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Why diversify outside of the US?
Why diversify outside of the US? The outperformance of US stocks in recent history has led some investors to question whether they should invest outside the US at all, yet there remains compelling reasons to diversify globally. US investors often think of the S&P 500 Index (an index of the largest companies in the US by market capitalization) when referring to the performance of the stock market. This is not surprising to hear as most US based investors exhibit a “home bias”, where they focus their investing domestically and less on international. In a Vanguard 2020 study, households they surveyed had 81% of their portfolio allocations invested in the US. On top of that, US stocks have set a high bar for performance globally, outpacing the gains in stocks across Europe, Japan, and emerging markets over the last decade. It’s become natural to ask, “Can’t I get better returns just sticking with US stocks? Why would my Betterment portfolio have any allocation to companies outside of the US?” Currently, Betterment’s Core portfolio strategy in the 100% stock allocation has a target allocation of more than 40% in international equities. Below, this piece will cover reasons diversifying internationally makes sense, including: The global market portfolio is a starting point for asset allocation There’s no guarantee that US stocks will continue to outperfor Diversification creates the potential for more consistent returns Investing in the global market portfolio The short answer is that Betterment constructs all of our portfolios to be representative of the makeup of global investable assets as a whole, and you’ll find that around 40% of the world’s equity assets are invested outside of the US. International investments play an important role in reducing the risk of concentration in any one particular country within your portfolio. There’s no guarantee of continued US outperformance We’ve all heard the phrase “past performance is not indicative of future results.” For instance, stocks of one region can string together multiple years of outperformance relative to others before that trend reverses and it enters a period of underperformance. The chart below illustrates this tug of war between US and international developed stocks. While the outperformance experienced by US stocks over the last decade is striking, international developed stocks dominated in the wake of the dot com bubble in the decade before that. “International stocks” is represented by the MSCI EAFE Index. “US stocks” is represented by the MSCI US Index. Past performance is not indicative of future results. You cannot invest directly in the index. Going back further into history, in the ‘80s international developed stocks actually outperformed US stocks to the same extent that US stocks have outperformed since 2009. We believe, and many on Wall Street will admit, that trying to time these cycles can be extremely difficult and a more consistent return may be achieved by holding exposure to each geographical region’s stocks over the long-term. Before US stocks’ strong run in recent history, investors may have been tempted to allocate more to emerging market stocks based on their momentum during the 2000s. Emerging market stocks had higher returns than US equities in eight of the ten years before 2011. If an investor piled into emerging market stocks in 2011 because of their decade long track record of outperformance, they would have largely missed out on the strong gains in the US over the following 10 years. There also may be reason to believe that markets outside the US have the potential to post strong gains over the next decade. Based on certain valuation metrics, US stocks appear more expensive than their global peers. For example, companies in places such as emerging markets source much of their revenue from quickly growing economies, which may enhance profitability in the future. Diversification helps avoid drawdowns and creates the potential for consistent returns International markets are not perfectly correlated with the US, meaning they do not move in lockstep. Allocating to markets around the world therefore promotes diversification, helping buffer portfolios from the heightened volatility of individual markets. The chart below ranks the returns of Betterment’s tenured Core portfolio strategy against different regions and asset classes across calendar years, illustrating diversification in action. The Core portfolio, with a 90% allocation to stocks and 10% allocation to bonds, consistently avoided losses compared to the poorest performing assets of recent history. This was also evident in 2020 where diversification provided downside protection as the US fell into a short recession and battled a pandemic. Investors focused on using the S&P 500 Index to benchmark performance will highlight that the index outperformed our Core portfolio in the time periods displayed. And while the strength of the US market is undeniable, it is important to not overlook the fact that our Core portfolio still has a sizable allocation to the US. Having a strategic, well-diversified portfolio allows investors to obtain exposure to not only markets that outperform like the US, but also to international stock markets and other asset classes that can dampen the downside in years where US stocks underperform. *See disclosures below At Betterment, we build portfolios and provide advice on portfolio allocations that should be suitable for each investor’s risk tolerance to help them reach their investment goals. Diversifying across stock markets, whether in the US or elsewhere in the world, helps in that continuous effort. It may be tempting to chase the high returns that US stocks have posted in recent history, anticipating that the US equity market will continue to outperform, but investors should recognize that future outperformance is near impossible to predict and that they should position themselves for a wide range of possible outcomes accordingly. This is why as a foundation of Betterment’s portfolio construction process, we start with a diversified global market portfolio.
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What is the maximum 401(k) contribution?
