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When I originally started using Betterment in July of 2015, my goal was finding an investment savings mechanism that was cost-effective, easy to use, and worked well. I needed a simple way to invest in low-cost ETFs without being able to royally mess myself up as my DIY investment training wheels were still tightly bolted on. They were a great fit. As time went on, I quickly saw that it is very easy to maintain a simple, low-cost index based ETF portfolio on my own. In 2016, I gave Betterment a bar to reach: if the tax savings of harvested tax losses (a piece of portfolio maintenance I felt least comfortable with) exceeded annual fees, I’d stay the course. The cards were stacked against them as I had very little taxable money for which tax losses could be harvested during most of the year, but it was at least a benchmark that I could easily monitor.
In 2016, Betterment harvested $176.17 in tax losses, which amounts to a $44 tax savings at the 25% tax bracket. However, this is less than my total Betterment fees for the year (I’m in the 0.25% price range), and there is little chance I’ll reach the 0.15% price range (100k+ total account balance) anytime soon. To be fair, there is no way I could have made all the trades they did with a single provider for less than they charged me. But whether or not I actually needed to make all those trades is another question altogether. Their Tax-Coordinated Portfolio (TCP) was a great product feature they rolled out, but is it helping or hurting to buy and sell the same securities multiple times in one month just to remain within a fraction of one-percent of an asset allocation target? My gut is that TCP has gone a little too far towards the unnecessary end of rebalancing frequency.
On the plus side, we made an allocation change with Betterment which was scarily easy. Due to some changes in my 401k account (some cheap Vanguard Institutional indexes became available!), I wanted to use Betterment for more of our bond holdings. The change was relatively minor, from 98/2 to 94/6 but I appreciated the ease by which a full US and International bond mix was increased. Secondly, their dividend reinvestment system is the way all portfolios should reinvest - they are treated as any other cash deposit and invested in asset classes based on whatever your portfolio needs (rather than only back into the originating security). From a performance perspective, our account is up 9.7% from July 27th, 2015 to January 8th, 2017. Stated as a time-weighted return, our Betterment portfolio achieved 3.6% versus 11.0% if we had been fully invested in only the S&P 500.
Since Betterment rolled out TCP in September of 2016, they have made a few tweaks to the asset location priorities:
Asset Location Priorities with a 90/10 Allocation
- Taxable: US Municipal Bonds -> US Total Stock Market -> US Mid-Cap Value Stocks -> US Large-Cap Value Stocks -> US Small-Cap Value Stocks -> International Medium Quality Bonds -> International Developed Stocks
- Traditional IRA: Emerging Market Bonds -> US Medium Quality Corporate Bonds -> Emerging Market Stocks -> International Developed Stocks
- Roth IRA: Emerging Market Stocks -> International Developed Stocks
With the start of 2017, Betterment has made a few ETF changes as well. The most notable of which is that iShares EMB is now the primary ETF for Emerging Market Bonds. They have slowly been moving my VWOB holdings to EMB during IRA rebalancing events that get triggered with each contribution. After the asset allocation rebalance to 94% stocks and 6% bonds, plus a number of contributions to both IRA and taxable portions of the account (albeit, mostly IRA) here is the breakdown of our Betterment assets across the TCP portfolio:
I’m going to press on towards the two year mark, which means my time as a Betterment customer is likely on its last 6 month run. Transferring away from Betterment may be a challenge of its own as the miniscule amount of some bond holdings will be more costly to liquidate then it’s worth and a nuisance to keep active. Though given the ease of rebalancing, it may make the most sense to just rebalance back towards equities until the tiny holdings are removed prior to transferring elsewhere.