow-ups from the advisers to make sure everything is running the way you like it. You can ask them questions about anything financial and they’ll actually have answers, or go do research and get back to you. Many people I know (and quite a few who send me emails through this blog) seem to like this style, and for them it could be a good match.

            But when it comes to money, I prefer dealing with machines. Screens, graphs, reports, and buttons I can click to get stuff done. Betterment seems to work that way. And given the youngish high-tech slant of a lot of the readers here, I thought it would appeal to more of them too.

      • Debtless November 5, 2014, 3:26 am

        I too was going to reference your previous posts to see why this particular write up is essentially anti-mustachian, but Dr. Funk beat me to it!

        How exactly is Betterment compensating you, reduced fees or straight up cash per sign up? Seeing as how several employees are here answering questions and likely monitoring compliance for your affiliate setup, I can only assume it is quite lucrative.

        I myself am an SEO manager and I get that you work hard on this blog and absolutely should monetize it – but this post seems to go against the core MMM values of do it yourself and avoid paying unnecessary fees (IE oil changes, vehicle maintenance, etc.). Everyone sells out at a certain point, it just feels like being a very young child and learning that Santa isn’t real. .15-.35% is not an insignificant fee to incur on large investment assets, I would be more than happy to use your affiliate links to throw a few bucks your way – but at such a large cost to retirement/investing accounts? Nope.

        Also, the vast majority of mustachians aren’t going to have 100k sitting around in a bank account (hopefully!) and by switching to Betterment will either pay higher fees than with Vanguard alone or incur capital gains/losses when they liquidate their taxed accounts to move the cash over.

    • Mr. 1500 November 5, 2014, 8:46 am

      “You could easily do this yourself, and it would take you about 10-20 minutes per year if you have all your taxable funds with 1 broker. Sadly, Betterment does seem to go against MMM’s philosophy of do it yourself”

      DIY doesn’t always work well with investing though. Many folks have trouble overcoming their emotions or biases (myself included). Letting a computer take of this for you eliminates the human brain and the associated biases.

      • Cyrus November 7, 2014, 4:23 am

        Agreed, that’s why I trust my spreadsheet. Also, the spreadsheet doesn’t charge me an annual fee.

  • CL November 4, 2014, 12:38 pm

    I’ve looked at Betterment before. I’m happy to keep my money at Vanguard. I see that Betterment has good services for someone with your wealth level and desire to optimize. That’s great. Vanguard is tried and true, and they have what I need. I’m happy to stay where I am. I would consider that email campaign that you mentioned spam, and I have zero desire to get those emails. I get the Vanguard webinar ones, and I mostly ignore them. Vanguard also churns out interesting research on retirement readiness, which I really enjoy.

  • MJB November 4, 2014, 12:45 pm

    Just a quick note to the critics who’ve posted their thoughts with lightening speed and consideration… I suggest taking what you feel is valuable, and if you disagree, let it go. This blog has offered a ton of useful, actually life-altering examples to try for yourself (or ignore). MMM has demonstrated some thick skin since post 1, but I’d hate to see this blog become a laborious slog through rapid-fire criticism and critiques by the peanut gallery, for him… Be curious, or better yet, start your own blog.

  • Adam November 4, 2014, 12:48 pm

    Does Betterment allow you to get around the minimum investments for Vanguard funds? When I first looked at your portfolio, I thought that was the case since you have small investments in several bond funds (Less than the $3,000 minimum for many Vanguard funds). With a closer look, I realize those are ETFs not through Vanguard, so they don’t have the minimum investment requirement.

    I finally have maxed out my 401k and Roth IRA, so I now have money to invest in taxable accounts, but it’s going to take me a while to buy into all the Vanguard funds I’d like in my taxable account ($3k for at least three different funds).

    Essentially the question is whether Betterment pools everyone’s investments in various funds, which would allow them to bypass the minimum investment requirements. That would be a huge advantage for Betterment in my opinion, although mainly just for people just starting off with taxable accounts.

    • Boris Khentov November 4, 2014, 4:34 pm

      Hi Adam,

      My name is Boris and I work at Betterment. Yes, we do that!

      One of the cool things we built into our platform is support for fractional shares, down to six decimal places. That means we can process a deposit as little as $10, and diversify it across your entire portfolio. So for example, you could have the exact portfolio that MMM posted a screenshot of above, with $10 instead of $100,000, invested across 10 ETFs at those percentages.

