A year ago I read Burton Malkiel’s seminal text on investing, A Random Walk Down Wall Street, and concluded that it made sense to invest in exchange-traded funds (ETFs). He imparted a challenging message: people are inherently poor stock pickers, but we can be better through diversification and buy-and-hold strategies. ETFs would be a quick, affordable, engaging way to diversify, too.
Despite the logic, my brain wouldn’t relent — I wanted to invest in an individual stock. Like a horse being kicked and yanked to the right but continuing left, I decided, against my better judgment, to place an investment in a risky, small cap stock. I’d been following it for quite some time, and made a small prior investment. I wanted to put more in, though.
Only two weeks after doing so, I lost $400. How could this happen? Why did I fall for this logical fallacy and bias? I was berating my brain for the errors. The company looked poised for a rapid expansion. I had drunk the Kool-Aid.
I knew better than to make this recent individual investment, and did it anyways. Humbled, I was the definition of many of the investing problems and fallacies individuals have a habit of engaging in.
Like my flawed investment, I realized much of my financial strategies had become stale. Having money to invest was a new feeling, and the do-it-yourself route wasn’t working. I needed to refresh my checking, savings, and investment streams. And I wanted to feel secure in my financial future. Here’s how I analyzed and reviewed it all.
1. Analyze current accounts
Almost all banking goes through Ally Bank. With 1% and 0.10% on savings and checking accounts, respectively, Ally is an industry leader. I’ve been with them for years, and appreciate the domestic ATM-fee reimbursements and free checks.
After paychecks are deposited into the account, about 40-50% of the money goes to regular, immediate bills. Then, another large portion gets spent on food and regular expenses throughout the month. This variable amount is something I continue to work on and struggle with. Reducing food budgets is something I’ve written about before, and will likely talk about again. It’s vital for a frugal life. But after all is said and done, there’s only about $300-400 in leftover funds.
Right now, I’ve been putting the surplus into a savings account. Additionally, I’ve been investing in individual stocks, but with mixed results. At this point, and with such little money at the end of every month, I need to be smart about what I do with any extra funds. These funds will be used to travel for job interviews, licensure, work clothes, moving expenses, and other emergencies. It’s important to have a fair amount on hand for all these moments.
After looking at the accounts, I can see that I have two piles: a checking and savings. There aren’t specific accounts for individual goals. Money is one big slush fund of fun.
Another major unaddressed part is regular investing. As mentioned it’s a weakness within my current financial management.
International travel has been also concern financially; not necessarily the cost, as I use bonus miles for most travel, but the currency exchanges. When I traveled to Colombia about a year ago, I needed local currency and had no method to get cash without fees. It cost me quite a bit to talk to a money exchange business and have them take my USD for Colombian Pesos.
2. Consider other accounts, options
Based on this analysis, I will stick with Ally Bank as my primary checking and savings method. Direct deposits will continue to flow to this checking account first. The goal will be to use this to manage all regular bills and upcoming expenses. Ally has really earned my respect over the years, and I’m happy to stay with them.
Staying with Ally doesn’t mean I’ll be staying with the same strategy, though. I’ll be opening up a new savings account and calling it, “Vocational Expenses.” This will be specific for interview, moving, and other work-related expenses incurred over the next three years. Now, how much should go in here and how fast? I will likely need $4000-5000 over the next few years, but this is a rough estimate. To meet this target, I’ll deposit $250 per month automatically out of every paycheck (Ally checking account) for the next 16 months on the first of the month.
International travel currency fees have been abysmal. To remedy this problem, I’ll be opening up a Charles Schwab Investor Checking account and solely using my Capital One Quicksilver credit card. The interest-earning checking account provides most of the features that an Ally Bank affords, but includes ATM-fee reimbursements for international ATMs and no foreign transaction fees for purchases out of country. The account is widely regarded as the best travel debit card in existence. And unlike Ally’s checking debit card, Schwab’s debit card has a chip and pin. In preparation for any travel, I will place a budgeted travel amount into the Investor Checking account, but leave it at low levels, as there’s no minimum balance necessary. Moreover, I’ll use the Capital One Visa for all international transactions, as it has no foreign transaction fees.
