Chrissy Celaya, CFP®

How Betterment Anticipates Market Volatility—So You Don’t Have To It’s difficult to endure volatile markets when it affects your investment portfolio. Betterment has automated features in place to address volatile markets when they occur. If you’ve ever been told to “sit tight and stay the course” when the market is dropping and your investment account is worth less than it was just moments ago, you’re not alone. Financial advisors, including Betterment, love this mantra and repeat it anytime there’s a market downturn—which every investor should be prepared to navigate at some point. But being told to do nothing when your account balance is dropping can feel like an inadequate response. And, unless your investment strategy has been designed from the ground up to anticipate and react to market volatility, you may be right. The reason Betterment can confidently advise our customers not to react or adjust their investment strategy during a market downturn is because our entire platform was designed with inevitable downturns of the market in mind. In this article, I’ll cover how our investment portfolio creation process, ongoing automated account management system, and dynamic advice, are designed with market fluctuations in mind, so that you can “sit tight and stay the course” and feel confident it’s actually the right thing to do. Our portfolios are constructed with market volatility in mind. Betterment’s portfolio construction process strives to design a portfolio strategy that is diversified, increases value by managing costs, and enables good tax management. Ultimately, our goal is to help you build wealth. This means: Our intent is to create portfolios designed to have the greatest chance of making money and also not losing it. At a baseline, our allocation recommendations are based on various assumptions, including a range of possible outcomes, in which we give slightly more weight to potential negative ones, by building in a margin of safety—otherwise known as ‘downside risk’ or uncertainty optimization. So, even before you’ve invested your first dollar, your portfolio has already been designed to account for the market fluctuations you will inevitably experience throughout the course of your investment journey, even the big downturns like 2008 and the more recent market crash in 2020. Furthermore, our risk recommendations consider the amount of time you’ll be invested for. For goals with a longer time horizon, we advise that you hold a larger portion of your portfolio in stocks. A portfolio with greater holdings in stocks is more likely to experience losses in the short-term, but is also more likely to generate greater long-term gains. For shorter-term goals, we recommended a lower stock allocation. This helps to avoid large drops in your balance right before you plan to withdraw and use what you’ve saved. All you have to do is: Tell us what you are saving for (your investing goal). Let us know how long you plan to be invested (your time horizon). We take care of the rest. By using your personal assumptions, in conjunction with our general downside risk framework, we’re able to recommend a globally diversified portfolio of stock and bond ETFs that has an initial risk level recommended just for you. And because we weigh investment time horizon and below-average market performance more heavily, our algorithm allows for some breathing room. If you wish to deviate from our advice— like increasing or decreasing your exposure to stocks or bonds, slightly beyond our default recommendation but still within a reasonable bound—we’ll still maintain the integrity of a properly diversified portfolio and investment strategy designed to meet your specific objective. After all, the chance of reaching any investing goal increases when the investor is comfortable committing to their strategy and staying the course in both good and bad markets. Our automated portfolio management features keep you on track during downturns. How we construct our globally diversified portfolios and the risk framework we apply to each investor’s specific allocation recommendation is just the starting point. It’s our ongoing and automated portfolio management that provides the additional value-add that's hard to replicate elsewhere, especially in times of heightened volatility. Our automated features like allocation adjustments over time, portfolio rebalancing, tax loss harvesting for those who select it, and updated advice when you need it, are what help most. Automated Allocation Adjustments When we ask you to tell us about your investment objective, including how long you plan to be invested for, it helps us choose the appropriate asset allocation for you throughout the course of your investment timeline, not just in the beginning. For most Betterment goals, we recommend that you scale down your risk as your goal’s end date gets closer, which helps to reduce the chance that your balance will drastically fall if the market drops. This is an especially important consideration for an investor who plans to use their funds in the near term. We call this recommendation of a gradual reduction of stocks in favor of bonds, a goal’s