      Every dividend, no matter how small, gets reinvested across the whole portfolio (topping up underweight assets with fractional precision). There is never any cash sitting in a Betterment portfolio.

  • arrdub November 4, 2014, 12:48 pm

    I have some money with Wealthfront, which appears to be very similar. They also do automatic allocation and tax loss harvesting for accounts over 100K. Have you compared Wealthfront and Betterment and if so are there any features or costs that make Betterment more attractive?

    • Brian November 4, 2014, 1:29 pm

      I think Wealthfront is better for very large ($500k plus) taxable accounts due to daily tax loss harvesting and the fact that they buy all 500 stocks in 500k plus accounts so get even more tax loss harvesting.

      But, for those investing in retirement accounts I think Bettermint is a lot better. And for those with little to no income, Bettermint is better in taxable accounts to.

      For those investing less than $20k though, Wealthfront is interesting in that it manages the first $10k free.

      That doesn’t appeal/apply to me, but for newer savers starting out, that could be attractive if they have low balances across taxable, a regular IRA, and a Roth, for example. Add in all three accounts for spouses, and your family could get $60k managed free.

      But no matter how you go, I think Bettermint and Wealthfront are a joy to use.

      • Boris Khentov November 4, 2014, 4:47 pm

        Boris from Betterment here.

        Our TLH+ service harvests losses daily. It’s also ideal for those who invest *both* in taxable and retirement accounts. We built a unique feature which offers bulletproof wash sale coordination between taxable and IRAs. It guarantees no permanently disallowed losses when you make IRA deposits (or IRA dividend reinvestments), while maintaining target allocation in both accounts.

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

  • Jason November 4, 2014, 1:01 pm

    Sounds like a pretty decent investment service – anything that focuses on long-term investing, and trying to slightly optimise returns without too much effort is a pretty great strategy.

    I must admit, I do love investing in individual stock too much to put all my funds into something like this – I guess I’m just striving to become one of those ‘Incredibly Rare Investment Tycoons’ :)

  • Alex November 4, 2014, 1:01 pm

    I’ve been using Betterment for the past eight months or so. I really like the automatic rebalancing based on the percentage of drift rather than on checking my portfolio at a certain interval. Betterment also lets you set up automatic deposits super-easily. A big chunk of every paycheck goes off into my betterment account by itself and gets invested in something like eight different ETFs without my having to lift a finger. Also, to answer a comment many have made: they do let you set up tax free accounts (I have a taxable account and a separate Roth IRA). They put you in different ETFs if you’re in a tax free account (not MUB, for instance, since there would be no point). MMM’s post doesn’t mention this, but Betterment also has a slight “value tilt” compared with competitors like Wealthfront, which was appealing to me.

  • Mario November 4, 2014, 1:12 pm

    While I have huge respect for Betterment and love their mission — and could see myself using them when my focus shifts to building my long-term investments up rather than paying down my debts, I wonder if someone who’s got the market power you do wouldn’t be better served at some brokerage where they’ll bend over backwards to give you a bespoke strategy — probably refund your fees too. That said, there’s also that old adage — if it ain’t broke, don’t fix it. It sounds like you’ve done more than your fair share of research. And if they’re working fine for you, then I don’t see any reason to look elsewhere.

    • Dan November 4, 2014, 2:58 pm

      You bring up an interesting point. “If it ain’t broke, don’t fix it.”

      There is also an interesting counter-argument to that sentiment…

      I used to have a big ol’ clunky desktop computer. It was fine. It worked. Nothing wrong with it.

      But do I still use or possess that same computer? Or flip phone? Or patron the non-online bank?

      Innovation is the antithesis of the “ain’t broke, don’t fix it” sentiment. E*Trade and Schwab were working great for me…until I encountered Betterment.


  • Colin November 4, 2014, 1:22 pm

    Any thoughts on when in makes sense to avoid tax loss harvesting? I’ve read that if you expect your income to go up in the future (like someone just getting started in their career) it could end up costing you more in the long run. I believe that this is because it decreases your cost basis making your investments appear more profitable from a tax basis. Anyone have more knowledge on this point? Thanks!