The last revised strategy will be a regular, monthly deposit into a taxable Wealthfront account of $100 on the first of the month. Wealthfront provides low-cost (and free for those under $15,000 invested) asset management, and automates the entire process. They choose real estate, emerging markets, and domestic stocks. They reinvest dividends and provide timely updates.
Now, I don’t need to worry about rebalancing my portfolio or looking for low-load or low-fee funds. I’m exceptionally happy with their service and professionalism. Because I might need the funds sooner than retirement, I’ll be placing them in a taxable, brokerage account for now. Eventually, when I have more cash flow and income, I will place more in my Roth IRA to invest without incurring additional taxes.
3. Review decisions and new strategy
With any financial management plan, there are going to be hiccups. When you make as little as me, automating savings and investing helps, but can also hinder my plans. Sometimes, I don’t have enough money one month and can’t make the savings necessary. At the same point, the plan motivates me to earn and save more. Maybe it’ll even encourage me to save on food!
As I analyzed and reviewed my current actions and future plans, I reflected on interest rates and banking business. Today, banks are not in the business of encouraging you to save. They nickel and dime customers — especially brick and mortar banks — for every little thing. Checks? That’ll cost you. Overdraft fees? You bet. Minimum balance not met? Say hello to my lil’ fee.
Banks earn more when you spend. They profit when you’re in peril; a tragic irony that places their interests (pun intended) above yours. From car loans to mortgages to credit debt, banks increase their margins by marketing these products to their customers.
To save requires great care, forethought, and hours of hard work. To spend takes the swipe of your card.
Reviewing and updating your financial plan is one of the most important actions you can do. If anything, it helps you understand your financial fitness and maximize interest earnings. And maybe still, it challenges you to look for new ways to save and scrimp.
I dissociate somewhere between Donnie smoking crack in the back of a restaurant and Jordan stacking bills on bills in a safe deposit box. This is probably the fourth time I’ve seen The Wolf of Wall Street with Leonardo DiCaprio, so I pretty much know the entire film. I laugh on cue, but mostly drift into some sort of revulsion to the moneymakers’ debauchery.
Jordan, played by DiCaprio, chucks a wad of cash off the side of his yacht, and I fantasize about what would life be like if I were filthy rich. Something stirs inside me. I want that level of wealth and I don’t know why.
My life is comically dissimilar from Jordan’s. I’m nearing the end of graduate school, thinking about jobs, and constantly checking my bank account. The latter stands stronger than ever due to saving and scrimping, but it’s a measly sum. I’ll have a small amount of student loan debt to pay off, too. When I graduate, I’ll expect to earn $50-70,000 with my Ph.D. in hand.
Privilege allowed me to choose my career path. Early in my college years, I replaced business with psychology. The switch forever changed my earning potential. I just hoped psychology would allow me to help others in need — the money didn’t matter much.
Now, as The Wolf plays before my eyes, I struggle with two mindsets.
There’s the Jordan side of me. I want to travel. Iowa is killing me slowly with its lack of diversity and landlocked status. I want to be able to live in lavish places and decorate as I see fit. My minimalism borders on austere. I want to be able to buy, buy, buy. Every time I do, I feel this pang of guilt — I need to save that dollar. And I sure as hell don’t ever want to be in debt again.
Then there’s the modest, frugal person who writes these words. Iowa has been the perfect place to save, bike, and enjoy graduate school. I don’t care to have much. I don’t need to own, own, own. I don’t want my primary title to be “consumer.” I like being able to save, live, and give to others.
Maybe I’m dreaming of wealth because reality isn’t always easy. I’m moving out of an apartment complex I can no longer afford, paying off a hefty sum for a car, and living on a tight budget each week. Scrimp and save is often more challenging than earn and invest.
If I had the opportunity to make more money, I wonder how much I’d want. Would a million dollars in savings/investments suffice? Would tens of millions? Would a billion?