glidepath. And instead of leaving this responsibility up to you, you can opt into our “auto-adjust” feature, which means our system monitors your account and adjusts your portfolio’s allocation automatically over time. Automated Portfolio Rebalancing The allocation that we choose for you, at any given time, is our best estimate of the combination of assets that will help you reach your goal by the date you’re aiming for. But, unless each asset you are invested in has the same exact returns, normal stock market fluctuations will likely cause your actual allocation to drift away from your portfolio target, which is calculated to be the optimal level of risk you should be taking on. We call this process portfolio drift, and though a small amount of drift is perfectly normal—and a mathematical certainty—a large amount of drift could expose your portfolio to unwanted risks. When the market fluctuates, not all of your investments are dropping to the same exact degree. For example, stocks are generally more volatile than bonds. As you can imagine, a period of sustained volatility could mean a significant shift in how your portfolio is actually allocated, relative to where it should be. Left unchecked, this drift could be especially harmful to your portfolio’s performance, which is why at Betterment, our portfolio management system provides ongoing monitoring of your portfolio in order to determine whether rebalancing is needed. While we generally use any cash inflows, like deposits or dividends, and outflows, like withdrawals, to help rebalance your portfolio organically over time, when a significant market drop occurs, there can be a need to sell investments in order to adjust your portfolio back to its optimal allocation. Consider an instance where the value of your stock investments has dropped significantly and now your bond investments are overweighted relative to your stocks. Our rebalancing system might be triggered to correct the drift. Not only would our automated rebalancing seek to ensure your portfolio’s allocation is realigned relative to its target, it would also mean buying stocks at their currently cheaper price point, setting you up nicely for any market recovery. Furthermore, if effective rebalancing does require selling investments in a taxable account, the specific shares to be sold are selected tax-efficiently using our TaxMin method. This is designed to ensure that no short-term gains are realized. We never want the tax impact of maintaining proper diversification to counter the benefits of applying our risk framework. Automated Tax Loss Harvesting Tax Loss Harvesting is a feature that may benefit you most when the market is volatile. After all, if there aren’t any losses in your account, we can’t harvest them. Our automated TLH software monitors your account for opportunities to effectively harvest tax losses that can be used to reduce capital gains that you have realized through other investments in the same tax year. This can potentially reduce your tax bill, thereby increasing your total returns, especially if you have a lot of short-term capital gains, which are taxed at a higher rate than long-term capital gains. And, if you’ve harvested more losses than you have in realized capital gains, you can use up to an additional $3,000 in losses to reduce your taxable income. Any unused losses from the current tax year can be carried over indefinitely and used in subsequent years. Our dynamic financial advice works for you during market fluctuations. Much like the automated features described in the section above, the advice we give our customers is dynamic and updates automatically based on many factors, including market performance. Just as your car’s GPS recommends the best route to take to reach your destination, Betterment recommends a tailored path toward reaching your financial goals. And just as the GPS updates its recommended route based on road conditions and accidents, we update our advice based on various circumstances, such as a market downturn. In addition to recommending a starting risk level tied to your specific objective, we also estimate how much you need to save. In the case of a really big market drop, we might advise you to do something about it, such as make a single lump-sum deposit, which will help keep your portfolio on track. Recognizing that coming up with sizable excess cash can be tough to do, we’ll also suggest a recurring monthly deposit number that may be more realistic. And, if it’s early on in a long-term goal, it’s unlikely you’ll need to change anything significantly, because you still have a lot of time on your side. Conclusion The path to investment growth can be bumpy, and negative or lower than expected returns are bound to make an investor feel uncertain. But, staying disciplined and sticking to your plan can pay off. Betterment has been purpose-built with all the worst and the best the market may throw at us in mind, by focusing on three key elements: intentional portfolio construction, automated portfolio features, and advice that reacts to market conditions. Feel confident that Betterment’s hard at work, for you, so that you can truly “sit tight and stay the course.”  