    • Boris Khentov November 4, 2014, 4:56 pm

      Hi Colin,

      I work at Betterment and I’m one of the authors of our TLH white paper. You are right that TLH isn’t right in all circumstances. *Generally* I would say that taking advantage of the $3,000 ordinary income deduction is worth it even at relatively modest income levels (to a point), because it has the effect of converting that income into long-term capital gains.

      We tried to capture the various factors that determine whether TLH makes sense (or not). Check out the “Best Practices” section:


    • tdp5150 November 4, 2014, 7:18 pm

      I’m a CPA and don’t personally tax loss harvest because it is by definition lowering your cost-basis, which means you’ll pay more taxes down the road if rates go up (due to the likely event that the government needs more money or if your “mustachian” ways put you in a higher tax bracket), which could more than wipe out your initial benefit. If for example the gov’t no longer gives capital gains preferential treatment (a good possibility), you’d likely lose money having tax loss harvested.


  • Eric November 4, 2014, 1:26 pm

    MMM – Thanks for the post! Since you’ve had a chance to actually sit down and talk with the Betterment gang, can you provide any more detail re why their solution is better than managing things yourself? As others have pointed out, anyone can go with Vanguard and do their own rebalancing and tax-loss-harvesting themselves.

    My (limited) understanding is they claim their algorithms optimize these tasks in a way that would be difficult to manage manually (timing, choosing which lots to sell, etc). Or is it more about the hands-off nature of it, for those who would benefit from these strategies but likely won’t take advantage of them for whatever reason? Considering that you’re fully aware of these techniques and are going with them I’m guessing there’s more to it than outlined in your post.

  • Fragile Robot November 4, 2014, 1:43 pm

    Sounds interesting.
    Schwab Intelligent Portfolios have caught my eye and seem to (they are supposed to be available Q1 2015 so details are sparse) provide a similar service with low or no fees.
    Anyone else looking at these?

    • Maury McCoy November 5, 2014, 9:31 am


      Schwab jumping into the game is a game changer as many of the robo advisors (Sig Fig, Betterment, Wealthfront, etc.) use Schwab funds.

      Schwab has said there will be ZERO management fees… How amazing is that? They have essentially undercut everyone in the business. Their index ETFs are already the lowest priced in the business so this will obviously be the lowest cost, automatic asset allocation service available to anyone.

      That said, will they let you choose your own allocation? (Their current allocations don’t even recognize REITs as an asset class…) Heaven forbid you should want Micro-caps, Real assets like timber or some other unique asset class.

      Also, Betterment, Sig Fig and Wealthfront all have slick HTML 5.o interfaces and mobile apps that make using them a joy. Schwab appears to still be stuck in the 90s as far as user experience is concerned.

      That said, I’d love to invest with Schwab, and use Sig Fig’s pretty interface to track how I’m doing. Seems like the best of all worlds.

  • Earguy November 4, 2014, 1:45 pm

    Funny, I have been researching Betterment for that past 6 months (and am a new follower to MMM) and here is a write up on the service! You have peeked my interest in your retirement principles, even though I am a bit late to the game. Going to celebrate paying off our mortgage on Friday and seriously kick things into gear. Thank you for sharing your insight and retirement playbook with us all.

  • Brandon Z November 4, 2014, 2:00 pm

    Am I missing something? Tax loss harvesting is all well and good, but at the end of the day, you are still hoping to net a huge return every year right? If we use Betterment for general investment (not 401(K) for example), won’t we be paying 35% short term capital gains taxes since the automated rebalancing and harvesting occurs on a nearly daily basis with your account? That’s a huge difference between Betterment and a Vanguard set it and forget it, right?

    • Boris Khentov November 4, 2014, 5:12 pm

      Hi Brandon,

      My name is Boris and I work at Betterment. First, no investment service should ever promise you a “huge return”. We aim to maximize market returns net of tax, net of fees, and net of behavior.

      None of the trading we do on your behalf is tactical – when we do (and it’s far less frequent than you imagine), it is to get you back to your passive allocation targets, rather than trying to beat the market. Think of it as “Set it and forget it 2.0”.

      *The investor* still does nothing, but low cost automation is constantly adjusting the investment to the optimal place. After all, Vanguard is constantly adjusting the underlying assets inside an index fund, to minimize tracking error. Betterment does that for an entire global portfolio of index funds, to prevent allocation drift.