The mind seems capable of more. Always more. The mode is more. More than enough. More than the other person. More than you.
As the movie finishes and Jordan begins to unravel and lose it all, the director’s message is clear: money doesn’t buy happiness. You can still be a miserable millionaire. But the urge remains. How can the mind be so illogical and rational at the same time?
What I learned about investing from my grandparents
As a young child, I loved pouring over the daily stock tables. Every day, I would scan over the newspaper to see how stocks moved up, down, and sideways. It was this fun dance of numbers.
Age-old wisdom about stocks was shared with me, too. Find some blue chip stocks and invest for the long-term, my grandparents said. They taught me about investing in great companies and pointed out stocks like GE, International Paper, IBM, and Wells Fargo. But living through the tech bubble and mortgage crisis tainted my perspective — it wasn’t easy to digest that buy-and-hold strategy.
My Millennial status seemed to set me up for some strong investments at a young age. I had a knack for picking winners. I purchased Apple in the double-digits before multiple splits. I eyed Google, but didn’t have any money to invest around $100 per share. More recently, there was Tesla Motors, where I invested around $30 per share. I don’t often take to optimism, but these companies embodied a positivity for the future. There was hope in these companies. It was easy to invest.
While the preceding investments paid off, plenty of others failed. There were embarrassing investments that went totally south. Additionally, trading fees ate up gains and increased losses. When you only have a couple thousand dollars to invest, losing $10 per trade can be painful.
Eventually, companies started marketing ETFs heavily. Some even incentivized the purchase of ETFs via free trades. But the investment fees were often expensive and I needed to buy whole shares. If I didn’t have enough liquid cash, I wasn’t going to be able to buy one. The money would sit in a paltry savings account and dwindle.
I spent years at Vanguard Group. They’re friendly, available, and supportive to smaller investors. They’re customer owned and tend to have lower transaction fees (about $7 per trade). The big bonus was low-fee ETFs that could be traded for free. It was perfect, except that income fluctuations and whole-share buying restricted diversification.
You’ve been investing wrong, here’s why
This summer, I decided to read A Random Walk Down Wall Street. I heard that this was the ultimate, research-based, investment strategy book. The author Burton Malkiel outlined the major investment theories that market makers, advisors, and average investors used.
The book blew my mind and set me on a race to change my investments. Malkiel introduced fundamental ideas such as, the more an individual trades (frequency), the worse they perform (usually). So if you trade nervously throughout the market’s swings, you’re likely performing worse than the broader market (compared to the S&P 500). The author also noted that male investors traded more often than women, too.
Fundamentally, the entire book wrapped psychology, economics, and politics into one perfectly assembled masterpiece about investing. I felt like I was sipping from the fountain of youth and could finally understand why — despite some good investments here and there — I was performing worse than the broader market averages.
Every time I thought I discovered a new pattern in the market or companies introducing breakthrough technologies, the entire market was too. I wasn’t the only one, and that screwed with my ability to profit from reason. And even more powerful, was this statement, “Even real technology revolutions do not guarantee benefits for investors.” That crushed my soul. How could I invest in life-changing technologies and companies, but not see profit and gain? The reason: companies are constantly growing and changing and falling from grace. It’s a constant cycle. To predict one company over every other competitor and up and comer is dangerous, potentially futile, and rarely as safe as investing in a broader average (a basket of stocks).
The book brilliantly analyzed humans’ use of heuristics and time-saving mental machinations that actually served to stifle our gains. Convinced that we are always right, we tend to reflect on our more positive investments and downplay the negative ones. We like to think we can “beat the market.” Being average is a bore, right?!
We grow up reading and watching articles and movies and novels that take us on an arc: introduction, rise, climax, decline, resolution. We grow accustomed to this style of story from a young age. And that can easily be applied (poorly) to the markets. We can look for climaxes and resolutions, where they might not be there. We can analyze past chart history to predict the future, but research shows that doesn’t give us an advantage over broad indexing. Despite searching for market patterns, rules to the market, etc., we overwhelmingly fail — time and time again — when compared to the averages. Our minds are tricking us.