How To Transfer Assets In Volatile Markets Have a high-fee or high-risk brokerage account that you’ve been avoiding transferring due to potential tax consequences? Recent market volatility due to COVID-19, otherwise known as coronavirus, has caused investors to feel like they are riding an emotional rollercoaster. While our advice is usually to stay the course during times of market volatility, there are a few things you can do right now to help control your investment outcomes. Here’s Why Taxes Matter Recent volatility could potentially reduce the amount of potential capital gains you would realize when making a switch. This is especially important when transferring taxable investment accounts, since there aren’t any tax consequences when you transfer tax-sheltered retirement accounts. One of the biggest barriers to moving taxable brokerage accounts is that the transfer may require you to sell certain investments you own, either prior to initiating the transfer or, as soon as the transferred assets are received in-kind. This is because your new provider may invest in a portfolio that has different assets in it than your old provider. For example, at Betterment we invest our customers’ assets into a diversified portfolios of low-cost ETFs. When possible, we will transfer assets in-kind via ACATS—but sometimes assets must be sold if ACATS isn’t an option for a given situation. If the investments you need to sell are trading at a large gain—way above what you originally bought them for—then there may be significant tax implications of making the switch. With markets currently down, the gains on your investments may not be as large as they previously were, which could lower or even eliminate the amount of taxes you’ll owe. Three Reasons To Consider Moving Your Investments We speak to prospective customers every single day who have good reasons to move their investments to Betterment. Here are the three most common situations where it’s worth considering a transfer, regardless of how the markets are behaving. 1) You Have Accounts With High Fees There are several fees you could run into when investing. Some of the most common are advisory fees and fund-specific costs, like expense ratios and mutual fund loads. While you can’t control how the market performs or what the tax laws say, fees are something that you actually can control. If you are invested in funds with high expense ratios or, you have an advisor that charges a high advisory fee—or even both—consider how much you could save by transferring. Our annual advisory fee is either 0.25% or 0.40%, depending on your plan. The average expense ratios of our portfolios range from 0.06 to 0.17%. Helpful Tip Even if you will incur taxes, consider running a break-even analysis to see how long it would take for what you’re saving on fees to outweigh the tax cost to switch. We have a calculator you can use to help you with your analysis. We recommend that you consult with a CPA or tax advisor if you have questions about your specific tax impact. Sync your other financial accounts to your Betterment account and we’ll uncover high fees for you. You can even sign up and try this out without ever having to fund your account—because we think it’s important for you to know this information. 2) Your Allocation Isn’t Quite Right We find that customers can be apprehensive about transitioning a stock-heavy portfolio. This is most likely because the portfolio has performed well over time, so the investor could realize large capital gains to divest out of large stock positions. While we always want to be mindful of taxes, our experts believe that prioritizing appropriate portfolio risk is more important than saving on taxes. If you have accounts that are more aggressive than what’s recommended for your goals, or you have high concentrations of single-stock, consider transferring to a portfolio that’s set to the appropriate risk level for you. At Betterment, we will worry about this so that you don’t have to. When you set up each of your investment goals, we’ll give you advice on what amount of risk is appropriate for your specific investment objective(s) and we’ll make sure you’re globally diversified. Helpful Tips Sync your other financial accounts to your Betterment account, so that we can analyze them. You can review how your current portfolio’s allocation and risk level compares to what we would recommend for you here at Betterment. If you hold individual stocks, our advice is to limit your investment in any one individual stock to no more than 10% of your overall investable assets. For example, if you hold $500,000 across all of your accounts and portfolios, you should have no more than $50,000 invested in any one individual stock. 3) You Own Mutual Funds That Pay Capital Gain Distributions Individual investors realize capital gains when selling shares at a higher price than what they were purchased for. However, there is another type of capital gain that you should be wary of when dealing with actively managed mutual funds—it’s called a capital gain distribution. Here’s how they work. Mutual funds invest in individual stocks and bonds. When a mutual fund manager sells underlying investments in the fund, they may realize capital gains, which are then passed on to individual shareholders—people like you and me. These distributions are taxable to shareholders. What’s even worse is that mutual funds can pay out capital gain distributions even if the fund’s overall performance is down for a year. This is just one of the many reasons why we invest in ETFs and not mutual funds here at Betterment. Helpful Tips Capital gain distributions are typically paid out at the end of the year. You can get estimates on these distributions from the mutual fund company directly, and compare it to your own cost basis in the investment. If the taxes you would realize from selling the investments are lower than the taxes you would pay on the capital gain distribution from the fund, then consider making the decision to sell your shares before the distribution is paid out. Making Lemonade Out Of Lemons While this recent market volatility may be hard to stomach, you may be able to use it to your advantage by making strategic investment decisions—like transitioning your investments into a lower-cost, properly diversified portfolio. Taxable account transfers are typically more complex than transferring IRAs, but we hope that this overview provides clarity and direction as you review your current investment strategies and consider making adjustments. Further, we’re here to help. If your taxable portfolio holds more than $250,000 in assets, stop stressing and simply reach out to our licensed transfer specialists at concierge@betterment.com. The service is complimentary and the team can review the specifics of your portfolio and provide you with a recommendation on how to best move—or not move—your assets to Betterment. Betterment is not a tax advisor, nor should any information herein be considered tax advice. Please consult a qualified tax professional.