The New age of passive investing

If you’ve managed to read all my posts up until now and thought “I get this is important, but it’s still so complicated! Can’t I just give you my money and you do all the work for me?” Well you’re in luck, because in this post, I’ll be talking about services that do much of the heavy lifting for you so that you could be all set in as little as 5 minutes.

Diversification Review:

Before I can move forward, I need to take a step back and give a quick review on the concept of diversification, which I talked about in my second investing post.

Investing can seem overwhelmingly complicated. There are thousands of stocks out there, but there’s also Mutual Funds, ETFs, Bonds, Commodities, and others to add to all this complexity. The number one rule though is to diversify your investing. There are many methods to diversifying, but when we just look at liquid assets, there’s a few shorthand parameters to work with:

Step 1: break up your portfolio into categories.

Dave Ramsey’s method is simply to have four categories: Large cap, Mid cap, Small Cap, and International. You can either make it as simple as that and make it 25% for each category, or you can add more categories if you’d like. For instance you can have a Large Cap International category that is made of large companies outside the U.S. and even specifically being in Europe, and then you can have an Emerging Market International category that is made up smaller companies from emerging market countries like India & China if you’re willing to have more risk for the potential of bigger returns.

Step 2: Invest in funds over individual stocks.

Once you have your categories, it is much safer (and easier) to find an ETF or Mutual Fund that fits in your category. There are hundreds of fund accounts that you can invest in that can be as specific as the ETF “EWL” which only has stocks of Swiss companies. Or if you want, you can get the ETF “JETS” that has stocks of only Airline companies. Or you can get funds that are so broad that they capture the entire stock market. Much of the busy work can be taken out by just finding a few funds that hold many stocks in the categories you would like.

Demo of a diversified stock portfolio:

If you just bought a share of SCHX ($68), VOT ($135), IJR ($80), & ACWX ($53), you would have diversified your investing across 2,680 companies in the four major categories for a total cost of $336.

Financial Advice:

Here’s the problem, I’ve been writing a lot about the fundamental concepts of investing, but do you know what a good investment actually looks like? If you’re looking for an ETF in a large-cap category, how do you know which one to choose? When do you buy and sell? There are still so many variables that go into investing that sit in the gap between what I’ve covered here so far and for you to execute prudent investing.

But don’t worry, we’re now transitioning into talking about services that help bridge this gap between fundamentals and real-life application and that’s the role of Financial Advisors. They take many different forms and all have different specialized angles of services that can benefit you. There are Financial Advisors, Financial Planners, CPAs, Robo-Advisors, Brokers, etc, and some people hold multiple of these positions at the same time. In general, these professionals are skilled at looking at your unique financial situation and goals and help cut through the complexity of it all to provide you with a road map and the means to execute on your goals.

But for this post, I’m going to focus on one of the latest and simplest forms of financial advice widely available and that is Robo Advisors.

Robo Advisors:

This is something new that has only been around for a few years, but it has been taking the investment community by storm. In short, Robo Advisors is an online service that a team of advisors and programmers put together to create automated investing platforms for investors.

Robo Advisors Explained:

While each Robo Advisor is set up slightly different, a Robo Advisor essentially just takes everything I’ve written about and automates it. A team of Financial Planners design multiple types of diversified portfolios full of different mixes of ETFs and then use algorithms to assign the right mix to the customer.

When you go to a Robo Advisor, you first are asked a series of questions about your investing horizon, risk tolerance, socially-conscious importance, etc. It then takes your answers and then assigns you a fully diversified portfolio that will match your unique situation. If you are young and willing to take on more risk since you have more time to invest, you’ll get a portfolio that may be more weighted towards small cap ETFs. But if you are older and getting closer to retirement, then your portfolio won’t have as much Small Cap ETFs, and may have more in Corporate Bonds.

With these Robo Advisors, all the legwork is taken out of the equation and it just works. You can literally sign up and have fully functional retirement account or other investing account in less than 10 minutes ( I just tried out two different ones in this past month and both were super fast and easy). It will diversify your accounts to your needs, keep transaction costs low, implement tax harvesting methods to minimize tax hits, and some will even provide connections to real advisors if you still need the human touch. All these services are typically charging less than 0.5% of your account’s value per year.

