You may or may not have heard about www.betterment.com. If you have, bear with me as I give a little background to the amateurs reading this. Betterment is a fairly new investment platform, kind of like Vanguard or Ameritrade. What makes it so unique is the methodologies they use to invest your portfolio. They use science and math and statistics and have developed very sophisticated algorithms for investing. They claim they can make an additional 2.66% return per year than someone doing it on their own (Betterment.com, 2018). According to Betterment.com that figure (2.66%) is after their management fee which is 0.25% for most accounts (Betterment.com, 2018).
Now you may be thinking that 2.66% more a year is not a big difference, which I would agree with you. However, you are not thinking big picture. Most of the average folk only invest for their retirement, meaning they are investing for long-term, maybe 25, 30, 35, or maybe even 40 years. So, what does that mean? This means someone who is investing for 40 years can expect an additional 106.40% return on their money! If you aren't jumping out of your seat over that number let me put it into an example for you so you can see how much 106.40% more over a lifetime of investing can net you. For example, say over your lifetime your investments end up being $1,000,000, now if you weren't using Betterment your money would only be that $1,000,000, now if you would have used Betterment over your lifetime you would have ended up with $2,064,000! An extra $1,064,000 dollars. That's a significant chunk of money! So, 2.66% more a year is significant for total returns.
Now that you have some background on Betterment and how big their claims are I want to talk to you about the experiment I have developed and how I arrived at it. So, I'll admit, Betterment had me sold so I created a general investing taxable account. I was going through their questions, kind of like a dating website questionnaire, designed to better understand you and your investment goals. After completing that it gave me a the portfolio mix they were going to use for me. It ended up being 90% stocks and 10% bonds, broken out over many different ETFs. They use ETFs as their primary means for investing. I was not surprised by this break out because that's what I personally do with my Vanguard Roth IRA and Taxable account. What was surprising is the fact that they give you the exact breakdown of each ETF you are going to be holding in your portfolio. The breakdown is below in the picture if you are interested in what mine currently is.
Even better, they allow you to click on the arrow next to each name and breaks it down even further and gives you the exact name of the ETF they are going to purchase for you. Also, they give you the Ticker Symbol in the name, but if you don't know Tickers then it's nice to see the exact name of the ETF. I started looking at each ETF I would hold and I realized every single stock ETF they are going to purchase are Vangurad ETFs. This made me think -- wait a second, I already have Vanguard accounts and I can purchase these ETFs directly on Vanguard's website. So, I went over to Vanguard just to confirm these were real ETFs available for purchase and sure enough they were!
This lead me to my experimental questions: If I follow this portfolio breakdown exactly in my Vanguard accounts and do everything Betterment is doing will I not get the exact same return by doing it myself? Which lead me to my next question: Shouldn't I actually have a higher return at the end of the year of 0.25% (Betterment's Management fee)(Betterment, 2018), because I won't be paying the management fee of 0.25%?
If my hypothesis is to be true at the end of the experiment I will have a 0.25% better return in my Vanguard accounts than my Betterment account.
You may be saying -- that's going to be a lot of work to track what they are doing. You are right, it is going to be a lot of extra work on my part to keep up with what they are doing, but to test my hypothesis I will need to do it. Plus, if the hypothesis does end up being true and I can save 0.25% per year while returning an additional 2.66% per year then I am perfectly fine running my own money. Who wouldn't want to make an extra 2.91% per year over 40 years?
To recap, I am going to be tracking my Betterment portfolio in Vanguard for one (1) year to see if I can get the same returns as Betterment, but with an additional 0.25% over the year. If the hypothesis holds true I should end up having a 0.25% overall better return after one year.
The question I had to answer for myself is how much was my first deposit going to be for both accounts and how much I would subsequently deposit per paycheck after that? I decided on starting with an initial deposit of $800 for both accounts (Betterment and Vanguard) and per paycheck I will split my investment amount in half and deposit that amount into each account.
The experiment is starting on Monday, May 7th, 2018. I will give updates about every month or every quarter, I haven't decided on a time-frame for updates. I want to give Betterment enough time to really flex it muscles and give it a fair chance. I will probably do it every month so I can give an update on the process and my findings each month.
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Betterment. (2018, May 5th). Retrieved from Betterment: https://www.betterment.com/resources/investor-returns/