What is the maximum 401(k) contribution? Everything you should know to help your employees save smarter this year. Every year, the IRS updates the rules governing 401(k) and IRA contributions, and they recently announced the guidelines for 2022. So what are the updates for 2022? Here’s the big news: The contribution limit for employer-sponsored 401(k) plans is $20,500 for individuals under age 50, up from $19,500. This is the first time the limit has gone up in two years! Now, let’s get into the details. In this article, we’ll discuss the new 2022 limits and rules—and how they may impact your retirement goals. What you need to know about retirement plans (and their contribution rules) As you may know, there are two primary retirement plans: employer-sponsored retirement plans and IRAs. Here’s how they differ: Employer-sponsored plans—like 401(k), 403(b), and 457 plans—are only available if the employer offers one. If they’re eligible, individuals can contribute to both an employer-sponsored plan and an IRA. IRAs are tax-deferred or tax-advantaged retirement accounts that individuals (who qualify) can open up on their own—regardless of their employment situation. Because the IRS offers tax advantages to people who participate in these plans, there are naturally a few strings attached. Specifically, individuals can only contribute a certain amount of money in a given year—and that amount decreases if they earn above a certain threshold. Good news—Most people can contribute more in 2022. If your employees ask “what is the 401(k) limit for 2022?” you’ll be able to share the good news that most people can contribute up to $20,500 in 2022. This is up from $19,500, which was the limit in 2020 and 2021. When you look at the following contribution limits, you’ll notice that some of them take into consideration taxable income, which impacts how much highly compensated employees and low-income earners can save. Estimating taxable income can be complicated, and since Betterment is not a tax advisor, we suggest talking with a qualified tax professional. Let’s take a closer look at the 2022 contribution limits. 1. Employer-sponsored Plan Contribution Limits In 2022, the limit on annual contributions to Roth or Traditional 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plans increases to $20,500. The additional catch-up contribution limit remains unchanged at $6,500 for a total contribution limit of $27,000 for employees 50 years old and older. 2. IRA Contribution Limits In 2022, the limit on annual contributions to an IRA is unchanged at $6,000. The additional catch-up contribution limit for individuals 50 years old and over remains at $1,000. The total contribution limit is $7,000 for employees 50 years old and older. Retirement Account Contribution Limits Contribution Limits Catch-up Contribution Limit (for individuals age 50 and above) Account Type 2021 2022 2021 2022 Traditional IRA Roth IRA $6,000 $6,000 $1,000 $1,000 401(k) 403(b) 457 Plans $19,500 $20,500 $6,500 $6,500 Income Limits for Deductible Traditional IRA Contributions One of the best benefits of a Traditional IRA is that you can deduct contributions on your tax return. However, if you or your spouse are covered by an employer-sponsored retirement plan, Traditional IRA contributions are only deductible if your modified adjusted gross income (MAGI) falls below a certain threshold. Above that threshold, there’s a “phase-out” range in which an individual is eligible for a partial deduction, and after that range, contributions are not deductible. Traditional IRA Deductibility Limits for Individuals with an Employer-sponsored Plan 2021 2022 Filing Status Income (MAGI) Income (MAGI) Deduction Limit Single individuals ≤ $66,000 ≤ $68,000 Full deduction up to the contribution limit $66,000 – $76,000 $68,000 – $78,000 Partial deduction ≥ $76,000 ≥ $78,000 No deduction Married, filing jointly ≤ $105,000 ≤ $109,000 Full deduction up to the contribution limit $105,000 – $125,000 $109,000 – $129,000 Partial deduction ≥ $125,000 ≥ $129,000 No deduction Married, filing separately < $10,000 < $10,000 Partial deduction ≥ $10,000 ≥ $10,000 No deduction Traditional IRA Deductibility Limits for Individuals without an Employer-sponsored Plan 2021 2022 Filing Status Income (MAGI) Income (MAGI) Deduction Limit Single individuals All incomes All incomes Full deduction up to the contribution limit Married, filing jointly + neither individual or spouse has an employer-sponsored plan All incomes All incomes Full deduction up to the contribution limit Married, filing jointly + spouse has an employer-sponsored plan ≤ $198,000 ≤ $204,000 Full deduction up to the contribution limit $198,000 – $208,000 $204,000 – $214,000 Partial deduction ≥ $208,000 ≥ $214,000 No deduction Married, filing separately < $10,000 < $10,000 Partial deduction ≥ $10,000 ≥ $10,000 No deduction 3. Income Limits for Roth IRA Contributions To read more about the IRA deduction limits, refer to details available from the IRS. Roth IRA contributions are not tax deductible. However, qualifying withdrawals (typically in retirement) can be made on a tax-free basis. However, to make the maximum $6,000 Roth IRA contribution, an individual’s income must fall below a certain threshold. In 2022, eligibility to contribute to a Roth IRA starts to phase out at $129,000 for single filers and $204,000 for married couples (filing jointly). That’s a higher start of the phase out threshold than in 2021, which began at $125,000 for single individuals and $198,000 for married couples. 4. Income Ranges for Partial Roth IRA Eligibility Individuals whose incomes fall within the following ranges are limited to making partial Roth IRA contributions. Those whose incomes fall below these ranges can contribute the full amount. Individuals with incomes above the range cannot contribute to a Roth IRA that year. Income Tax Filing Status 2021 MAGI 2022 MAGI Single $125,000 – $140,000 $129,000 – $144,000 Married Filing Jointly $198,000 – $208,000 $204,000 – $214,000 If you are married and file separately and lived with your spouse at any point during the year, you will be completely phased out of making Roth IRA contributions if your MAGI is $10,000 or more. For more information and guidance regarding Roth IRAs, review the expanded IRS rules. Income Limits for the Retirement Savings Contributions Credit (Saver’s Credit) To help low-income people save for retirement, the IRS offers the “Saver’s Credit.” Individuals may be eligible for the credit if they’re saving for retirement and their income falls below specific ranges. This credit offsets the individual’s income-tax liability; however, it phases out as the individual’s adjusted gross income (AGI) increases.
