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Market Downturn

How to Earn Returns Through Volatile Times

Markets are moving on news about Greece—however, for appropriately invested goals investors, this is no big deal. Here's what you need to know about volatility and investing.

Articles by Dan Egan

By Dan Egan
Managing Director of Behavioral Finance & Investing, Betterment  |  Published: July 1, 2015

Volatility is part of investing—and the smart thing to do is turn off the news, not worry, and focus on the factors you can control.

Betterment portfolios hold no significant exposure to Greek stocks or debt.

Volatility is part of investing—markets go up and down, and at some times faster than others. This week is no different.

If you have been following the news, you may be aware the market has been oscillating because of Greece’s effective default on a loan from the International Monetary Fund (IMF). The one thing that’s certain is that there will always be uncertainty, and if it’s not related to Greece it will be related to some other issue in the future.

For investors new and old alike, it can be exciting/depressing/scary to listen to economic reports and market news. In fact, it may even make you feel like you should do something. Of course, the smart thing to do is absolutely nothing. Emotions and investing are never a good mix, and moments like this tend to separate the speculators who chase short-term returns (or try to avoid short-term losses) from those who stay on course. As we’ve shown before, the investors who stay the course benefit from growth far more than the fair-weather speculators.

There are several things to know that will help put your mind at ease about current events—and your own Betterment portfolio. First, what’s happening?

What’s happening and what does it mean?

Greece, which is part of the eurozone, has struggled to pay its debts to the IMF and effectively defaulted on a loan due July 2015. That has implications for the euro, which is used by 19 countries, including the powerhouses of Germany and France. Given that Greece has had ongoing trouble paying its bill, it’s unclear whether Greece can or will remain using the euro as its currency—and that kind of uncertainty is affecting all markets in various ways.

In the long-term, whether Greece stays or goes with the eurozone, it doesn’t mean much for American investors. In fact, it might make Greek vacations and goods more affordable. This will be a tough time for Greek citizens, however.

How Does Greece Affect My Betterment Portfolio?

Simply put: By itself it really shouldn’t. Your Betterment portfolio holds extremely limited exposure to Greek stocks and bonds. For example, if you have a portfolio that has a 70% stock allocation, only 0.00018% of it is made up of Greek stocks. While you do have international stock exposure through the VEA ETF in your portfolio, most of that is in countries that are not using the euro, including Japan, Switzerland, and the United Kingdom.

Again, to look at a sample portfolio of 70% stocks, you are also invested in international bonds through the ETF BNDX. Unlike VEA, BNDX is currency hedged, so it is designed to be unaffected by movements in the exchange rates between the euro and the U.S. dollar. Like VEA, the majority of your international bond exposure is in countries outside of the eurozone.

All of this is part of our strategy of providing you a well-diversified portfolio that is designed to not over-expose you to one region’s economic issues. However, in a globally connected world, it also means that uncertainty in one area does create a ripple effect, which is why you might see a temporary dip in your portfolio’s performance. Again, however, keep your calm and ignore short-term returns.

How Does My Betterment Portfolio Weather Volatility?

Just as your portfolio is designed to weather market volatility (whether it’s the current Greek default crisis, Puerto Rico’s municipal bond debt, China’s bear market, or any other international issue), our algorithms are also hard at work doing any necessary repairs.

    • Rebalancing Your Account: Asset allocations most often drift away from their target level during periods of heightened volatility. Betterment is monitoring your portfolio daily and assessing if your allocation has drifted significantly from its target. We will rebalance when your drift exceeds our thresholds, and do so in a tax-efficient way in taxable accounts.
    • Daily Tax Loss Harvesting: Volatility often means more opportunities to tax loss harvest. If you have Tax Loss Harvesting+ enabled, we will monitor your portfolio daily for these opportunities, and harvest losses when appropriate.
    • Keeping You on Track: While market movements can seem like a big deal when they happen, they often don’t mean anything for your long-term performance. But if a drawdown does knock you off track, it’s a good time to check your savings rate and get back on track. You can check if you’re still on track on the Advice tab in your Betterment account.

What Can I Do?

Enjoy summer vacation and don’t monitor your portfolio frequently. While seeing the news reflected in your portfolio is interesting, it also opens you up to making emotional mistakes. Monitoring frequently greatly increases your chance of seeing extremely short-term, noisy losses. It will not help you make better decisions.

To give some context about how important it is to invest based on the term of your goal, we looked at how a global portfolio would have performed through the financial crisis in 2008, the worst period in recent history by far, and which was likely far worse than anything to come from a Greek exit.

Let’s look at historical performance of the Betterment portfolio for three hypothetical investments made in June 2008, just a few months before the big drawdown in September: three different goals with a 1 year, 4 year and 30 year horizon. Betterment’s advice would have put you at 10%, 40% and 90% stocks, respectively. The very short-term goal would have experienced a negative return of -1% at the end of its term, but the others more than recovered (the 30 year still has plenty to go, of course). Note how different the cumulative return is from the drawdown these goals would have experienced along the way. If investors reacted to that drawdown and had withdrawn their funds, they would be worse off today than by staying the course.

This is just one time period, and pretty bad, as far as they go. The point is to illustrate that the way to manage unexpected volatility is not to react emotionally. It’s to stick to the plan and steadily reduce your stock allocation as your goal approaches.

Three Investments Made in June 2008, Just Before Financial Crisis

Investment Time Horizon Return Over Horizon Max Peak-to-Trough Drawdown
Short-Term Goal (10% Stocks) ~ 1 year ¹ -0.9% -4.6%
Safety Net Goal (40% Stocks) 4 years² 20.0% -26.0%
Long-Term Goal (90% Stocks) 30 years³ 52.0% -48.0%

¹Through June 2009; ²Through June 2012; ³Through April 2015 

For more on how we compute backtested historical returns, see here

Finally, keep your auto-deposits going. They help us rebalance by buying your underweight positions, and also could mean you’re purchasing assets at lower prices, which is never a bad thing.

Of course, no one has a crystal ball and knows what will happen in a week, a month, or year from now. And when politics intersect with markets, the results are even more unpredictable than usual. However, we do know that over the long term—meaning many, many moons—returns have been shown to go up.

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