      Our rebalancing algorithms will never trigger short-term capital gains. However, we don’t need to trigger even long-term gains very often. That’s because we use dividends and deposits to buy underweight assets first, reducing the need to rebalance by selling. Just by scheduling regular auto-deposits, you are likely to never require a rebalance.

      TLH, of course, would never trigger capital gains. By definition, it would only sell a loss.

      • Brandon Z November 5, 2014, 5:54 am

        I’m following you mostly, Boris. Thanks for the information.

        If rebalancing should, in theory, rarely require any sale of assets that would trigger short-term or long-term capital gains, then when is TLH even employed? According to MMM above, the purpose of TLH is to offset capital gains to minimize the tax burden you must pay at the end of the year. See copied text below.

        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.

        • Boris Khentov November 5, 2014, 11:44 am

          Good point. MMM summarizes a key interaction between auto-TLH and auto-rebalancing, but there’s more to it than that.

          I would say that TLH also has substantial value for most people with respect to the $3,000 annual deduction against ordinary income. That means, even if you realize absolutely no capital gains for the year, you can use up to $3,000 of capital losses, saving your marginal tax rate on that amount.

          So here you have a classic buy-and-hold portfolio getting a tax benefit without realizing any gains whatsoever. Say you are in a 25% bracket and TLH nets you $3,000 of losses. That means you save $750 on your taxes that year.

          In some future year you sell (maybe decades away but maybe just 1-2 years later) and you will realize an offsetting $3,000 gain (which you wouldn’t have had, if not for TLH). But that will be LTCG, taxed at 15% (so the tax is only $450). So you pay $300 less, and if it’s many years later, you were able to compound that $750 along the way. Or, perhaps you are no longer making substantial wages and you can realize capital gains at a 0% rate.

          All of this is valuable positive tax arbitrage, without ever straying from your target portfolio allocation. If you harvest in excess of $3,000, the extra losses get carried over, and you can use it against ordinary income in future years (when harvesting opportunities are fewer).

      • Brandon Z November 5, 2014, 5:59 am

        Perhaps even more fundamentally (with an example), if I invest 100K on January 1st of 2015 and my portfolio is 110K at the end of 2015, will I be paying capital gains taxes (assuming no 401K or IRA here)? If so (I’m assuming the answer is yes), will I be paying taxes at a rate similar to what I would expect from a set it and forget it Vanguard index fund?

        • Boris Khentov November 5, 2014, 11:55 am

          It is very possible (I’d say likely) that you will owe no capital gains tax, because the rebalancing thresholds were never triggered.

          It is possible that you may owe some (but certainly not on the entire 10k gain). It totally depends on how that 10k of gain came about. How far our of whack are the various asset classes are at the end of the year. Is the entire gain due to one ETF, out of 10? Extremely unlikely (I’d say virtually impossible). More likely, some ETFs went up, some went a bit down (if stocks are way up, then bonds might have dipped, though not always). Along the way, with every dividend reinvestment, your drift from your target allocation is corrected with buying, minimizing the need for selling. If you have TLH turned on, that could further buffer any tax liability, as described by MMM.

          Holding a single Vanguard index fund is less likely to incur capital gains than holding several Vanguard index funds and trying to adjust them periodically. If you have cash flows, those can be used strategically. Note though that even a single fund can distribute capital gains as part of a dividend at the end of the year, but that may be getting too into the weeds.

          In all cases, you will owe tax on dividends, no matter how you hold the funds, and how many.

  • EarlyRetirementGuy November 4, 2014, 2:32 pm

    Hmm, Wish we had such as automated service here in the UK. Guess I’ll just have to stick with the Vanguard lifestrategy funds which handle the automatic re balancing side. Still; $100k is a pretty big lump sum punt, will be interesting to follow it along!

    • Brian November 4, 2014, 3:15 pm

      You do. It’s called Nutmeg. I haven’t done any due diligence as I ilve in the US, but my understanding is it’s your equivalent to Wealthfront and Betterment.

      • Rob November 8, 2014, 10:45 am

        Wouldn’t bother with Nutmeg – the fees are much more expensive than Betterment (0.3%-1.0%) and the main benefit, tax loss harvesting, isn’t available (nor is it relevant to most UK investors who will be using tax sheltered ISAs).

        I’d recommend sticking with Vanguard LifeStrategy for the zero maintenance UK investor (my mum is happy, for one!)