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Welcome to the Betterment 401(k)
Welcome to the Betterment 401(k) Find out how to make the most of your plan and start saving for your future. We’re excited that your company has chosen to help you prioritize your financial wellness with us, starting with your 401(k) plan. Betterment’s goal-based investing approach is designed to help you feel confident that the money you need will be there when you’re ready. Let’s get started. TABLE OF CONTENTS Importance of saving for retirement now How much to save How Betterment makes saving easy Getting started with your Betterment 401(k) Set up or update how much you save Traditional and Roth contributions Customize your retirement plan Your investments with Betterment Rolling over an old 401(k) to Betterment Access to your 401(k) funds Importance of saving for retirement now Retirement is a significant, long-term goal. That’s why, no matter where you are in your career, it’s never too soon to start saving in your 401(k). The sooner you start, the more you’re likely to have when you do retire, whenever that may be. And, of course, it’s never too late to start saving either. There are several advantages to saving for retirement through a 401(k): You can save on taxes Contributions (also called deferrals) made through payroll deduction are convenient and automatic You can legally save more than you can in other retirement vehicles, like an individual retirement account (IRA) In addition, your employer may make contributions to your 401(k) account on a matching (or other) basis. To find out if your employer makes contributions to your account, log into your account, click on “Documents” in the left-hand menu and choose “401(k) documents” to download your “Summary Plan Description” and read about “Contributions to your Plan.” How much to save Whether you decide to contribute to your 401(k) as a percentage of your paycheck or a flat dollar amount, the amount you put aside now is a big factor in how much you’ll have at retirement. Most experts recommend saving 10%–15% of your annual income. We can help you figure out how much you should be saving depending on when and where you want to retire. And, even if you can’t save that much now, save as much as you can every pay period, and commit to revisiting your contribution amount in the future. IRS rules determine how much you’re able to save in your 401(k). For 2022, you can save as much as $20,500 in your 401(k). Those aged 50 and older can save an additional $6,500. How Betterment makes saving easy Our approach uses low-cost exchange-traded funds (ETFs) so more of your money stays invested in your account. Betterment makes saving easy in other ways as well, all at no additional cost to you: Your Betterment dashboard allows you to see all of your financial goals—not just retirement—in one place We automatically incorporate sophisticated investment features that make your money work harder. For example, portfolios are automatically rebalanced, are automatically adjusted over time, and can benefit from tax coordination strategies We offer personalized advice that takes into consideration everything you tell us about you and your situation, including any other accounts you may have Getting started with your Betterment 401(k) Once you become eligible to save in your 401(k) plan, Betterment will create an account and send you a welcome email inviting you to start contributing and to establish your retirement goal. Were you automatically enrolled into your plan? By now, you’ve been notified that your employer is going to help get you started by automatically enrolling you into your 401(k) plan with a specific percentage of pay going toward your 401(k) account. Keep in mind that this default amount, which you see when you first enter your account, is just a starting point. You can increase or decrease this amount at any time. Set up or update how much you save You determine how much to contribute to your 401(k) account each pay period, either as a percentage of your paycheck or flat dollar amount. To set or update how much you’re contributing: Log into your account and choose your Retirement goal from the left-hand menu. Under “Accounts”, locate the contribution type (Roth or traditional) you’d like to update, and click on “edit” within the “Automatic Deposit” column On the next screen, toggle between “% Percent” and “$ Amount” to input the new desired rate or amount you’d like to save. Here, you’ll also see how much you have contributed to your account year-to-date and how much you have remaining before you reach the maximum allowable contribution amount Click on “Update setting” and your new contribution amount will be reflected in your next paycheck (or the next paycheck, if your change was made too close to deadline for payroll changes) Traditional and Roth contributions Since they are part of your compensation, 401(k) contributions are taxable, but the IRS provides flexibility in letting you choose when to pay those taxes: now (Roth) or later (traditional). Roth 401(k): Taxes are paid up front before contributions to the plan are made. The advantage of making Roth contributions is that withdrawals—both the contributions and earnings—are tax-free once you hit age 59½, as long as you’ve held the Roth account for at least 5 taxable years. Traditional 401(k): Contributions are deducted from your paycheck before any taxes are withheld