Side by Side Comparison of Wealthfront and Betterment
As a marketer, I’m a data geek, I love having metrics available to me; so when I was comparing Wealthfront and Betterment to know where I should invest my cash, I figured I’d do a little A/B test to find out which service performed better. The test: How does $500 invested in Wealthfront perform compared to $200 invested in Betterment? Let’s take a look.
Let’s look at a comparison between real money invested in Betterment, and Wealthfront passive investment accounts.
What are Wealthfront and Betterment
Let me take a step back and explain a bit about these companies first. Both Wealthfront and Betterment offer a way for people to invest their cash without requiring them to know much about the stock market. All you need to tell these services is how risky you are willing to be with your investments, and when you plan to retire. From there, your invested cash is used to buy a diversified portfolio of stocks. If you are someone who wants to hand select stocks and bonds to buy, these services will leave you wanting.
What makes these services better than other investment options? Other investment options such brokerage accounts at E-Trade, Scottrade and your personal bank of choice charge you for every trade you make. This means you have to know a thing or two about the stock market, or you’ll lose money from the fees alone.
Other companies such as Merrill Lynch and Fidelity offer similar stock buying services, as well as managed accounts where you pay to have someone invest your 401(k) and IRA in stocks, bonds, and mutual funds. Given the return in the stock market, you won’t make much of a gain after paying the bank’s maintenance fees; especially on smaller amounts.
How They Work
Wealthfront and Betterment are different. They’re still trading ETFs on the market, and growth still increases your investment accounts, but they take a vastly different approach. Sophisticated computer algorithms analyze the stock market, and your account is optimized for you based on your risk tolerance, and how many years you have until retirement. This allows them to spend more time analyzing ETFs, letting the computer system do the trading for individual investors.
What this means for you as an investor: all you have to do is fund your account, and let the advanced algorithms determine what stocks and bonds to invest your money in. Yup, you don’t need to know a thing about investing to start earning interest on your un-invested cash.
Sophisticated computer algorithms analyze the stock market…
But Does it Work?
As great at that sounds, the big question you have is… does it actually work? I was skeptical too. But I figured I could risk $700 dollars to see if this thing was as great as they made it out to be. Below you will see just what I learned from my side by side test of Wealthfront and Betterment.
Oh, and don’t forget that all investments have risk, so I could have lost all $700 if these services didn’t work as promised.
Wealthfront Investment Data
My first deposit invested was for $500 as this is the minimum to open an account with Wealthfront. I set my risk tolerance at 10.0; this is the most risky, but it invests in the most stocks, so I could really get a good feel for how well the computer algorithm worked. Besides, I have a good 40 years until retirement.
My first deposit entered Wealthfront on January 12th 2016. Yup, right before the stock had a really bad month. So within a day, my $500 deposit dropped ~1.8% to a value of $491.
“Oh great,” I thought to myself, “this test is sure going to cost me.”
On Feb 11 it reached it’s lowest point of $475, having lost $25, or 5% of my portfolio’s total value. This was turning into quite the learning experience. In fact, it stayed at, or below $500 until March 1 when it actually started gaining in value.
On March 21st, when the value of my $500 dollar investment increased by ~8% reaching $540, I figured it was time to add in some more cash.
Wealthfront’s investment metrics for undisclosed amount on April 30, 2016
That’s 8% by the way, not .8%. The kind of 8% that beats your savings account interest rate. Needless to say, I was quite pleased with the result. It actually hasn’t spent much time below the principal amount I invested since February.
You might point-out that the S&P also climbed during this time-frame, but the algorithm still needed to invest in the right stocks to benefit from this climb, and my investment actually rose higher than the S&P rose.
Betterment Investment Data
My first deposit invested was for $200 as this is what I had available in liquid assets at the time. I again set my risk tolerance at 10.0. to keep the variable at a minimum for this test.
This deposit also entered Betterment on January 12th. So you might be able to guess what happened next.
Yup, within a day I lost $2. That’s not going to break the bank, as it’s only a 1% loss.
February 11th, however, brought about a loss of 4.5% or $9. At this point, Betterment is looking like the lesser of two evils as I lost a slightly smaller percentage than with Wealthfront.
Betterment’s investment metrics for $200 on April 30, 2016.
But the story keeps going. So Wealthfront’s downturns were a little more steep, but their highs are also higher.
At it’s peak on April 20th, Betterment gained 6.6% over the principal amount invested. That’s a little less than my 8% at Wealthfront.
Verdict
First of all, I know that a 4 month period of time is nothing when compared to how long your money will be invested before retirement, but this does act as a good litmus test in foretelling what might come in the future.
Sure the lows might be lower with Wealthfront, but the highs have been higher too. When I think about the money I haven’t invested in Wealthfront yet, all I can think about is the potential gain that I am missing out on. What if you could increase your bank account by 8% over the next 4 months. Would you do it?
For the time being I’ll keep some cash in Betterment to see if it redeems itself, but put most of my investments in Wealthfront.
Let me know if you want an update as to the health of these two portfolios, or if there are other investment platforms I should try out.
And leave you own experiences in the comments below.
Sign-on Bonus
If you are interested in signing up for either of these services, they offer cool referral bonuses.
Wealthfront: If you signup for Wealthfront with this link, you and I will get an extra $5,000 invested fee-free. And that’s on top of the $10,000 fee-free investment they provide everyone. So why pay a broker to invest when you can get great returns for free, up to $15,000?
Betterment: Little more cautions with your cash, and want to avoid deeper troughs? Sign up for Betterment with this link and you can try out Betterment for yourself with 6 months managed for free. I think I only get 1 month managed for free when you sign up, but it will be enough to let me keep this test running longer for more accurate results.