  • RT November 4, 2014, 3:41 pm

    Hi there,

    How would you rate this service for someone not investing the full 100k? It appears the fees are 0.35% for a balance under $10,000.00, and there is not the additional benefit of the tax lost harvesting!


  • Zac November 4, 2014, 3:47 pm

    So basically I’m paying a 100-200% premium for tax loss harvesting? My quick calculations says that Im losing out on about $15,000 in retirement earnings by the time I reach (real) retirement age. That may be worth it to you, but not to me.

    • Gerard November 5, 2014, 6:47 am

      But the issue isn’t what it costs, but rather what it costs or gains relative to your other strategies. What will you do instead of this? No tax loss harvesting, giving up the apparently large sums involved? Or DIY tax loss harvesting, which seems to have a lower return on time/knowledge invested than most other insourcing?

      • Zac November 6, 2014, 8:07 am

        No, the issue IS what it costs. If I want to be lazy, Betterment will double or triple my Vanguard expense ratios. And MMM has beat into us all what losing a dollar here and a dollar there looks like over 10+ years.

  • Frugal Bazooka November 4, 2014, 3:50 pm

    These are the kind of excellent financial blog entries that got me hooked on MMM phonics. I saw a Betterment article on Yahoo a few months ago trying to raise the company profile and while it looked interesting, I’m too fucking cheap to let a tech company do what I can do just as badly (or goodly as the case may be) for free. It’s an interesting cutting edge technology that will probably one day rule the markets, but for now I’m sitting on the sidelines.
    I did guide one of my kids to a Vanguard Index Fund that does a similar thing re: allocation.
    As you age…it re-allocates the fund from high risk to low risk each year until the age of 50 or so. It goes from majority stock to majority bonds. Very simple, cheap and easy to understand.

    Having said that, your explanation of Betterment was better than Betterment’s explanation of themselves and that seems to be your greatest strength – explaining the value of complicated stuff in a way that average idiots can understand…including this idiot.

  • Fred November 4, 2014, 4:21 pm

    What about ethical investing though? If you don’t support things like major human rights abuses, polluting industries, or inhumane factory farming- why would you want your money supporting it through your investments?

    I’ve found that Wealthfront, Betterment, and the rest have nothing to offer investors who care about ethics. The only place I’ve seen that does this is Valued Investing.

    Are any other Mustachians concerned about ethical investing?

    • James November 4, 2014, 8:04 pm


      The guys over at givewell have a nice write-up on ethical investing. Considering how much lower the returns are on ethical mutual funds and how ambiguous the task of determining the evil / goodness of a company can be sometimes, I think their argument makes a lot of sense.


      • Fred November 4, 2014, 9:47 pm

        Hey James. I’m familiar with GiveWell- I know the cofounders come from Bridgewater Associates which is not exactly a haven of ethical investing, so I’m not surprised they opposite.

        Can you link to evidence saying ethical funds receive “much lower” returns than other funds? Here are two pieces with evidence showing that is not the case:



        Back to GiveWell- let me explain why their argument fails to convince me. They say “People should buy their favorite products and give to their favorite charities, rather than spending extra money on products that are “made without evil.” Avoiding the bad isn’t nearly as effective or important as identifying and supporting the best (… so … GiveWell is awesome). ”

        I only buy cruelty-free cosmetics- that are not tested on animals- nor do I want to invest in companies like P&G that do cruel and unnecessary animal cosmetics testing. Yet according to GiveWell, I shouldn’t worry about this, and just buy whatever products I like and I can alleviate any harm done by donating to charity. Well, the harm is already done by buying the product, and no amount of donating to animal sanctuaries will change that.

        • James November 5, 2014, 10:24 am

          I hear you. The lower returns simply come from comparing the total performance (including dividend reinvestment) of Vanguard Social Index or other socially responsible mutual fund to the total stock market index fund or S&P500. Generally, I’ve found the social indexes to be higher expense ratios, maybe because they have to evaluate the virtuousness of each company? Not so in Vanguard’s case, but the value of $10,000 over 10 years is $23,000 in total stock market, $22,000 in S&P, and $19,000 in the social fund, and this is one of the lowest-cost social funds out there (https://personal.vanguard.com/us/funds/snapshot?FundId=0213&FundIntExt=INT#tab=1)

          In terms of stocks specifically, even if someone is investing for proactive impact as opposed to avoiding evil, the money usually doesn’t go to the company unless they are repurchasing stocks, or doing an initial or secondary offering, so holding virtuous stocks (or avoiding evil ones) doesn’t really impact the company.