As a species we love heuristics. Brain schemes allow us to save time and look for patterns. In nature, patterns help us stay safe — snakes are dangerous. TV shows follow traditional arcs: intro rise climax decline conclusion. An episode of Law and Order follows characters for one hour through a new problem. We expect a resolution. By 45-50 minutes in, we should find our culprit. When we apply these patterns and rules to the market, we tend to fail. Even if there are patterns, the markets quickly learn about them and destroy the potential use. When everyone knows the pattern, nobody needs it. The market smooths out the differences that the pattern once held. As much as our minds search for patterns and see them, they’re an evil chicanery. The market winners know this.
After reading all the books conclusions, it was like getting smacked over the head with a large frying pan. I felt dizzy and sick. Why hadn’t I been given this knowledge prior to this date? Why had I been allowed to invest on my own, without any research understanding of market behavior?
I was investing all wrong. It was costing me money (in fees, lack of diversification, and portfolio performance) and time (researching different investments, ETFs, and scanning for proper diversification). After reading the book, I couldn’t help but look for a better way.
How to easily, affordably diversify
Over the last five or so years, there’s been a torrential rise in robo-advisors. These are companies that invest the money for you, with little overhead and fees. Additionally, they use the market theories introduced by Burton Malkiel’s book and apply it to your investments. Instead of staking claims on individual stocks, which are prone to heavily volatility (read: risk), they broadly diversify across sectors and areas of the economy. The intention is to keep risk minimal, while maximizing performance.
The research is clear: low-fee diversification via ETFs is the best option for most investors. Moreover, when it’s managed and invested for you it cuts down on day trading and psychological biases. Numerous companies have sprouted up to take on the challenge. The most popular robo-advisors tend to be Betterment, FutureAdvisor, Schwab’s Intelligent Portfolios, and Wealthfront. Each provides different fee structures and diversification practices. It’s important that you select the best one for your financial needs.
Recently, I wrote about how it is hard to save when interest rates are this low. It’s pushed the stock market higher, but left savers in the lurch. The average interest rate on a savings account is 0.06%, while inflation rates generally stay around 1-2%. That means you’re losing money by keeping it in a savings account.
With little disposable income or money available to invest, I wanted a robo-advisor that would provide all the diversification I needed, with few fees, and the ability to invest immediately — without a minimum. That’s a tough bargain, right?
After considering all these factors, Betterment was the clear winner. Let me tell you why.
Betterment marries technology and market knowledge to provide a low-cost choice. They provide three brackets for users: 0.35% (below $10,000), 0.25% ($10,000-$99,999), and 0.15% ($100,000+). When you have less than $10,000 invested, like me (for now), that 0.35% management fee is assessed — regardless of returns. Thankfully, that’s comparable to all the current robo-advisors right now (note: Schwab’s Intelligent Portfolios don’t charge a direct fee, but they grab your interest in a forced cash quantity — 6% of the portfolio).
My prediction is that these fees will precipitously reduce over the next 5-10 years. The technology will clearly be very competitive and adaptive. Any company that continues to charge a lot will be priced out of the market. Competition will be extremely helpful in this area.
Here’s what I like about Betterment:
There are no minimums for new accounts. Thankfully, simpletons like me can start with $100 and invest over time. This is especially helpful for irregular — month-to-month — incomes. Let’s say I make $2000 this month, which provides $1000 to invest with (rounding for simplicity), I can direct that $1000 into Betterment. But if I can’t rely on that amount, and I make $1100 the next month, I can manually transfer in $100 instead. The only minimum you need to meet is $100 invested per month until you reach $10,000. Once you reach that level, you reduce to 0.25% in management fees and $0 minimum deposits.
This really sets Betterment apart from the rest of the pack. Normally when you invest, you need to buy whole shares. That means if there’s an ETF that costs $125, but you only invest $100, it won’t be purchased. Unfortunately, uninvested cash can hurt your potential gains. Betterment allows you to purchase fractional shares of every ETF they invest in. Your money is always working at full capacity!