Limitation:

In short, what a Robo Advisor is is a service that handles all the diversification investing decisions for you for a minimal fee; All you have to do is put money in and the system will make sure your money is being allocated in a stable method of passive growth. It is important what it is and what it isn’t. A Robo Advisor isn’t designed to provide individual advice; it isn’t going to know your medical background, where your kids are planning on going to school, your dream of buying a house, or how you’re trying to pay off student loans. All these things are important to you and they affect what is your objective with investing and how to achieve that goal. These are the things that Financial Planners will be able to address more effectively and even look at how your daily finances affect your future outlook as well.

I will focus on real financial advisors in a later post, but for now I’ll just say that if you want to get into investing but don’t want to make a huge financial or time commitment, then using a Robo Advisor would be a perfect way to start. Once you’ve had first-hand experience with investing, you may find the value to getting a real financial planner in your corner to guide you further since a financial planner will be able to provide a more detailed plan and educate you on new opportunities to achieve your financial goals.

Meet the Robo Advisors:

I have tried out three different Robo Advisor services recently and each has their own unique angle and I have been really impressed with them all. The three I’ve used is Betterment, Wealthfront, and Acorns Investing.

Acorns

I’ve been using Acorns Investing the longest in that I first started using it at the end of 2014. I hadn’t even really heard of Robo Advising before then and it was my dear friend Cubby who brought it up to me, and asked what my thoughts were on it. So I have been playing around with it over the past couple of years ever since.

Acorns is currently a mobile app that you download onto your smartphone and you get to choose between 5 different investment portfolios based on risk tolerance: Conservative, Moderately Conservative, Moderate, Moderately Aggressive, & Aggressive. They are all made up of the same accounts for the most part, and they are all ETFs, but it’s the percentages is what changes.

If you chose the Conservative portfolio, you would get the following distribution:

40% Government Bonds (SHY)
40% Corporate Bonds (LQD)
12% Large Cap Stocks (VOO)
4% Large Cap International Stocks (VEA)
2% Small Cap Stocks (VB)
2% Real Estate Stocks (VNQ).

If you chose the other extreme with the Aggressive portfolio you would get:

40% Large Cap Stocks (VOO)
20% Small Cap Stocks (VB)
20% Large Cap International Stocks (VEA)
10% Real Estate Stocks (VNQ).
10% Emerging Market Stocks (VWO)

For the most part they are the same, except the Aggressive dropped the Bonds & changed the allocation percentages. What is cool about all this is that it isn’t that super complicated; I just listed all the ETFs that make these up and if you wanted, you could just go to E-Trade and get these yourself, but it may be harder to get the percentages the same.

What makes this Special:

Acorns is the most simplistic platform of the three I tried, but there’s one gimmicky feature that I’m just a sucker for and you may like as well and it’s the Round-Up feature. Some banks used to have a feature like this for savings, in that what you do is link your debit or credit card to Acorns, and whenever you buy something with that card, it will round up the transaction to the next whole dollar and hold the change. Once you’ve gathered $5 in Round Ups, Acorns will invest that into your portfolio automatically. So if you want a mindless feature to help you to invest without having to even think about it, try using the Acorns Round Up feature. I’ve had mine set up this way and other than the initial $20 I put into the account, all the funding has come through this feature and now I have over $350 in the account (I had the feature turned off for a year, so it’s basically grown that much in 2 years.

In addition to the round up feature, they now have a debit card that you can get that links to your checking account, and when you make purchases at select vendors, Acorns will contribute an additional percentage of the transaction into your investing account.

Fees:

Acorns makes the fee structure easy: $1 per month. If you have an .edu email account, you get 4 years free. If you’re just starting out and doing like what I did and only putting in a couple hundred dollars a year, this service could be pricey since if you only had $100 in the account & you had the account for a year, you’d pay $12 in fees, which would then be 12% of the value of your account! So if you don’t have a student email, it would be in your best interest to try to get past $500 in the account as fast as possible so the fees don’t weigh down your account.

Acorns Later:

A few months ago, Acorns launched an IRA program, called Acorns Later. You can open up either a traditional or Roth version IRA, but they charge an additional $1/month for this service.

Betterment:

I just opened Betterment & Wealthfront this month, and they both are very similar in function, but so far I’ve enjoyed using Betterment over Wealthfront.

Betterment has a fully-featured web-based site, as well as a mobile app. There are a lot more features to Betterment over Acorns, but they’ve managed to streamline the process so that I was still able to open an account within 10 minutes.