and will therefore lower your taxable income. Both the contributions and associated earnings are “tax-deferred” until you withdraw the funds, when taxes will be due. You can choose to make Roth contributions, traditional contributions, or both. Read more about how to decide what’s right for you. Customize your retirement plan Planning for retirement may seem overwhelming, but Betterment makes it easy. When you create a personalized retirement plan: You’ll get our recommendations on how much to save, and in which accounts You can see whether or not you’re on track to meet your goal every time you log into your account (and take steps to get on track if needed) You can input personal information like income and retirement age so that the advice is customized to your needs You can sync other accounts so our advice takes your entire financial picture into consideration To set up your personalized retirement plan: Log into your account and choose your Retirement goal from the left-hand menu From the “Plan” tab, click on “Get started” Follow the prompts and click “Finish setup” at the bottom of the “Review Allocation” screen. Don’t worry, you can always change your inputs! Next, track your current savings and sync any outside accounts you’re using to save for retirement Finally, click on “see your plan” to receive Betterment’s recommendations for how much you should be saving (and in which accounts) this year From the left-hand menu, you can also add other financial goals, like building an emergency fund or a vacation fund, and you can even open a cash or checking account. Your investments with Betterment Your retirement account is designed as a long-term investment. Market ups and downs along the way are a normal part of the process. We encourage you to maintain a long-term perspective and to avoid making rash decisions, like removing investments, based on events in the market. Read more about our investment approach. To get started, you’ll be defaulted into our Core Strategy, with a globally-diversified portfolio that’s built based on how long you have until retirement. Betterment will automatically rebalance and adjust your portfolio over time. As an alternative to your default portfolio, you may customize your investments at any time with our Flexible Portfolio option or by choosing one of our Socially Responsible Investing Portfolio strategies, the Goldman Sachs Smart Beta Strategy, or the BlackRock Target Income Portfolio for those in retirement. To learn about these options or to change your portfolio, go to the “Holdings” tab of your Retirement account, and click “Edit” underneath “Portfolio Strategy”. Rolling over an old 401(k) to Betterment When you roll over (or move) other accounts to Betterment, you could lower your investment fees and get personalized advice. Having your retirement accounts in one place can make it easier for you to keep track of your savings. Plus, you’ll be invested in a diversified portfolio and can take advantage of our tax-smart features, which could mean more money in retirement. Start your rollover now to move your 401(k) over from another provider. Questions about whether you should roll over to your 401(k) plan or a Betterment IRA? We’ve got answers. Access to your 401(k) funds Your 401(k) account is designed for retirement, so access to your funds is limited. Keeping your retirement savings invested, even when you change jobs, means that it can continue to grow for the benefit of your future. Generally, you cannot withdraw your 401(k) savings before turning 59½, unless you leave your employer (or become disabled or pass away). If you are still working for your employer, your plan may include provisions that allow you to access funds in a couple of ways: Loans may enable you to borrow a portion of your 401(k) account and repay it over time with accrued interest. This does not impact your credit score because you are borrowing from your own account. Hardship distributions. According to IRS rules, this type of distribution must: be due to an immediate and heavy financial need be necessary to satisfy that need not exceed the amount you needed A hardship distribution to an employee younger than 59½ often includes a 10% early withdrawal penalty. The money you withdraw may also be taxable. In addition, if you were impacted by COVID-19 and your plan adopted certain provisions, you may qualify for special distributions and/or loans in 2020. If you have left your employer, learn about your options with respect to your 401(k) account. Information on the withdrawal and loan provisions can be found in the “Summary Plan Description” (SPD), available within your Retirement account by clicking “Documents” on the left-hand menu and navigating to “401(k) documents”, or within your 401(k) account as part of the withdrawal menu. Didn’t find what you were looking for? Get answers to commonly asked questions and a variety of saving and investing topics via our FAQ or our educational articles. You can also start planning for the future with our free interactive tools. If you’re looking for more in-depth advice or to feel more confident about your financial decisions, consider our advice packages. Our Customer Support Team is available five days a week to help answer questions about your account. Reach out here. Want to educate yourself on retirement planning and financial wellness? Check out our employee resources for more articles and videos.
