Investing in a single, low-cost, globally-diversified total market fund can be a solid starting point for building long-term wealth. However, there’s potential to optimize your investments further by strategically using multiple funds. Betterment’s automated investing and expert-built portfolios offer a solution that combines ease of use with enhanced performance.
The key to this approach lies in tax optimization and cost reduction. By using more than one fund, investors gain the flexibility to fine-tune their allocations and unlock additional savings. Betterment’s technology automates this process, making it accessible and efficient.
Harnessing tax advantages through strategic fund selection
Tax-loss harvesting is a strategy that can give your taxable investments an edge. It involves selling and replacing assets that have experienced a loss. However, with a total market fund, you must wait for the entire fund to dip before you can harvest losses. This limitation is why Betterment switched to using three separate funds representing small, medium, and large-sized U.S. companies.
This approach allows Betterment to harvest losses from specific segments of the market when opportunities arise. Additionally, it enables asset locationa strategy that involves strategically placing assets in different types of accounts, such as traditional, Roth, and taxable accounts. For instance, stocks with high growth potential are often better suited for traditional accounts, allowing them to grow tax-free until retirement.
Betterment’s Tax Coordination feature automates this process, ensuring that your assets are placed in the most tax-efficient accounts. To start taking advantage of this, simply open any combination of the three account types and follow a few easy steps.
Customizing your investment strategy beyond target dates
Target date funds have been a popular choice for retirement savings since the 90s. They automatically adjust asset allocations, or glide pathsover time. However, these funds come with constraints, such as limited choices and higher costs.
Betterment’s automated investing offers more than a handful of portfolios to choose from, including options tailored for social responsibility and innovation. Moreover, using multiple funds provides more levers to fine-tune your exposure and manage risk. For example, in bond-heavy portfolios, Betterment can increase exposure to short-term corporate debt and U.S. Treasuries to hedge against rising interest rates.
Reducing costs through strategic fund selection
The cost of target date funds has been trending downward, with many total market funds available for expense ratios of less than 0.1%. However, Betterment can squeeze out even more savings by splitting a portfolio into multiple funds and shopping for better deals.
A single basis point (one hundredth of a percentage point) may not seem significant, but it adds up. For example, you could pay 6 basis points (0.06%) for a total world stock fund. Alternatively, you could pay one-third of that for your U.S. stock allocation by breaking it up into three funds like Betterment does with its Core portfolio. For Betterment’s customers with nearly $20 billion worth of U.S. stocks, this amounts to roughly $7.6 million in combined savings each year.
By strategically using a few more funds, Betterment can enhance tax advantages, optimize across account types, and potentially unlock even more cost savings. All of this is done automatically, providing simplicity and efficiency for investors.