          I agree that the example you use of buying cruelty-free cosmetics does have a more direct impact, albiet a marginal one compared to, say, using the extra money that normally gets spent on cruelty-free cosmetics and giving it to a really really effective animal rights philanthropy instead, such as one listed here: http://www.animalcharityevaluators.org/recommendations/top-charities/ .

          If being an ethical consumer and investor didn’t cost any additional money, there wouldn’t be issues. But, for me at least, I agree with GiveWell that the extra money I would spend on ethical products/investments could probably accomplish more good being spent on true direct-impact philanthropy/advocacy.

  • LeisureFreak Tommy November 4, 2014, 4:57 pm

    Great post and I appreciate all of the digging to check Betterment out and explaining the benefits. I absolutely dislike tracking the market and I try to keep everything as simple as I can. I do use an adviser for my primary accounts that are funding my early retirement but I have started dipping my toes in DIY investing. Once again a MMM post and some follower’s comments that leaves me financially smarter than when I woke up this morning.

  • FB November 4, 2014, 11:46 pm

    For those of you who use Betterment or Wealthfront in taxable accounts where tax loss harvesting is done, approximately how many transactions show up on your 1099, neighborhood of tens or hundreds…?

    If you do your own taxes, do you auto import the transactions into your tax prep software (and is correct cost basis computed)? Or do you have to manually enter each transaction?

    In my case, I use an accountant for my taxes. I’m concerned that I will get charged much higher fees for him to input all the transactions manually, which would undo some of the benefit of the gains from tax loss harvesting.

    Would love to hear comments from actual users or from Betterment employees directly, since they have been very active/helpful on this thread. Thanks.

    • Boris Khentov November 5, 2014, 12:04 pm

      Hi FB,

      I work at Betterment. Our TLH+ service launched in the spring, so we’ll generate our first batch of 1099s that include TLH activity in January. In my own Betterment account, there have been maybe a dozen or so additional transactions due to TLH, though others may have more (frequent deposits in particular will offer more TLH opportunities). Personally, I use TurboTax, and my Betterment info auto-imported: no need for manual anything.

      Losses realized by every transaction will be accurately reported on the 1099s, along with a top level summary, so an accountant would not need to be computing those.

  • Tron November 5, 2014, 12:18 am

    A long-time lurker, I really enjoy MMM but finally feel compelled to comment. Since it is his site to do what he darn well wants, I have no problem with reviews of products that includes fully-disclosed referral links. All fine there. However, it really leaves a bad impression when representatives of those companies enter the comments section to shill their products.

    I also just want to highlight a couple points that were made earlier in comments. The portfolio allocates nearly half of the fixed income to taxable bonds, which is just silly. The vast majority of people would be better served to practice tax location depending on bond type. Why have EM debt in a taxable account instead of your IRA?

    And more importantly, I think investors need to realize that there are major factor tilts in this portfolio versus a total stock market index. This will cause meaningful performance variations from the market. Now the idea is that this has worked historically over long periods of time and there may be reasons for it (Fama French, DFA, etc) and that is hasn’t been arbitraged away and will exist in perpetuity going forward. But there will certainly be times when value lags. Meaningfully. Over the past 10 years, the value fund used (VTV) has trailed the growth fund avoided (VUG) by a huge amount – 1.25% annually. Doesn’t sound like a lot? Go chart the 10 year return of the two funds and you’ll see what that looks like compounded over 10 years.

    Another major difference in the international allocation. The majority of equities are in international stocks (here they appear to be following the global index weighting). This is significantly more than Vanguard (and most other institutions) recommend.

    None of this is inherently “wrong”. Markets may go back to value outperforming over the long run. It may pay to have the majority of your equity allocation in international stocks. But there are major bets in place, and you should go in with eyes wide open.

    • Mr. Money Mustache November 5, 2014, 9:30 am

      Your criticism and comments are welcome, Tron!

      But the Betterment folks are here because I like them and invited them here to my living room to come answer questions – see my Twitter feed for yesterday to see where this happened. There is a difference between “Shilling” and “answering questions with some pretty deep analysis” and I think the answers I see from them here are deserving of respect.

