As many of you know, if you’ve taken YNAB’s Investing Course or grabbed the $1 Kindle Version, I think you should be investing once your cash flow is in a good spot.

(A “good” spot is unique to you. For me, personally, that means I have no consumer debt, spend money that’s an average of at least 30 days “old” and have a 6-month emergency fund.)

Investing can be unbelievably complex if you let it. That’s the whole reason I wrote the investing course. It helps you start and shows you that anyone can be an investor.

You follow some basic rules:

Diversify across lots of assets, sectors and countries

Don’t try and time the market (be passive)

Choose cheap-cheap-cheap fund options (Index funds and ETFs)

Use a proper asset allocation for your risk tolerance

Invest as much as you want/reasonably can

If anything in those basic rules was new or confusing to you, I’d encourage you to take the Investing Course. I go over all of it, make it pretty exciting (as exciting as this stuff can get) and keep it very short. It’s an hour-long read.

Right … but What is Betterment?

Betterment is an investing option that helps you hit every single one of the investing rules listed above, while making the whole process as simple as opening a savings account. (It’s like opening a savings account, but you are, in fact, investing with risk involved.)

If you’ve read this blog (or the Investing Course) for any length of time, you know I’m a big fan of Betterment. (Read my original review, if you’d like.) It makes investing easy, and gets people started. Starting is a massive barrier, and massively important. I love that they’re tackling that.

(I should mention that YNAB receives no compensation, financial or otherwise*, for our promotion. We used to, and I didn’t like having to say things like, “Yes, we earn a commission, but we’d really recommend it even if we didn’t!” So I emailed Jon, their CEO, and told him I wouldn’t take commissions anymore.

*He said he still hoped to buy me dinner on occasion. I accepted, and will make sure to order an appetizer _and_ dessert on their dime.)

There Are Two Downsides to Betterment

Downside #1: Betterment Charges a Fee

Their pricing is pretty straightforward. It’s far, far less than what you would pay a financial advisor, and far, far less than what you’re paying in your 401k (unless you work for YNAB, where, like a bloodthirsty lion, I chased down our 401k fees clear across the Wall Street savannah and killed them).

Their fee pays for them to:

Determine your proper asset allocation ( Here’s how they do it.)

Here’s how they do it.) Maintain your proper asset allocation

Harvest tax losses (if your account is large enough)

Do I think they should charge a fee? Um, yes. I personally find the convenience of the above services worth the price of admission. Is there a way to DIY and avoid the fee? I think so. More on that in a moment.

Downside #2: Betterment is not Available Internationally

If you’re one of many YNABers that doesn’t live in the U.S., Betterment isn’t available to you. I’ve never liked promoting Betterment while having to say that it isn’t available to everyone.

How to Create a DIY Betterment Portfolio

if you 1) Want to Avoid the Fee, or

2) Aren’t Based in the United States.

You can casually (in an afternoon) throw together (painstakingly create) a spreadsheet that will mimic a Betterment portfolio. If you’re brand-new to investing, this might seem a little confusing. I’d encourage you one last time to read the Investing Course.

Now, I don’t have access to Betterment’s Secret Sauce so I simply looked at my stock/bond split (95/5). Then I looked at the holdings they had for me, and I reverse-engineered the corresponding weighting for each holding. It’s important to note that Betterment may change their investment mix, underlying funds, or any other number of things that could make your spreadsheet less accurate.

How the DIY Betterment Portfolio Works

Asset allocation is extremely important when it comes to investing. It’s an economic free lunch, in that if you do it right, you can get a higher return with less risk. A whole lot of research backs up the idea that asset allocation is the most important component of a solid investing plan.

Let’s say you invest $100,000 in a 50/50 split between stocks ($50,000) and bonds ($50,000).

After one year, stocks have increased 20%, and bonds have dropped 10%. Keep in mind, you haven’t invested any more money.

Your 50/50 portfolio now looks like this:

Stocks: $60,000 (57%)

Bonds: $45,000 (43%

Total: $105,000

If you were invested with Betterment, this wouldn’t have happened, because they would have been rebalancing your portfolio to 50/50 throughout the year.

However, you’re wanting to DIY, so you’ll need to sell some stocks, and buy some bonds. Specifically, you will:

Sell $7,500 of stocks.

Buy $7,500 of bonds.

Your rebalanced portfolio would then look like this:

Stocks: $52,500 (50%)

Bonds: $52,500 (50%)

Voilà! The nice bit about rebalancing: You’ve sold stocks when they are high (notice, I didn’t say at the peak, because who knows?) and bought bonds when they are low (notice I didn’t say at the bottom … ). It ends up working pretty well.

That Didn’t Seem So Hard, Right?

Imagine that you’re holding eight different funds, in your $100,000 portfolio. You want each of the funds to represent 12.5% of your portfolio:

$12,500 * 8 funds = $100,000 (Check … )

One year later, they look like this:

A: $5,000

B: $16,217

C: $1,190 (this one took a dive…)

D: $12,010 E: $13,198

F: $12,501 (this one gets an ‘A’ for effort)

G: $14,835

H: $11,415

Instead of each of those funds being 12.5% of your portfolio, they’re now 5.79%, 18.78%, 1.38%, 13.91%, 15.28%, 14.47%, 17.18%, and 13.22%.

How did I do that math in my head? I didn’t. I used a spreadsheet. Just for this contrived “simple” example.

But we’re just getting started!

Your portfolio is now only worth $86,366 (mainly A’s and C’s fault). You need to rebalance. Things are out of whack. What do you sell and what do you buy?

Given your new portfolio value of $86,366, funds A-H should all equal $10,796.

Which means you need to buy/sell funds A-H in this way:

A $5,796 (buy)

B -$5,421 (sell)

C $9,606 (buy)

D -$1,214 (sell)

E -$2,402 (sell)

F -$1,705 (sell)

G -$4,039 (sell)

H -$619 (sell)

“But Jesse, that looks like you just copied and pasted your contrived example’s rebalancing formula from a spreadsheet.” Does it? You get the idea.

Once you’ve bought and sold, funds A-H will all equal $10,796 and you’ll be set for another year.

My point in this second example: rebalancing can be a bit daunting. Computing machines make it easier.

Back to the Betterment DIY Approach

Back to Betterment. If you like the idea of following a Betterment portfolio and also like the idea of not paying their management fee for the asset allocation, rebalancing, and tax loss harvesting, then you may want to employ this spreadsheet technique.

Do I personally intend to DIY their portfolio? Nope. But if you’re the type, have at it. Also, if you’re outside the U.S., that’s your answer.

Wrapping Up

First, there are tax consequences to buying and selling to rebalance, unless you’re in a tax-sheltered vehicle (401k, IRA, etc.). Be aware of that.

Second, you can use your spreadsheet to help you rebalance any portfolio. You’d just plug in new tickers, descriptions, and target weights.

Third, and finally, for further reading on portfolio rebalancing and, more broadly, asset allocation, I’d encourage you to pick up The Intelligent Asset Allocator and The Four Pillars of Investing.