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How We Built 3 New Socially Responsible Investing Portfolios
How We Built 3 New Socially Responsible Investing Portfolios Betterment is moving the category forward for socially responsible investors by offering SRI portfolios that are fully diversified and keep costs low. It makes sense that some investors try to align their investments with the values and social ideals that shape their worldview. The way they live, the career they choose, and the people they care about align with their personal values; shouldn’t their investments do the same? Socially responsible investing (SRI) is an approach to investing that reduces exposure to companies that are deemed to have a negative social impact—e.g., companies that profit from poor labor standards or environmental devastation—while increasing exposure to companies that are deemed to have a positive social impact—e.g., companies that foster inclusive workplaces or commit to environmentally sustainable practices. The Betterment SRI portfolio strategy aims to maintain the diversified, low-fee approach of Betterment’s core portfolio while increasing investments in companies that meet SRI criteria. Betterment has constructed three SRI portfolios, each with a different focus within the realm of Environmental, Social, and Governance (ESG) investing. Betterment’s Broad Impact portfolio offers increased exposure to companies that rank highly on all ESG criteria equally, while Betterment’s Climate and Social Impact portfolios focus on increasing exposure to companies with positive impact on a specific subset of ESG criteria To learn more about how and why we’ve built the Betterment SRI portfolios, read on to the following sections. The technical details of our approach can be found in our full portfolio methodology as well as in our SRI disclosures. Why Did Betterment Develop SRI Portfolios? Betterment is dedicated to offering a personalized experience for its customers, including participants in Betterment 401(k) plans. This means providing them options that help customers align our advice to their personal values. We decided to develop SRI portfolios because, currently, there are three major ways that investors attempt to execute an SRI strategy, and none meets an investor’s full needs: Some investors buy SRI mutual funds, settling for unreasonably high fees compared to performance and often losing out on important tax and cost optimization opportunities. Others opt for one of several SRI-specific investment managers whose SRI portfolios may fulfill the investors’ desire for SRI screening but do not always provide proper diversification against risk. Still others try to pick their own basket of SRI investments—a challenging, time-intensive, and inaccessible approach for most everyday investors. We set out to do better for SRI investors who should not have to choose between holding an SRI portfolio and following a low-cost, diversified investment strategy (with tax optimization, where applicable) in order to make sure their investments reflect their personal values. The Betterment SRI portfolio strategy is designed to achieve this balance. We allow socially conscious investors to express that preference in their portfolios without sacrificing the aspects of Betterment’s advice that protect their returns the most: proper diversification, tax optimization, and cost control. What Is Betterment’s Approach To SRI? While SRI has been around for decades, especially for institutions like churches and labor unions, the SRI funds available to individual investors have only emerged in the last 20 to 30 years. And most of these SRI products have been actively-managed mutual funds with high fees. Only recently have lower cost options, like ETFs for SRI, emerged in the market. As we developed each of Betterment’s SRI portfolios, we analyzed all low-cost ETFs available which align with the SRI mandate of each portfolio, searching for products that could replace components of our core strategy without disrupting the diversification or cost of the overall portfolio. In each of our SRI portfolios, some bond asset classes are not replaced with an SRI alternative either because an acceptable alternative doesn’t yet exist or because the respective fund’s fees or liquidity levels make for a prohibitively high cost to our customers. Broad Impact Portfolio In 2017, we launched our original SRI portfolio offering, which we’ve been steadily improving over the years. With this release, our original SRI portfolio benefits from a number of additional enhancements, and becomes our “Broad Impact” portfolio, to distinguish it from the new specific focus options, Climate Impact, and Social Impact. As we’ve done since 2017, we continue to iterate on our SRI offerings, even if not all the fund products for an ideal portfolio are currently available. Figure 1 shows that we have increased the allocation to funds screened for ESG criteria each year since we launched our initial offering. Today all primary stock ETFs used in our Broad Impact, Climate Impact, and Social Impact portfolios are screened for some ESG criteria. 100% Stock Allocation in the Broad Impact Portfolio Over Time Figure 1. Calculations by Betterment. Portfolios from 2017-2019 represent Betterment’s original SRI portfolio. The 2020 portfolio represents a 100% stock allocation of Betterment’s Broad Impact portfolio. As additional SRI portfolios were introduced in 2020, Betterment’s SRI portfolio became known as the Broad Impact portfolio. As your portfolio allocation shifts to higher bond allocations, the percentage of your portfolio attributable to SRI funds decreases. Additionally, a 100% stock allocation of the Broad Impact portfolio in a taxable goal with Tax Loss Harvesting enabled may not be comprised of all SRI funds because of the lack of suitable secondary and tertiary SRI tickers in the developed and emerging market stock asset classes. Betterment’s Broad Impact portfolio is Betterment’s general ESG investing option. The portfolio seeks to give investors greater exposure to all of the different dimensions of social responsibility, such as lower carbon emissions, ethical labor management, or greater board diversity. By investing in funds that consider all aspects of ESG investing, we create a portfolio that grades well with respect to a number of dimensions that socially responsible investors consider when making investment decisions. When creating the Broad Impact portfolio, the asset classes (i.e., portfolio component) that we can confidently replace with an SRI alternative are: U.S. Stocks Emerging Market Stocks Developed Market Stocks U.S. High Quality Bonds Four asset classes use SRI-specific funds—the rest remain similar to the Betterment core portfolio—and that difference has an impact on the social responsibility of an individual’s overall portfolio. For one, many investors are most concerned about the social responsibility of the largest U.S. companies in their portfolios, which often set standards for acceptable corporate behavior that other companies try to emulate. In our Broad Impact SRI portfolio, stocks of companies deemed to have strong social responsibility practices, such as Microsoft, Google, Proctor & Gamble, Merck, CocaCola, Intel, Cisco, Disney, and IBM may make up a larger portion of the SRI portfolio than they do for Betterment’s core portfolio. In addition, a major reason why there are no acceptable SRI alternatives for other asset classes is that the demand for these products has not been sufficient to encourage fund managers to create them. By electing to use the Betterment SRI portfolio strategy, plan participants signal to the investing world that there is a demand for high quality SRI investment options and may help to encourage the development of well-diversified, low-cost SRI funds in a wider variety of asset classes. If you’re interested in a more quantitative understanding of how the Broad Impact portfolio compares to our core portfolio in terms of social responsibility, you can review the SRI ratings published by MSCI, shown below. MSCI’s ratings for the SRI funds used in Betterment’s SRI portfolio are higher than the ratings for the funds used in the Betterment portfolio. For more information on what the numbers mean, read our full whitepaper. MSCI ESG Quality Scores U.S. Stocks Betterment Core Portfolio: 5.94 Betterment Broad Impact Portfolio: 7.31 Emerging Markets Stocks Betterment Core Portfolio: 4.22 Betterment Broad Impact Portfolio: 6.31 Developed Markets Stocks Betterment Core Portfolio: 6.81 Betterment Broad Impact Portfolio: 8.33 US High Quality Bonds Betterment Core Portfolio: 6.13 Betterment Broad Impact Portfolio: 6.91 Sources: MSCI ESG Quality Scores courtesy of etf.com, values accurate as of August 25, 2020 and are subject to change. In order to present the most broadly applicable comparison, scores are with respect to each portfolio’s primary tickers exposure, and exclude any secondary or tertiary tickers that may be purchased in connection with tax loss harvesting. Climate Impact Portfolio Betterment’s Climate Impact portfolio offers investors an SRI portfolio that is more focused on being climate-conscious rather than focused on all ESG dimensions equally like the Broad Impact portfolio. The portfolio achieves this objective by investing in ETFs with a specific focus on mitigating climate change. When compared to the core portfolio, all of the stock positions have been replaced with more climate-conscious alternatives. Half of the stocks in the portfolio are invested in a global low-carbon stock ETF, which systematically overweights companies with lower carbon emissions, while also underweighting their high-carbon emitting peers. The other half of the stocks in the portfolio are invested in fossil fuel reserve free ETFs. These ETFs replicate broad market indices, while divesting from owners of fossil fuel reserves, defined as crude oil, natural gas, and thermal coal. By investing in the Climate Impact portfolio, investors are actively divesting assets away from holders of fossil fuel reserves while cutting their investments’ carbon emissions. Carbon emissions per dollar of revenue in the 100% stock Climate Impact portfolio are half of those in the 100% stock Betterment core portfolio, based on weighted average carbon intensity data from MSCI. The other change from the core portfolio is that the Climate Impact portfolio replaces our International Developed Bond and US High Quality Bond exposure by investing in a global green bond ETF. Green bonds, as defined per MSCI, fund projects that support alternative energy, energy efficiency, pollution prevention and control, sustainable water, green building, and climate adaptation. Social Impact Portfolio Betterment’s Social Impact portfolio offers investors an SRI portfolio that is more focused on supporting social equity and minority empowerment compared to the Broad Impact portfolio. The portfolio achieves this objective by augmenting the ESG exposure achieved in the Broad Impact portfolio with two additional ETFs each with a unique focus on diversity, NACP and SHE. NACP is a U.S. stock ETF offered by Impact Shares that tracks the Morningstar Minority Empowerment Index. The National Association for the Advancement of Colored People (NAACP) has developed a methodology for scoring companies based on a number of minority empowerment criteria. These scores are used to create the Morningstar Minority Empowerment Index, an index that seeks to maximize the minority empowerment score while maintaining market-like risk and strong diversification. The end result is an index that provides greater exposure to US companies with strong diversity policies that empower employees irrespective of race or nationality. By investing in NACP, investors are allocating more of their money to companies with a better track record of social equity as defined by the NAACP. SHE is a US Stock ETF that allows investors to invest in more female-led companies compared to the broader market. In order to achieve this objective, companies are ranked within each sector according to their ratio of women in senior leadership positions. Only companies that rank highly within each sector are eligible for inclusion in the fund. By investing in SHE, investors are allocating more of their money to companies that have demonstrated greater gender diversity within senior leadership than other firms in their sector. Let’s Make Investing More Socially Responsible As employees review our SRI portfolios, they might ask themselves, “Is it more important that my portfolio is well-diversified with reasonable costs, or should my money be exclusively invested in SRI funds, regardless of the cost or level of diversification?” These are insightful questions that get at the heart of the tradeoffs involved in socially responsible investing today. Currently, most accessible SRI approaches make investors choose between a well-diversified, low-cost portfolio and an inadequately diversified and/or higher cost portfolio comprised of SRI funds. Diversification and controlled costs are investing fundamentals that all investors—SRI or not—deserve. They’re principles that live at the heart of fiduciary advice. The only reason other SRI solutions settle for higher costs and less diversification is because the industry isn’t challenged to offer something better. We at Betterment believe we can create a future that does not ask SRI investors to choose. We are committed to achieving more socially responsible investing through our research over time and are tracking the availability of better vehicles for these purposes. Since originally launching the Broad Impact SRI portfolio in 2017 with ESG exposure to only U.S. large cap stocks, we’ve been able to expand the exposure to now cover also developed market stocks, emerging market stocks, and US high quality bonds. We’ve also been able to launch the Climate and Social Impact portfolios which add exposure to focused ESG issues by allocating to assets such as green bonds or gender-diverse U.S. Stocks. As always, we will continue to monitor additional ways to improve our portfolios. In the future, we will improve our SRI portfolio even further, iterating and adding new SRI funds that satisfy our cost and diversification requirements as they become available. -
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What does inflation mean for your retirement savings?