Psychologically, humans suffer without clear goals. With retirement and other long-term goals (vacations, cars, homes, etc.), it’s tricky to understand how best to allocate funds. How much do you really need to invest in your Roth IRA to maintain your current standard of living? How much to improve it? How much if you cut back a bit? This is where Betterment shines. The company has designed beautiful graphs customized to your needs. For instance, I’m saving to move away from Iowa City right now. I estimate that I’ll need a couple thousand dollars when it comes to interviews for jobs and moving and finding a new place to rent. That all costs sizable sums, and I don’t dare consider debt. I estimate the time until completion, and Betterment provides an initial deposit and regular monthly contribution to meet the goal. Simple, as any financial advisor should be.
The maintanence of a diverse portfolio is one of my least favorite activities. Let’s say I want to be invested in 90% stocks and 10% bonds, but the stock market has improved and bonds have lagged. Your stock position might represent more than you allocated. That requires you to sell a portion of the stock and reinvest elsewhere to regain balance. This can be time-consuming and tax-laden. Thankfully, Betterment handles it automatically. If your portfolio “drifts” 5% from its intended allocation, they’ll rebalance for proper diversification. Additionally, they’ll minimize any tax implications associated with the activity. That’s one of the hardest parts of managing your own portfolio.
For those in the big leagues with lots more money than me, you also could benefit from tax-loss harvesting. Essentially, the portfolio will sell off your losses so that you can have a tax writeoff and invest in a comparable stock. Without getting into the weeds, that’s a really good thing as you want to prevent “wash sales.”
This aspect has nothing to do directly with money. Since my shift to Betterment, I’ve noticed I’m calmer and clearer about my investments. I know how I’m invested and why. Likewise, I have confidence in the market principles that are used. Whereas individual stocks can make you go wild — needing to buy and sell all the time — this highly diversified portfolio provides comfort.
Another essential aspect for any company managing your money is rapid investment of deposits. Betterment invests all your deposits the next day. With that turn around you don’t miss the market’s moves, and can quickly benefit. Numerous companies require cash to be held about 3-5 days before it’s invested, and then you need to find ways to diversify it. Betterment does all the work for you.
Here’s what I dislike:
No direct transfer from brokerage to IRAs
This is a pesky rule, but Betterment does not allow any cash positions. Therefore, to transfer money from a brokerage account in the company to an IRA, you need to withdraw the funds and redeposit them through your bank account. That takes a lot of time, in some cases. For instance, if I want to invest $500 from my brokerage to Roth IRA, it’ll take about 1 week or more even though Betterment already has all my funds.
No progressive fee structure favoring poorest
I’m disappointed that no robo-advisor’s fee structure is preferential for those with less. It’s a universal problem for the industry, not just Betterment. Still, I’d like to see the process of investing and taking charge of your future be easier for everyone involved. Those with $100 per month or less to invest shouldn’t have to pay more than those who invest $1000.
No manual cash positions
Sometimes, especially near retirement, it can be helpful to temporarily have cash or cash-equivalents in your account. Unfortunately, Betterment does not provide space for cash positions. They note that it goes against their entire premise and philosophy to allow pure cash positions. I understand their rationale, but it’s scary not being able to run for cover (you have to withdraw to your bank account to be in cash).
No expected returns presented
Instead of presenting expected returns from your portfolio allocation of stocks and bonds, Betterment provides predicted totals. As a novice, it would be helpful to see gains in a percentage form. That way I could compare portfolio allocations to other types of investments.
No real estate exposure
Lastly, Betterment doesn’t seem to provide real estate exposure through something like Vanguard’s REIT ETF (VNQ). Burton Malkiel suggested that some amount of nearly every retirement portfolio should have real estate exposure because they’re a safer place for higher yields. I would tend to agree, especially since the population growth rate is very strong in America.
After I read Malkiel’s A Random Walk Down Wall Street, I realized I needed to take action. But even before that book, I wanted something that would minimize my time spent researching ETFs and strategies and individual companies. Betterment has been the perfect solution, and a wonderful way to concentrate on what really matters: those around me.