I wrote this post in August 2014 comparing Betterment to Wealthfront, so it's been about 15 months, and I thought it'd be a good time to check in on relative performance, as a buddy of mine recently wrote:
"I saw your post on betterment. I'm thinking of moving everything over to a roboinvestor. What's your thinking on betterment vs wealthfront, and whether you'd just dump everything on there?"
As I wrote in my original post, I put $5k into both Betterment and Wealthfrontto test them against each other. To date, both have under-performed the S&P 500 by a considerable margin. S&P is up 10% since August 2014. Betterment is down by 2% and Wealthfront is down by 5.4%. So, should I just have invested in the S&P 500? And as per my other previous blog, Show Me The Money: Six Strategies to Put Your Cash to Work, how should I re-allocate based on this new data? And what would I recommend to my buddy? Let's dig into the data a bit to come to a conclusion:
Here's a chart in my Betterment dashboard that compares the performance of my Betterment investment (in orange) to the S&P 500 over the same period (in blue). I also threw in a Vanguard bond fund's performance just for a benchmark on how a more conservative investment has done:
Sadly, Wealthfront's dashboard isn't nearly as sophisticated. Here's all they show me:
Interestingly, here's how the Wealthfront has actually performed vs. how they predicted it would:
Meanwhile, in my "six strategies" blog post I referenced investing in peer to peer micro-lending via LendingClub, and then I wrote this update on using the LendingRobot API to be more sophisticated about how I do the P2P lending. Here's the LendingRobot dashboard of my P2P returns to date:
So LendingRobot is predicting that the money I invested in LendingClub using its "automated investing" service (before I knew that LendingRobot existed) will return 8.92%, but the money I'm investing in LendingClub using the more sophisticated rules I've created with LendingRobot will return 13.20%, for a blended return of 9.79%. Needless to say, I've stopped using LendingClub's automated investing service and am using LendingRobot exclusively for all investments in LendingClub moving forward. But let's just assume I can make an average of a 10% return in LendingClub. Does that mean I should move all the ETF investments over to LendingClub?
Well, not necessarily: There are several drawbacks to P2P investing, namely:
And to add to the complexity, I recently found a Vanguard high yield ETF that's returning a 3.11% yield, which provides for a blended approach: the liquidity and tax benefits of long-term-hold equities with some of the income elements of P2P lending.
So at the end of the day, here's my answer to my buddy who asked: Your decision really has to be based on your goals. Are you looking for an income producing asset? Are you willing to deploy cash in a risky way? In that case I'd focus on putting cash into LendingClub, via LendingRobot. But conversely, are you looking to stash cash somewhere that it can grow with the markets, where you don't need any immediate income from it? In that case I'd go with equities because historically they return in the 7% range annually, they're more liquid and get better tax treatment. And even though the Betterment and Wealthfront investments have greatly under-performed the S&P 500 over the past 15 months, I'm still sticking with them for now (and for the bulk of my cash, with Betterment specifically, which I greatly prefer over Wealthfront from a user experience perspective). Logically, I buy into their approach -- I like the Tax Loss Harvesting, I like the diversification into large, mid and small cap stocks and emerging markets. But I'm definitely going to keep tabs on how things go over the next couple of years, and I'll keep writing these updates (I'm in this for the long haul -- here's to decades of updates!). If I don't see Betterment start to out-perform other alternatives over a multi-year period, I'll likely change my approach.
I'd love to hear feedback from anyone who loves to geek out on this as much as I do! And for those of you who don't invest at all: Start with something small. $50. $100. Just get into it. Try a few things. There's a world of difference between $0 and $100, even just in the way you feel like you're investing in yourself and your family's future.
UPDATE: I've posted lots of updates since I originally wrote this blog 2 years ago. If you want to go deeper down the rabbit hole, check out this post comparing Betterment vs. Wealthfront ETFs and this one on Peer to Peer lending.
My wife Sue and I have been mulling over how to most effectively deploy cash in the current economic climate to generate decent returns without taking outsize risks. We've honed in on six main strategies, which I outline below in descending order of risk.
Since everyone has a varying amount of cash to invest, I'm going to specifically call out ways to deploy small amounts of cash in some of these strategies, as I want this post to be really actionable for anyone. The most important part is to just get started, and the biggest barrier to doing that is you thinking "I don't have any money to invest." So get yourself out of that mindset and jump into the world of being an investor, even if it's just with $25 (yes it's possible, below), $100, or $1,000 or $10,000, or whatever. I also recommend putting money aside every month to invest; that's a great way to get started.
Riskiest: Angel Investing
Summary: Most funds require a minimum investment of $3,000. But you can invest in several index funds through Betterment, which doesn't have minimum deposits or hidden fees, and makes investing much simpler by selecting several index funds for you.
We’ve come a long way! As a reminder, here is a cheat sheet to remind you of what you can expect from each investment.
You can feel that money burning a hole in your pocket, and want to start investing right away I can tell. Let's look at some of your options as far as brokerages:
Your employer's 401k: Chances are, the investment options provided by your employer's retirement plan are limited and the fees are high (average .71%/person in 2011). However, you should contribute at least as much as your employer will match- something like a 50% match up to 6% of your paycheck. 50% risk-free return in a tax-deferred account? That's a no-brainer.