  • Benjamin November 5, 2014, 1:40 am

    If I understand correctly, the ideal situation would be to every year realize a capital loss equal to your realized capital gains plus $3000, right? Basically, we want to turn realized capital gains into unrealized capital gains. I can imagine a way to do this automatically at scale. The concept is you would enter into a large number of very small investments which each have an independent extremely risky immediate event (50% are total loss, 50% are 100% gain) and thereafter behave as reasonable normal investments (stock, bond, mutal fund). You realize the total losses and keep the gains. The reason for the large number of very small investments is to use law of large numbers to have a relatively small random change (standard deviation for binomial distribution goes as 1/sqrt(N)).

  • Sebastian November 5, 2014, 6:54 am

    Thanks for this valuable info!
    I´m following a ETF rotation scheme by myself (one ETF at a time) but this seems like a much better approach and was wondering if it exists a similar service for european customers because it seems Betterment allows only US based people. Greetings!

  • E.A. Mann November 5, 2014, 7:00 am

    Great write up! Just wanted to point out that unless you’re putting new money into the account year over year, your opportunities for tax loss harvesting will be limited in the long term.

    As the market goes up over time, the delta between your original cost basis and the newer, higher value of your investments will make it harder and harder to extract any losses. There will be a little bit in the new buys executed during rebalancing a portfolio, but that’s about it.

    However, if this is an ongoing account where you’re investing monthly, there will be new cost basises coming online all the time and TLH opportunities should abound. Another benefit to investing over time in an account like this (beyond just dollar cost averaging)

  • Slay November 5, 2014, 7:10 am

    how does six different highly correlated equity funds give you diversification?

    • Jason G November 5, 2014, 9:31 am

      Diversification is still achieved with funds that overlap, because the funds represent ownership in so many companies and economies which is the main concept behind diversification. I know that many bogleheads like to hold three funds, which is great for passive investing, but it is very hard to utilize tax loss harvesting when you hold so few funds. In fact I am skeptical of Betterments ability to both keep the portfolio balanced and to optimize tax loss harvesting with so few overlapping funds.

      • slay November 6, 2014, 7:18 am

        correlation is the main concept behind diversification, not owning a bunch of different companies and economies. when they all move in the same direction at the same time then you haven’t achieved much. maybe the tax loss effects make up for lack of actual diversification (doubtful) but that’s a lot of data to process to find out.

  • EDSMedS November 5, 2014, 7:12 am

    As a devout Mustachian and Betterment member for 19 months (thank you YNAB), I can say that the service gives me what I need. It provides a transparent, simple, well-studied method for thoughtless capital appreciation. It allows me to pursue other priorities besides learning how to execute complicated strategies. Betterment does a good job speaking to WHY they pursue strategies. They also provide excellent prognostic visuals for some fun daydreams. The beauty of Mustachianism is the sigh of relief when you realize that you are comfortable without consumption, and you can think about money LESS. Betterment supports that for me.

    I utilize Betterment for taxable and non-taxable, short and long term savings goals. Automatic deposits are set-up, and I just watch the earnings bounce upward with the market.

  • Zach November 5, 2014, 7:34 am

    I was considering tax loss harvesting on my own portfolio. However, I am having a difficult time seeing where the tax benefit comes from for someone with a 15% marginal tax rate (which I believe MMM to be in from previous posts) given long-term capital gains rates of 15%. It seems that using a service like Betterment would continually drive down the cost basis for any holdings. While this would give a current tax break, lowering the tax basis would just result in differing taxes into the future. Alternatively, it could result in a higher tax bill if income level increases or marginal tax rates increase in the future.

    • Mr. Money Mustache November 5, 2014, 9:25 am

      Excellent point, Zach – tax loss harvesting declines in value the lower your income gets.

      However, readers of this blog seem to reach into some fairly high tax brackets (saving for a very early retirement often goes with higher income). Also, my own family’s “retirement” income has been creeping up recently and it is now in a higher bracket.

  • J Dub November 5, 2014, 8:29 am

    Seems like everyone is missing MMM’s main point on Betterment – Tax harvesting, not asset allocation.

    “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 calculation is simply the estimated benefit (0.77%) vs. the cost (0.15%). MMM wasn’t performing DIY tax harvesting and sounds like his doesn’t plan to. Am I missing something?