What does inflation mean for your retirement savings? Rising prices constitute a concerning development for retirement nest eggs. Inflation has reached levels not seen in decades, showing up in the prices paid at the gas pump, at the grocery store register, and elsewhere. Savers increasingly question whether the higher future cost of living will mean that their current savings won’t go far enough, even if they grow in the meantime via a portfolio of investments. Below, we address these developments and suggest ways to think about what inflation can mean for retirement. Keep things in perspective: today’s high inflation likely won’t last forever It makes sense to be concerned about inflation, but we caution against panicking and potentially taking risks in the face of the recent increase in prices. Inflation, though it has been low over the past decade (often dipping below 2% on an annual basis), has had a consistent presence for much of the history of the US economy. The alternative of stagnant or even falling prices can throw a wrench into economic activity, depressing incomes, employment, and the value of investments. We also don’t think that this bout of high inflation will ultimately last as long or be as dire as historical periods such as the 1970s in the US, when a wage-price spiral and commodity price shocks caused volatile inflation that contributed to a long-lasting economic malaise. The current inflationary environment appears to be driven by supply chain issues associated with operating an economy during a pandemic, though commodities have also been a major factor. This can be seen in the out-sized contribution of goods prices to the levels of inflation we see. We would expect goods prices to return to their longer-term trend of more modest contributions to price increases after the market takes its time to work out kinks in supply chains. Source: BLS, FRED. Core goods represent goods prices excluding food and energy. Core services prices represent service prices excluding food and energy. Should I be concerned if I’m not retiring yet? The short answer is that you should not be overly concerned. A major goal of any portfolio invested for the long-term should be the preservation of purchasing power, which can be eroded by inflation. The following are some of the ways that Betterment attempts to help you navigate through this environment. 1. Maintaining a well diversified portfolio. Within the Betterment investing experience you have the ability to incorporate your risk tolerance (your ability and willingness to take risk), and time horizon (years left before you need your savings). If you’ve indicated that you are saving for retirement and you have a longer time horizon, we will recommend a Betterment Core portfolio allocation that has more stocks than bonds since you are able to take on more risk for the potential to generate greater growth compared to someone who is nearing or in retirement. Having a higher allocation to stocks not only helps serve this purpose, but inflation also flows through to company earnings and ultimately to the valuation of the stock market. During these earlier stages when the focus is on accumulation, we will also recommend asset classes that have historically seen higher growth, such as emerging markets, within stocks. In the case of inflation surprising to the upside, there is an increased likelihood that monetary policymakers including the Federal Reserve in the U.S., may take steps to raise interest rates in the economy in order to dampen borrowing and inflationary pressures. This rise in interest rates can adversely affect the returns of bonds. The recommended bond allocations in the Core portfolio strategy, however, are well diversified across geographies and credit quality. They have sources of return outside of markets which may face higher inflation than others. For example, most of the portfolios in the Core strategy hold an allocation to Treasury Inflation Protected Securities (TIPS), where the amount of the allocation varies according to the stock/bond split and overall risk level of the portfolio. TIPS are “inflation protected” in that the securities’ principal will be adjusted higher based on the increase in a consumer price index and the interest paid will be based on the inflation adjusted principal, shielding the return on the bonds from declining in real (inflation-adjusted) terms. Where and how you stay invested over time is important. 2. Inflation assumptions built into our advice It is better to overshoot than undershoot your retirement savings. Building in inflation assumptions can help paint a better picture in estimating your future spending power. The advice we provide in our goal forecaster takes into account 2% annual inflation, and the projected retirement balances are adjusted after inflation. We regularly review this inflation assumption, and Betterment users have the ability to override it with their own expectation of annual inflation if desired. Our advice tool highlights if you’re on or off track and whether there is a risk of shortfall from meeting retirement goals. It then provides guidance on how much you should be contributing in order to meet these goals. Something to note is that within this guidance, we will reflect any regulation changes that allow for greater retirement contributions. In 2022, the IRS is increasing the employee contribution limit for 401(k) plans from $19,500 to $20,500. What if I’m nearing or in retirement? Don’t worry, there are ways that you can bolster your retirement savings in this environment. Increase contributions: Those who are 50 years or older have the ability to make “catch-up” contributions of $6,500 on top of the $20,500, allowing a total of $27,000 in retirement contributions. This is a great opportunity for those nearing retirement who are concerned about their future retirement spending to contribute more. Additionally, Social Security general benefits increase based on cost-of-living adjustments over time. Hold off on taking required minimum distributions (RMDs): The 2019 Secure Act increased the age for when you would need to take RMDs from 70 ½ to 72. However, if you are 72 and meet certain requirements you do not need to take the RMDs right away, allowing your retirement savings to continue growing in the market. Maintain an appropriate level of investment risk: If you choose to follow Betterment’s advice, Betterment can automatically adjust your allocation through time to control risk based on your time horizon. Also, although Betterment’s qualified default investment alternative (QDIA) is the Core portfolio strategy, we have other investment options that are built for more conservative investing. Betterment offers the BlackRock Target Income portfolio strategy for those who may prefer not to be exposed to the risk of stocks. It is an all bond portfolio meant for generating income while preserving capital. This portfolio has four different risk levels which are associated with different income yield targets to help you generate a desired level of income. Retirement is a long-term goal. Betterment will continuously guide you throughout different market environments and provide solutions to help you accomplish this goal. -
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Why diversify outside of the US?
