I’ve traded stocks and options for years now. I’ve used E-Trade, TD Ameritrade, Scottrade, ShareBuilder, and Fidelity. But I can’t really recommend working with these companies anymore. Actively trading stocks and options has been profitable for me, but probably not more profitable than simpler strategies that wouldn’t have required as much time, attention, and emotional involvement.
As an economics student, my professors drilled into me that there’s one optimal portfolio to own – the market portfolio. I’m no smarter than the millions of other people watching the market, and I don’t have better information. -Jon Stein, CEO Betterment
There are several newer, low-cost companies that allow you to get automated exposure to the market without having to execute trades, pay fees, or manage anything. The main players (ordered by total assets managed) are Wealthfront, Betterment, Personal Capital, and FutureAdvisor.
I have funds at Betterment and Wealthfront. Both have their advantages, but I’d recommend most people start out with Betterment for these 5 reasons:
- Betterment has no minimum deposit. Wealthfront requires $5,000 to open an account.
- Betterment has a simpler signup process. Both firms invest it in a well-balanced mix of low-fee index funds on your behalf. But Wealthfront grills you with a series of fairly complex investment questions in order to figure out your risk tolerance. I don’t think their system does any better than Betterment’s much shorter, simpler signup process which also determined the exact same risk profile for me with way less hassle.
- Betterment has tax-loss harvesting for accounts with as little as $50,000. Wealthfront requires investors have $100k+ before you get their tax-loss harvesting product. Especially if you’re not going to start out with that much, you probably want to be with the company where you can more quickly gain access to this extra 0.77%-1.6% in expected earnings.
- Betterment’s top tier fees are much lower (0.15% / yr) than Wealthfront’s. Wealthfront is technically cheaper for accounts with $5-$15k in them, but this initial savings is very small and only useful for people who can deposit a lot up front. If that’s you, there’s probably no downside to investing $5-$15k into a second account at Wealthfront. That’s part of why I use them too (in addition to just wanting to learn about them so I could write about their service).
Once you have a Betterment account, you also get really well-designed dashboards like these:
2. Maybe Also Put Some Money Into Peer-to-Peer Lending @ LendingClub
Daniel Odio wrote a great introduction to LendingClub. The same reasons he’s investing is why I am:
I was at a VatorSplash startup event where I heard the CEO of LendingClub, a peer-to-peer investing platform, talking about his company’s growth. It was impressive. They’ve funded over $3.5 billion in loans (including over $250 million in the past month) and they’ve paid over $345 million out to investors in interest. Although there’s a lot of talk about the sharing economy generally (think AirBnb, Getaround, Lyft, etc.), LendingClub might just be the giant of them all: Sharing your hard earned dollars with those who need them, and are willing to compensate you for loaning them out.
The idea behind LendingClub is this: Banks return a paltry, sub 1% return in checking & savings accounts. But credit cards often have a 15%+ interest rate. There’s a huge spread there. If a lending platform could use technology to efficiently help investors get a higher return on their money than a bank’s offering, while letting borrowers get a lower interest rate (on, say, their credit card debt), then everybody wins. That’s exactly what they’ve done, and it’s awesome.
But it gets even better. LendingClub lets you customize the level of return you want to get based on the amount of risk you’re willing to take. Every borrower is scored between A1 (best) to G5 (worst). You can pick which types of loans you want to fund. The riskier borrowers will pay higher interest, but there will be more charge-offs. My wife and I created a fairly aggressive portfolio that is projecting a 10.15% annual return. Here’s a screenshot:
You can see that the effective interest rate predicted is 18.51% based on our chosen mix of A through G notes we’re funding, but 7.65% of that return is expected to be charged off, netting out to 10.15%.
The beauty of LendingClub is that your investment is divided into $25 chunks and is then diversified over hundreds or thousands of loans, which really mitigates your exposure. Think of it as your own personalized CDO 🙂 LendingClub also has a service called “PRIME” which will invest the money for you based on the risk & return profile you specify (that’s what the screenshot above is showing). The minimum investment amount for that service is $5k, and I recommend using it so you don’t have to try picking the loans you want to fund manually. But if you don’t want to put $5k into it, then you can get started with as little as $25, and it’s the same story as stocks — putting just a little money here is infinitely better than zero, if only to get you in the mindset of being an investor. Or conversely, if you have, say, $1MM to deploy and you’re willing to put it to work at the risk level we chose above to achieve a projected 10.15% return, you could potentially earn $101k a year in interest income; enough to basically not have to work (don’t forget about taxes, though; interest income is typically taxed at ordinary income rates, so cut 35%-ish off the top). You can learn more about peer-to-peer lending here.
Note: The minimum to invest with PRIME @ LendingClub recently dropped to $2,500.
For those who are curious, here’s how I would rank the financial services companies I’ve worked with:
- Online Advisors: Betterment > WealthFront >
Personal Capital> FutureAdvisor> BrightScope
- Peer-to-peer Lending: LendingClub >
- Online Trading: Fidelity >
Scottrade> ETrade> TD Ameritrade> ShareBuilder
- Online Asset Dashboards: Mint >