5 Reasons Why I Told My Sister To Invest With Betterment

by Corey Philip //  April 14, 2017

When I had that talk with my sister about “so how much money do you have sitting in the bank? – You need to invest!”, I ultimately pointed her to Betterment.  At the most basic level Betterment aims to get you simple, do nothing, stock market returns – adjusted for your level of risk and time horizon.  With Betterment you buy (according your goals), do nothing except keep investing, and check back in many years to see how much you have (aka buy & hold).  Some of you might be a bit shocked by that I would suggest a buy & hold allocation for my closest relative.  If you know me or have read my blog, its no secret that I’ve invested countless hours into finding quantitative formulas to beat the market.  Formulas to give me a slight edge over the market beta returns of a globally diversified portfolio like what betterment offers.  So why would I, her brother, who has all kinds of awesome quantitative investment ideas and knowledge point her to Betterment – a solution so simple?

  1. Its effective. No secret, I’ve got many fancy quantitative investing strategies up my sleeve, backed by countless hours of research, that should beat the market or control volatility.  Their backtests look great, but the past is not prologue.  Chances are, they will not beat the market beta returns of Betterment or any other index fund portfolio.  In fact over 92% of actively managed large cap funds failed to be beat the S&P 500 index.  I’m willing to take a chance on these strategies, because I have a solid understanding and belief in them.  I also believe I can manage my emotions and stick to the strategy through thick and thin.  Statistically speaking though, it is very likely that I’ll fail and my sister, myself and everyone else, will do best with a diverse, low cost, index fund portfolio.
  1. Its simple. There’s no need to research anything.  No need to spend hours learning.  No paperwork.  Simply set it up and within minutes you can be investing.  Simple wins in many parts of life, and with investing as well.
  1. It doesn’t require any financial knowledge or research. At a basic level, to come up with a low portfolio that has even a remote shot at competing with a Betterment portfolio, in performance after fee’s and taxes (more on this later) my sister would need to have a damn good understanding of asset classes, allocations, and taxes. Its not hard to get a solid grasp on things, and I encourage learning about it, but with Betterment you don’t have to.

Investing in mutual funds, requires the knowledge of asset classes, allocation, taxes, and then a solid understanding of what makes a mutual fund more likely to outperform (most people don’t know this).   This takes a bit of time.  Then you should also understand the strategy behind the fund – statistically understand, not just what the fund literature says.  This takes a lot more research & time.

Investing in the same strategies I do, requires even more knowledge & research time; CAPE Ratios, price return vs total return, and moving averages, and all kinds of other financial metrics, my sister is clueless on.  Although simple on the surface, the quantitative strategies that I invest in, require a deep understanding of the fundamentals and anomaly’s behind them and belief they will persist.  Even if she were to take the time to learn all about them, chances are it wouldn’t get her any premium (see 1.).

  1. Betterment Invests Tax Efficiently. I mentioned this earlier, but besides worrying about fundamentals and security analysis, when building a portfolio, you need to worry about taxes.  That throws a wrench in things.  Taxes can take a huge whack out of the portfolio.  Lets look at it like this: A $10,000 investment, with an 8% annual return, for 30 years would be worth $100,626.57.  Lets assume you’re in the 33% tax bracket, you forget about the tax problem and end up having to pay short term capital gains tax every year.  That $100,626.57 would get whittled to $47,534.38 after taxes.  On the flip side, if you only pay long term capital gains on the investment, you’ll be left with $85,532.58.  Now see what a difference taxes make?  Betterment handles this for you by investing in the most tax efficient manner.   Their tax coordinated portfolio, put investments in the most advantageous accounts, and they use tax loss harvesting, to get you a tax break.  While I know a lot about this stuff myself, I can’t monitor my sisters portfolio and tax situation as good as Betterment can.
  1. Its hands off. If my sister were to build her own buy & hold asset allocation portfolio, she would have to make sure each contribution is invested properly.  In other words if her allocation was 50% stocks, and 50% bonds, she would have to contribute that much to each every time she wanted to sink money in, and stick with it.  Practically speaking asset allocations are never that simple.  Then it would need to be rebalanced annually.  If she wanted to get into the quant strategies I track, she would need to check the portfolio monthly.  With Betterment, put your money in it, and let them do the rest.

Now I realize it sounds like I knock my sisters intelligence, but she’s actually pretty sharp (sorry Shannon), but she’s actually pretty sharp.  She’s got a college degree, has a job that pays well, and manages to save quite a bit, but investing is something she’s never learned… and really doesn’t have to.  Thanks to modern technology she can get a globally diverse portfolio, that will do better than nearly all other strategies and makes good use of the tax code to maximize returns.

About the author

Corey Philip

Corey Philip is a small business owner / investor with a focus on home service businesses.

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