Small Things
From time to time I catch little things that I had either glossed over originally or not even noticed at all. When I do realize these "small things" I will make a post about them so that I can share these thoughts.
Small Things: Betterment Smart Dividend Reinvestment
Last year I decided to add Betterment to my portfolio as a means to diversify the EAF portfolio through mutual funds and also to take advantage of dollar cost averaging through smaller monthly deposits (thanks to no trading costs). So far it has worked like a charm. Q1 is almost at a close and Betterment continues to perform admirably. I will post a full report on the EAF portfolio after the close of March but in the mean time I realized something today while looking through the small dividend payments that I've been receiving for the Bonds portion of my Betterment investment.
One of Betterment's claimed advantages is that it is a more actively managed portfolio than most people construct while buying mutual funds. From my own experience funds tend to be something I set and check every once in a while and that is it. Betterment specifically runs on the idea that the small amount you pay out of your earnings each year yield you higher gains through their active management. I assumed that this was for the most part referring to the distribution based on your goal (which is really just a time horizon matched to your risk tolerance) and the fact the when your distribution becomes off-balanced by 5% or more they will rebalance your funds for you.
Chances are if you are reading this blog and have made it to this sentence that you at least have a 401k and a general idea of what it is. Even so I'm going to highlight this right here "rebalance your funds". The first thing any financial consultant should tell you concerning your 401K is that you should be managing and periodically rebalancing it. The idea behind it is part security and part value increase. If one of your funds in your 401K has too high of a percentage of your total funds you should balance it by selling some of it to increase your holdings in the rest of your funds thus keeping your diversification in tact. That is security. At the same time lets say another one of your funds hit a slump and fell by 10%. You still think this fund will make you money in the long term so your aren't pulling out. Instead you funnel some of the over weighted fund into this one basically purchasing it at a 10% discount. When the fund recovers from its slump you have made 10% more than buying it at a more "normal" price. That's increased value.
I'm going to go out on a limb and say that I have more fingers than people I personally know that have ever rebalanced their 401K. Personally I have a bond fund in my 401K specifically for rebalancing. When the market goes up, I "cash out" some of the higher stock price into safer bonds. When the market goes down I "cash in" by selling the bond funds and purchasing stock funds at discounted prices. It has been a good strategy. Betterment will do that for you whenever your account tips 5% one way or the other. For most people there is a lot of value added here by itself and at a price you can't beat.
That isn't even the reason I wrote this (supposedly small) post. The small thing I realized today is that Betterment does this with dividend payments too. If you aren't up to date on what a dividend is you should probably go here. Betterment literally took a $0.07 dividend payment from my three bond funds and split it between two of my stock funds and this blows my mind. Normally dividends roll into themselves which is to say your dividends payments for fund A just go to buy more of fund A (also known as a DRIP). Bond funds tend to build very slowly, they are more for security than making large profits. Betterment gives you the security while moving any dividend proceeds to higher yielding instruments. Again with no trading cost. This is one of the smartest things I've seen an online investment firm do and is something I thought was only done by live managing (expensive) brokers. I was wrong and I'm impressed.
Q1 is almost over and Betterment so far has been a good performer with zero input from me. Its no secret that I'm pulling for Betterment. I'd love to be able to endorse a worry free, incremental stock vehicle to my family and friends. I will however reserve judgment until the end of Q2. Once I have 6 months under my belt with the system I will be much better informed as to whether this idea really can be the easy street to investing or if it is all flash and no dash.
As always send me any questions or comments you have and I will answer them. Socializing ideas is a great way to get informed. Investing is a hugely broad subject and the more we talk to each other about it the better we all become. Thanks for reading.
Comments
Post a Comment