Why diversify outside of the US? The outperformance of US stocks in recent history has led some investors to question whether they should invest outside the US at all, yet there remains compelling reasons to diversify globally. US investors often think of the S&P 500 Index (an index of the largest companies in the US by market capitalization) when referring to the performance of the stock market. This is not surprising to hear as most US based investors exhibit a “home bias”, where they focus their investing domestically and less on international. In a Vanguard 2020 study, households they surveyed had 81% of their portfolio allocations invested in the US. On top of that, US stocks have set a high bar for performance globally, outpacing the gains in stocks across Europe, Japan, and emerging markets over the last decade. It’s become natural to ask, “Can’t I get better returns just sticking with US stocks? Why would my Betterment portfolio have any allocation to companies outside of the US?” Currently, Betterment’s Core portfolio strategy in the 100% stock allocation has a target allocation of more than 40% in international equities. Below, this piece will cover reasons diversifying internationally makes sense, including: The global market portfolio is a starting point for asset allocation There’s no guarantee that US stocks will continue to outperfor Diversification creates the potential for more consistent returns Investing in the global market portfolio The short answer is that Betterment constructs all of our portfolios to be representative of the makeup of global investable assets as a whole, and you’ll find that around 40% of the world’s equity assets are invested outside of the US. International investments play an important role in reducing the risk of concentration in any one particular country within your portfolio. There’s no guarantee of continued US outperformance We’ve all heard the phrase “past performance is not indicative of future results.” For instance, stocks of one region can string together multiple years of outperformance relative to others before that trend reverses and it enters a period of underperformance. The chart below illustrates this tug of war between US and international developed stocks. While the outperformance experienced by US stocks over the last decade is striking, international developed stocks dominated in the wake of the dot com bubble in the decade before that. “International stocks” is represented by the MSCI EAFE Index. “US stocks” is represented by the MSCI US Index. Past performance is not indicative of future results. You cannot invest directly in the index. Going back further into history, in the ‘80s international developed stocks actually outperformed US stocks to the same extent that US stocks have outperformed since 2009. We believe, and many on Wall Street will admit, that trying to time these cycles can be extremely difficult and a more consistent return may be achieved by holding exposure to each geographical region’s stocks over the long-term. Before US stocks’ strong run in recent history, investors may have been tempted to allocate more to emerging market stocks based on their momentum during the 2000s. Emerging market stocks had higher returns than US equities in eight of the ten years before 2011. If an investor piled into emerging market stocks in 2011 because of their decade long track record of outperformance, they would have largely missed out on the strong gains in the US over the following 10 years. There also may be reason to believe that markets outside the US have the potential to post strong gains over the next decade. Based on certain valuation metrics, US stocks appear more expensive than their global peers. For example, companies in places such as emerging markets source much of their revenue from quickly growing economies, which may enhance profitability in the future. Diversification helps avoid drawdowns and creates the potential for consistent returns International markets are not perfectly correlated with the US, meaning they do not move in lockstep. Allocating to markets around the world therefore promotes diversification, helping buffer portfolios from the heightened volatility of individual markets. The chart below ranks the returns of Betterment’s tenured Core portfolio strategy against different regions and asset classes across calendar years, illustrating diversification in action. The Core portfolio, with a 90% allocation to stocks and 10% allocation to bonds, consistently avoided losses compared to the poorest performing assets of recent history. This was also evident in 2020 where diversification provided downside protection as the US fell into a short recession and battled a pandemic. Investors focused on using the S&P 500 Index to benchmark performance will highlight that the index outperformed our Core portfolio in the time periods displayed. And while the strength of the US market is undeniable, it is important to not overlook the fact that our Core portfolio still has a sizable allocation to the US. Having a strategic, well-diversified portfolio allows investors to obtain exposure to not only markets that outperform like the US, but also to international stock markets and other asset classes that can dampen the downside in years where US stocks underperform. *See disclosures below At Betterment, we build portfolios and provide advice on portfolio allocations that should be suitable for each investor’s risk tolerance to help them reach their investment goals. Diversifying across stock markets, whether in the US or elsewhere in the world, helps in that continuous effort. It may be tempting to chase the high returns that US stocks have posted in recent history, anticipating that the US equity market will continue to outperform, but investors should recognize that future outperformance is near impossible to predict and that they should position themselves for a wide range of possible outcomes accordingly. This is why as a foundation of Betterment’s portfolio construction process, we start with a diversified global market portfolio.