When you set up an investing account with Betterment, you determine what your investing goals are; either just doing general investing, saving up for a child’s college education, big purchase down the road, or retirement. Once you’ve determined your goal (you can open multiple portfolios if you’d like), you are given a few portfolio mixes to choose from. There’s the standard portfolio that Betterment puts together, there’s also a conservative BlockRock’s Target Income portfolio that is purely made up of bonds. Another portfolio put together by Goldman Sachs that is more aggressive and higher risk, but the portfolio I’m most excited about and that I use is the Socially Responsible Investing Betterment portfolio. It doesn’t have super strict parameters, but the portfolio is made up of ETFs that don’t have companies that have poor labor standards or actively contribute to environmental devastation, while doubling down on those who invest in green methods or push for better workplace standards.

This is what comes in the Socially Responsible Investing Portfolio at a 9:1 stock-to-bond ratio:

37.4% Developed Markets (VEA)
29% US Large-Cap (DSI)
10.8% Emerging Markets (VWO)
6.6% Mid-Cap Value (VOE)
4.9% US Small-Cap Value (VBR)
3.5% International Bonds (BNDX)
3.1% US High-Quality Bonds (BND)
1.7% US Corporate Bonds (LQD)
1.5% Emerging Markets Bonds (EMB)
1.2% US Mid-Cap Growth (VOT)
0.4% US Small-Cap Growth (VBK)

I like this portfolio mix just because I like diversifying in more subsets than the typical 4 I talked about earlier, and Betterment does a good job at incorporating the international markets into the portfolio mix. Betterment emphasizes more on value investing over growth investing, which is cool to play with since in my own personal investing was all in growth funds.

Financial Terms: Value & Growth Investing.
These are the two major camps in investing philosophy; value investing is about finding “cheap” stocks that are currently undervalued by the market, while growth investing is about riding a rising stock that is building up momentum. Value investing is a little more on the conservative side since it looks at undervalued stocks that have better financials than the stock price indicates; you pay less and the stock may not rise much and you just take dividends as your gain, but it could later take off and you got it a great price. Growth investing is about finding a stock that is rising in value and people are getting excited about it; the company starts reinvesting its earnings to keep expanding and growing which then fuel prospects of great returns down the road. You may pay more for this stock, but if it continues to grow at the current rate, you’ll be making a lot of money shortly. Tech stocks usually fit in the growth category since it’s an arms race to controlling the tech market. So a growth investor would have looked at Amazon when it was at $100, and even though it was a high price for a stock back in 2010, just so that they could have ridden that stock as it grew over $1000 7 years later.

Pricing:

All Betterment charges for this services is 0.25% off account value per year. That means if you only had $100 in your account for a whole year, you’d only be charged $0.25, when back at Acorns you would have paid $12. Another benefit of Betterment’s service is there’s no minimum account balance. So if you just wanted to test out this service but wasn’t quite sure if you’re ready, you could just start off with $25 or something just to see how it looks and then start making monthly deposits once you feel more confident.

Wealthfront:

Wealthfront is another huge Robo Advisor service that has over $7 Billion in managed assets. It looks pretty similar to Betterment in desktop and mobile platforms. One thing about their homepage that is a little different is they have what is called Path, and it is a projection of how much you’re expected to have when you reach retirement age based on your current investing trends. You can link up any external investing accounts you have so you can see your total net worth and Path uses that number to make a projection.

Portfolio

When opening an account you will have to first answer a couple survey questions about what kind of accounts you would like to open, it then asks you questions involving your reaction to certain hypothetical situations to determine your risk tolerance (which you can modify if you’d like) before it sets up your investment portfolio.

Wealthfront’s portfolio options are designed similar to Acorns in that there aren’t different sets of portfolios to choose from, like in Betterment’s case, but your risk tolerance determines the weighed percentage of the diversification. I had mine set at the highest risk tolerance and this is my portfolio for my Roth IRA through Wealthfront:

31% Emerging Markets (VWO)
20% US Total Stocks (SCHB)
18% Foreign Stocks (SCHF)
16% Real Estate (SCHH)
5% Emerging Market Bonds (PCY)
5% Dividend Stocks (VIG)
5% Corporate Bonds (LQD)

I don’t like this mix as much as Betterment since it doesn’t tap into smaller size company ETFs and just works with macro scale categories, but this does balance out well with my other accounts so I’m fine seeing how this performs down the road relative to my other ones.

