For more details about our advice calculations, review our Advice and Projection Methodology.
Last Updated: August 09, 2013 5:00PM EDTBetterment's advice is customized for each goal individually. This advice includes how to set your allocation to stocks and bonds, and how much you should save to achieve your goal. In order to provide such specific advice, we require some details about your goals. For example, for retirement goals this includes the age you would like to retire, as well as how much you will need to retire on.
For more details about our advice calculations, review our Advice and Projection Methodology.
Last Updated: March 16, 2015 4:33PM EDTStocks are generally more risky than bonds, meaning they go up and down more frequently. However, over time, stocks tend to grow more than bonds. How much to allocate to stocks depends on how much you are personally able to stomach the ups-and-downs (your 'risk tolerance') and how long you plan to be investing for your particular goal.
Our advice will guide you to the best allocation based on the time horizon (or retirement age) you have provided. Changing the time horizon will change the blue shaded regions on the slider. From there you can tweak it up or down based on your personal preferences (conservative, moderate or aggressive). We also realize that preferences change, so you are always able to change your allocation without fees, up to once a day. Our Tax Impact Preview tool will allow you see the estimated tax consequences that would result from an allocation change in real-time, before you confirm the change.
Last Updated: June 16, 2016 2:03PM EDTThe answer is probably yes. The reasons to not be saving are:
- You are retired/decumulating rather than saving.
- Your income is so low that you can’t save, i.e. you have no income left after taking care of life’s necessities.
- You have so much wealth already you don’t need to save more.
- A dollar of consumption is guaranteed to make you happier now than it will later.
If one of these isn’t true for you, than odds are you should be saving. You might not have any particular savings goals in mind, but we’ll help you with that too.
Last Updated: January 26, 2015 1:50PM ESTThe correct answer depends on what will make you comfortable with getting invested. But first, let’s define these terms.
Dollar-cost averaging (DCA) refers to an investment strategy of investing a fixed amount of money over a time period (say 1 year). There are two types of DCA:
- Voluntary DCA implies you have a liquid amount of cash to invest, but are intentionally parceling it out over time. The cash will (hopefully!) be earning interest while it’s not invested.
- Involuntary DCA is generally auto-deposits set up to invest as you earn money. Your purchase points are at different points, but you did not have any period of sitting in cash.
The big difference between these two is how long you were sitting on cash, rather than investing it in a portfolio. Involuntary DCA implies that you could not have invested sooner, while voluntary DCA is an investment strategy where you could have.
Ok, so what's the answer?
From a pure investment strategy perspective, because the expected total return of markets is positive, it makes sense to invest immediately, and not worry about timing the market. It's important to remember that while the price of stocks may go up or down, they are usually paying about 2% in dividends (sometimes higher). Thus your price return can be flat, but your total return (price return + dividend return) is still up. So if you wait, you'll probably have a lower total return, though not by a large amount.
One investment strategy reason to dollar-cost average is because you have a weak view that the market will be going down in the near/short-term. Otherwise, it's best to just invest the money, and not worry about timing it.
However, there are some very nice psychological benefits to dollar cost averaging:
- It diversifies your purchase price, which makes you less susceptible to the Disposition Effect.
- It likewise reduces your anxiety that you have bought "at the top", and thus makes you less disposed to attempt market-timing and pull out after being invested.
- It gives you a concrete plan for moving out of cash. The move from "safe" to "higher risk/return" is an uncomfortable one, and often people want to feel that they're doing it in a controlled manner. Having a clear plan to do it over a period of time is better than not doing it at all.
Last Updated: April 21, 2017 11:14AM EDTUnderstanding and managing the fees in your portfolio is very important because they directly and significantly impact your long term wealth. Here's why.
Our fee calculation covers two kinds of fees - the expense ratio of funds, and the advisory fee that might be paid to manage those funds. We determine the expense ratio for mutual funds and ETFs based on the ticker you hold and our external data source of fund expenses. The advisory fee can be optionally entered on the External Accounts tab in your account settings. You may also pay one-time load fees on mutual funds (at purchase or sale), or commissions on trades, but our calculation doesn’t consider these since these were typically already paid.
Advisory fees are considered high if greater than 0.5% for most accounts. Employer plans like 401(k)s may have additional fees due to record-keeping and plan administration costs, so for employer plans, advisory fees are considered high if greater than 0.6%.
Funds are considered high fee if their expense ratio is greater than a threshold that is based on asset class. To calculate the high fee threshold, we looked at every exchange traded fund (ETF) currently available in the U.S. and classified each into 8 different asset types. We then established a high fee threshold for each asset type by dividing all the ETFs into four quartiles and taking the average expense ratio for all funds in the lowest quartile of funds. The default threshold for funds that do not fall into 1 of the 8 asset types is 0.35%. For example, the Vanguard Target Retirement 2055 Fund, VFFVX, spans several asset classes consisting of US stocks and bonds as well as international stocks and bonds. The fund therefore gets the default threshold of 0.35%.
