Table of Contents
Introduction
Investing can often seem like a tricky task, especially if you are new to finance. With numerous strategies and options available out there, it can be quite confusing as to where to start. And then there are robo-advisors, which were specifically created to navigate through this process. These are computer-based investment managers that can help improve and manage your investments. In this article, we will explain what Betterment is and how it can help you get the most out of your money when it comes to investing.
What is Betterment?
Betterment was launched in 2008 with a vision of making investing easily available and affordable to everyone. It combines technology with professional advice to provide and manage investment recommendations that are suitable for your goals and risk appetite. Whether it is a retirement account, an ordinary taxable account, or a trust, Betterment has a variety of investment products to offer.
How Does Betterment Work?
When you join Betterment, you will be asked a number of questions to determine your financial objectives, comfort with risk, and the time you have to achieve your goals. In your case, Betterment offers a recommendation for a portfolio allocation that is most appropriate for your situation. Their state-of-the-art algorithms then take over, and they invest your money across a wide range of low-cost exchange-traded funds (ETFs).
The tax-loss harvesting strategy is another key advantage of Betterment. This is because the platform seeks to minimize your taxes through the use of TLA. In its simplest form, this means that the firm sells some of your losses to offset gains and thus decrease your taxable income. Due to their technological infrastructure, Betterment is able to identify potential tax-loss harvesting strategies and, therefore, presents them as a valuable feature for long-term investors.
The Benefits of Betterment
Using Betterment as your robo-advisor comes with a number of benefits:
- Low Fees: Betterment has a simple and fair fee structure that charges users a percentage of the assets they have under management, which is quite affordable for investors.
- Diversification: With Betterment, your portfolio is spread across different types of assets and geographical regions to minimize risk and maximize potential returns over the long run.
- Automation: It is easy to set up deposits and withdrawals with Betterment to achieve your investment goals automatically. It also offers a feature that allows you to balance your portfolio on your behalf.
- Goal-Based Investing: You can specify certain financial goals, for instance, saving for retirement or buying a house, and Betterment will provide recommendations for investing for those goals specifically.
Case Study: A Real-Life Example of Betterment: John’s Experience
To help you understand how Betterment enhances investment returns, let’s take the example of John, a 35-year-old employee who wants to save for his retirement. John is a moderate risk taker and has 30 years’ time frame, therefore he starts his investment journey with Betterment.
When signing up for the platform, and answering the survey on financial goals and risk appetite, Betterment recommends that John invest 80% in stocks and 20% in bonds. He then makes the first investment of $10,000 into his Betterment account.
Over the next 30 years, the algorithms employed by the platform work to continuously update John’s portfolio, according to the recommended strategy. Throughout the various market movements, the strategy of diversification and automatic rebalancing implemented by Betterment aims to reduce the effects of volatility on the portfolio.
At the end of 30 years, John’s investment has grown to $100,000 with an annual average return of 7%. Without the surveillance of Betterment, John might have struggled to generate such remarkable returns on his own.