Pricing:

Wealthfront has some great advantages and some annoying disadvantages to its pricing model. We’ll get to the good news in that you can invest up to $10,000 without any fees! Once you go over $10,000 it goes to the same price as Betterment at .25% Since most of you who are reading this probably don’t have $10,000 to work with yet, then it’s basically a free service for you.

The negative is there’s a minimum deposit of $500 to open an account, which may be too high of a hurdle for those just starting out. After that $500 deposit though, you can set monthly deposits with no minimum amount.

Other Robo Advisors

There are a few more Robo Advisors out there that have different angles to approach passive investing, but I’ll talk quickly about one that I haven’t used but is notable.

Stash:

Stash is like in between Acorns and Betterment in that it looks identical and mostly operates off of its mobile app like Acorns does. But you have options in selecting what kind of investments you’d like that would more closely resemble Betterment, but it takes it even further in that you can individually select the ETFs you’d like to create your own mix. They even focus on very specialized ETFs so you can put your money into what you care about. Examples are:

“Clean & Green” (ICLN)
“Combat Carbon” (CRBN)
“Internet Titans” (FDN)
“Copy the Experts” (GURU)
“Social Media Mania” (SOCL)
“American Innovators” (VGT)
“Essential Europe” (VGK)
“Defending America” (ITA)

It, like Acorns only charges $1 per month. My concern with this is that if it’s just providing you a set of ETFs to choose from, you could just do that on your own and all they’re doing is giving you fewer options to make decision-making easier. If you want more direct control over your investing this may be appealing, but at that point I would just say use the Robinhood Trading app and just buy these ETFs on your own with no fee. What makes Robo Advisors great is the mixing of these accounts and automating the diversification, in my opinion.

Comparing Robo Advisors:

As a whole, most Robo Advisors provide a similar product of diversified portfolios based on your current situation and preferences at a minimal cost. If you looked at my portfolios between the three accounts I have, you’ll see that they even use many of the exact same ETFs but at different percentages. All three used the ETF, “VWO” for the Emerging Market sector:

Acorns: 10%
Betterment: 10.8%
Wealthfront: 31%

So let that be assuring to you in that in the end, the passive approach isn’t super complicated and even these companies that spent millions of dollars creating these investment portfolios all even ended up using most of the same stuff. They all are going to point you in a positive direction. However, each one will have a little bit different service that may be more better suited to your preferences though.

Acorns is great if you want a super easy way to start in investing and want a fun way to contribute as well with the Round Up feature. I haven’t used this yet, but they even link up with certain vendors that if you buy with your card at, you’ll get a percentage of your purchase directly added to your investment on top of the round up. (Get 10% of your purchase at Dollar Shave Club deposited into your Acorns account. The drawback is the fees can start to add up if you don’t start contributing a decent amount into it since it’s a flat fee of $1 per month (which still isn’t bad). It is also the least diversified portfolio of the three I have, with the least amount of options. But again if you feel overwhelmed by options, then this is probably the easiest.

Betterment is great for the most well-rounded experience in a great display, plenty of supplemental information for education, and the most diversified portfolio with the most options to work with as well. There’s no minimum amount so you can start with as little as you want and you only get charged 0.25% per year on the account. Betterment is also the only one of the three that has a Socially Responsible feature that allows you to back the CSR movement financially.

Wealthfront is great if you want a central hub for all your investing and a great projecting tool to see if you’re on track for long-term investing goals. Wealthfront provides the most kinds of investing accounts to cater to your unique financial situation and goals, whether that be you need an IRA for retirement, a 529 for College Savings, or individual investing account. You’ll get essentially the same investments, but based on your risk tolerance will the distribution change. The advantage of Wealthfront is you get up to $10,000 in assets to be managed for free.

Wrap Up:

Investing as a fundamental is not overly complicated, but the real life application of it can be overwhelmingly complicated, and if you’d like assistance in taking action, then using one of these Robo Advisor services is a great way to start. I’m impressed with the effort to providing strong portfolios that also emphasize low fees which help maximize your capital gain, and will definitely be using more of these services in the future to supplement my own investing methods. But at the end of the day, there’s only so much that a simple algorithm can produce, that will ultimately be limited in its breadth of service it can provide. We are all unique and what is best for us individually isn’t a easy answer. That is why my next post will be about Financial Planners and how they can bridge this gap. But if you want to take a strong step forward and have a secure place to start in investing in your future, then these Robo Advisors is going to be an excellent place to start.