The Right Kind of Portfolio Diversification
The more active funds there are in a portfolio, the greater the chances of underperformance.
By the Editorial Staff
Betterment Resource Center |
Published: June 21, 2013
Actively managed portfolios with two or more funds in the same asset class did dramatically worse compared to similar index-fund portfolios, according to research.
All index-fund portfolios containing 10 assets classes outperformed an active portfolio with comparable investments nine out of 10 times.
New research from Betterment shows that active funds don’t just underperform compared to index funds on average – they can be actively bad for the health of a portfolio.
A key finding from a new white paper released last week from Betterment and Richard A. Ferri, CFA, of Portfolio Solutions®, an independent investment firm, showed that actively managed portfolios with two or more funds in the same asset class did dramatically worse compared to similar index-fund portfolios.
For example, investors with a standard three asset class portfolio who hold three active funds in each asset class have less than a one in 10 chance of outperforming an index fund portfolio of the same asset classes.
The research also showed that all index-fund portfolios containing 10 assets classes outperformed an active portfolio with comparable investments nine out of 10 times.
Betterment’s Alex Benke, a member of the investment committee and a Certified Financial Planner™, said the findings underscored the importance of using an all-index fund portfolio for investors who want to maximize long-term wealth.
To conduct the research, the Betterment data team looked at returns from existing index funds and mutual funds, including mutual funds that have been shuttered, in order to most closely recreate the experience an investor faces. The research did not include portfolios managed by Betterment or Portfolio Solutions.
Recommended Content
View All Resources
Jon Stein on “How I Built This:” Reflecting on Our Story
Jon Stein joins NPR’s Guy Raz for an episode of “How I Built This” to look back at how Betterment started, what mistakes were made, and how they turned into learnings for the robo-advisor we are today.
Redesigning How You Manage Your Finances at Betterment
Our new design represents a synthesis of a large body of customer feedback. We hope it meets your expectations.
Your Portfolio vs. “The Market” – Comparing Apples to Fruit Salad
When you order fruit salad, you don’t expect it to taste like a single apple. If you’re invested in a diversified portfolio, it’s unrealistic to expect it to behave like Apple or even only U.S. stocks.
Explore your first goal
Safety Net
This is a great place to start—an emergency fund for life's unplanned hiccups. A safety net is a conservative portfolio.
Retirement
Whether it's a long way off or just around the corner, we'll help you save for the retirement you deserve.
General Investing
If you want to invest and build wealth over time, then this is the goal for you. This is an excellent goal type for unknown future needs or money you plan to pass to future generations.