3 Tools That Can Make Your Investing Simpler and Cheaper

Last week, we discussed the three keys to successful investing being properly diversified, minimizing costs, and re-balancing periodically. Over the last few years, we’ve seen the emergence of online automated investment services (often called “robo-advisors”) that aim to make these steps even easier. After reviewing the various options, there are three in particular that I really like. Here’s a comparison of how each of them can help you with the three steps and what type of person they might each be best suited for:

Motif Investing

Diversification: Motif Investing gives you a choice of various “motifs” composed of up to 25-30 individual stocks or ETFs (exchange-traded funds). This provides an easy way to invest in a diversified stock portfolio (they don’t offer individual bonds) or an entire asset allocation portfolio of stock and bond ETFs. If you don’t like any of the existing motifs, you can even build your own and earn money when other people invest in it.

Cost: Each motif is only $9.95. That’s the cheapest way I know of to invest in 25-30 individual stocks. The ETFs are already generally very inexpensive and while certain brokerage firms allow you to purchase some of them with no transaction fee at all, $9.95 is a small price to pay for the convenience of having all your stocks and ETFs in one place. However, they do not offer any automatic tax-optimization or tax loss harvesting to minimize taxes.

Re-balancing: For another $9.95, you can re-balance or update your Motif.

Best for:  Investors who have a good idea of what they want, especially if they’re looking to minimize costs with a portfolio of individual stocks.

Future Advisor

Diversification: Based on your answers to a short risk tolerance questionnaire, Future Advisor can recommend a full portfolio of mutual funds and ETFs for accounts you link to it. (However, it cannot make recommendations for your employer’s retirement account.) It can even build the portfolio to complement any investments you want to keep. Finally, the recommendations incorporate research showing higher potential returns from small and value stocks so those types of investments are over-weighted.

Cost: The recommendations are free, use low cost funds, and are tax-optimized. (It will recommend you keep more tax-inefficient investments in tax-sheltered accounts.) However, it does not use tax-free municipal bonds and you have to enroll in the managed service for a .5% fee to get automatic tax-loss harvesting. You also have to pay any transaction fees your brokerage account may charge.

Re-balancing: You can easily re-balance the portfolio by periodically checking for new recommendations but it will not automatically re-balance or otherwise manage the portfolio unless you are enrolled in the managed service.

Best for: Investors looking to optimize their portfolio across multiple accounts and are willing to do their own trading, including tax loss harvesting in taxable accounts.

Charles Schwab Intelligent Portfolios

Diversification: Charles’ Schwab’s service will automatically diversify and manage your Schwab account based on a risk tolerance questionnaire. However, it will not manage, provide advice on, or even take into consideration any outside assets.

Cost: The service uses low cost ETFs, includes automatic re-balancing for accounts over $50k, and there are no management or transaction fees. Some people have criticized Schwab for making money on the service from the allocations to Schwab Bank for cash and to Schwab ETFs (although not exclusively). However, any costs from lower returns on the cash or slightly higher fees on the Schwab ETFs need to be balanced with the lower risk of cash and the potentially higher returns and lower risk that can come from Schwab’s “fundamental indexing” strategy. You also have to compare that with the typical .35% fee that other robo-advisors charge for a similar full management service.

Re-balancing: Portfolios are automatically rebalanced.

Best for: Investors who want to take a totally hands-off approach with investments outside of their employer’s retirement account.

Do you have an online investment service that you like best? Share your thoughts in the comments section below. Next week, we’ll discuss how a couple of these tools were used in a real life situation to save someone tens of thousands of dollars.

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