  • Adam G November 5, 2014, 8:32 am

    Great article, I too have been crushed (more than once) thinking I could pick and choose the winners. Long term is the only way to go…I met with the person managing my IRA last week and was again in awe over the incredible long term numbers associated with a strong, diversified stock investment….where the market has seen an annual gain over 9% when averaged for the last 85 years, to include the great depression. That’s where my money is going from now on.

    Unfortunately, I would say 90% of the people in this country who remain poor and disenfranchised have no idea of these numbers. Schools should show every student this site:


    Even someone of lower than average income (even minimum) can save over $1 million before retirement age just by investing what they would otherwise spend on TV and junk food. Instead of complaining about greedy corporations, get your slice of their earnings and understand anyone can have a nice chunk of corporate success.

    • Frugal Bazooka November 5, 2014, 1:10 pm


      great comment. It’s a shame that so many Americans don’t seem to be able to get their shit together in that regard. They spend so much time complaining about how bad the system is they don’t bother to learn how to make the system work for them. It’s not a perfect system, but it can be brought to heel if you’re willing to read a few books.

  • Maury McCoy November 5, 2014, 9:21 am

    Long time reader, first time commenter…

    I’ve recommended both Betterment and Wealthfront to friends, but I personally am waiting another quarter to see what Schwabs “Intelligent Portfolio” is all about.

    It appears to be a “Betterment Killer” for lack of a better term. It promises to do everything Betterment does, except for free. (No management fee.) There are the underlying ETF costs, but those are true for any Robo Advisor.

    It always shocks me a bit to see that Betterment (in the 90/10 portfolio) has more than 50% of their portfolio abroad… Seems a bit excessive as someone like Swensen at Yale suggests closer to 20% in his “lazy” model portfolio.

    I’d like the ability to customize those allocations myself. I’m curious to see if Schwab will allow that.

    • B November 5, 2014, 11:25 am

      Great point about Schwab. I will be curious to see if they offer daily tax loss harvesting or simply monthly or even annual harvesting. I will also be curious if they choose very low cost ETFs or if they choose more expensive ones. But it’s going to be interesting.

      It’s just a very exciting time to be an investor, as the costs to get the kind of diversification that required $10 million dollars only a decade ago are now going to be available to someone with $5000, and for 1/10th the % cost. It’s just unbelievably exciting. I would NOT recommend any of my kids to go into financial planning nowadays, that’s for sure!

      • wberkgal November 5, 2014, 7:05 pm

        I’m curious about what Schwab is planning as well. Right now, I’m using the free tool on the FutureAdvisor site to wrangle our investments. Some months ago after reading the MMM posts (well, most of them) I rolled over our old 4o1Ks and miscellaneous IRAs with the big expenses to Schwab and started putting them in random ETF and index funds. However, I still had a current 401K that only has few investment choices. Using the FA tool I could enter all of my investments and link the Schwab accounts so the FA investment suggestions only included trades that worked well at Schwab and also took into account the investments in my 401K that I couldn’t change. I have some non-retirement money in FA as well, and the tool does suggest tax harvesting strategies. In the free tool, I make all of the trades myself, but it really isn’t time-consuming, it’s empowering.

        I’m retiring Dec. 1 –in reading MMM I realized we were FI–yay! and at just over the 59 1/2 cutoff, don’t have to deal with some of the money management issues that younger retirees have. I’m really looking forward to rolling over that last 401K. The Betterment retirement income feature looks interesting, however, and I’d consider it in a year or so if life seems to be getting complicated again.

        • pb April 8, 2017, 2:28 pm

          Doing the same at FA and invest through Schwab, which is a PCRA/self directed brokerage option through my 401 and 457. Have IRAs at WF and am considering transfer to Vanguard and simply following the FutureAdvisor.com recommendations. HOWEVER, after reading jlcollinsnh’s book, I am considering simplifying and just letting everything ride on one fund (admiral shares total index) or VTI for monthly investments (maybe I will simply roll the larger accounts into admiral shares and do the monthly thing in VTI.

          Question is about FA? What do folks think?

  • Spicola November 5, 2014, 9:23 am

    For more on this topic for Canadian readers, check out the canadiancouchpotato blog. Recent posts include an Interview with Wealthsimple and also Tax Loss Harvesting:



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