High fee thresholds:
- US Bonds: 0.15%
- US Stocks: 0.25%
- US Munis: 0.25%
- Real Estate: 0.35%
- International Developed Stocks: 0.35%
- International Developed Bonds: 0.35%
- Emerging Market Stocks:0.50%
- Emerging Market Bonds: 0.50%
If fund fees as a percentage of account balance are less than or equal to 0.25%, fees are considered low. If fees are between 0.25 and 0.5% they are considered moderate. Above 0.5% is considered high.
If either your advisory fees or fund fees are high, your "Total Fees per Year" will be shown as "high" on your External Portfolio page.
Last Updated: June 15, 2016 10:16AM EDTFor each externally synced portfolio, the Portfolio Tab pie chart displays how much that portfolio holds in each of 5 major asset classes (US Stocks, US Bonds, International Stocks, International Bonds, Cash) as well as "Other". For diversified mutual funds or ETFs that may contain multiple asset classes (e.g. a target date fund), the allocation looks "through" the fund, meaning it splits up the fund by the relevant asset classes to give a more precise visualization of the actual holdings.
For example, a target date fund like VFFVX, the Vanguard Target Retirement 2055 Fund, has allocations to stocks, bonds, and cash, even though it is most heavily weighted towards US stocks. Unlike some other allocation tools, we display VFFVX’s allocation to each of the given asset classes rather than assigning 100% of VFFVX’s allocation to one single asset class like US stocks or a fund type like “Target date fund”.
Knowing your portfolio’s true allocation can help you better understand the risks you are taking and make decisions about the allocations in other accounts.
Is this allocation data real time?
Your balance in each account and fund is updated daily. However, the underlying allocation data is only published by mutual funds on a quarterly basis, so your current portfolio allocation is only an approximation of the current actual allocation.
Is current portfolio allocation used to determine the fee level of a fund?
Our fee assessment of a fund uses the overall fund type (E.g. US Total Market Stock Funds, International Bond Funds or Commodity Funds) and not the asset classes within the fund. While the overall fund type is related to the underlying allocation, the actual fund expense ratios are set per fund and not per asset class within the fund.
Last Updated: June 15, 2016 10:16AM EDTWhat is "idle cash"?
“Idle cash” is the balance you have in cash or cash-equivalent securities including currencies and money market funds. It is “idle” because it’s not invested - and not working for you.
Note that your portfolio may actually contain additional cash within the funds you hold because the fund manager may decide to hold cash or be required to in order to meet redemptions. While you’ll see this in our “current portfolio allocation”, we don’t include this “fund cash” here because you cannot invest it. Your only option is to sell the fund and buy a fund like an index fund that minimizes cash.
Betterment believes that cash does not belong in a long-term investment portfolio due to its low return after you adjust for the fact that it’s purchasing power is eroded by inflation over time. Learn more about how cash affects your investments.
I didn’t realize I had cash in my portfolio, how did it get there?
Cash can build up if cash dividend payouts from investments aren’t automatically reinvested. If your brokerage doesn’t offer fractional shares, you might also have additional cash that wasn’t enough to purchase full shares. Betterment offers fractional shares to put every penny in your investment account to work.
How much cash is too much?
While a small portion of cash may seem insignificant, it can still significantly drag down your returns due to compounding. However, we recognize that practical issues in accounts that don't have free trading and fractional shares like Betterment may cause you to have a bit of cash. Generally, if your cost to re-invest cash into securities outweighs the value of the trade by some threshold, you should hold the cash until you have more to invest.
If we assume an average trading cost of $7 per trade (typical of discount brokerages) and you don’t want to reduce your returns by more than 1%, then you should have, at most, $700 of cash. Again, it’s still better to hold the least amount of cash possible.
How can I invest cash in my external account into my Betterment account?
To use Betterment which automatically buys the correct securities for your allocation and reinvests cash over time, first transfer the cash from your brokerage account to the bank account used by your Betterment account. Then, make a deposit on the Transfer tab.
Last Updated: May 17, 2016 1:49PM EDT
Choosing whether to invest or pay down debt is a common question. As much as we would love everybody to become a Betterment customer, there are certain situations where you should pay off debt before you open an account with Betterment
First, you should make at least the minimum payment on all debts before investing. Not doing so can lead to penalties and added interest, in addition to ruining your credit score. For some debt like mortgages, this would be the full payment. For other debt like credit cards, the minimum payment is listed on your statement.
Second, you should typically make sure that you have enough cash to pay off the monthly balance on your credit cards before investing. The average interest rate on credit cards is 15%. Paying these debts down is equivalent to a guaranteed 15% rate of return on your personal balance sheet.
In general, any debt with an interest rate of 5% or above(1) is considered high and you should typically pay off that debt before investing.
Once high interest debt is eliminated, it makes sense for most people to consider investing. Not all debt is bad or should be viewed as a barrier to investing. Debt can be a valuable tool to help you reach your goals faster (such as a mortgage on a house), but it should be used in moderation. A good rule of thumb is to keep your total debt payments below one-third of your gross income.
If you proceed to open an account at Betterment, it will be our understanding that you have read the above and have determined that you are not investing at the expense of making minimum payments on your debt or paying off high interest debt.
(1) 5% is the approximate return of a conservative Betterment 60/40 portfolio over the last 10 years.