We believe that truly optimal wealth management is always personal.
A holistically optimal investment recommendation includes the investor’s circumstances, goals, personality, and views.
At Betterment, we focus on helping customers achieve higher take-home returns, not just investment returns. Investment returns are the public, pre-cost, pre-tax, pre-behavior investment growth you might read about on a fund’s prospectus. “Take-home” returns make up the growth that individual investors actually achieve once you consider the cost, tax, and behavioral losses they often experience. It’s the additional dollars you actually take home.
Our goal is to add value—real dollars—through improved financial planning, risk management, tax management, and behavioral optimization, in addition to offering an appropriate investment strategy for you.
We’ve long tailored customer portfolios based on goal type, time horizon, risk tolerance, account type, and the use of asset location. Now, we’re further personalizing our advice at the level of the portfolio strategy itself.
In addition to Betterment’s core strategy, we will now offer the following four portfolio strategies to help ensure that your investments are personalized to your preferences:
- The Betterment Portfolio – A globally diversified mix of exchange-traded funds, chosen to help you earn better returns at each level of risk.
- Betterment SRI Portfolio – This strategy maintains the diversified, low-fee approach of the Betterment portfolio while increasing exposure to companies that meet SRI criteria.
- BlackRock Target Income portfolios – A low-risk alternative to the Betterment portfolio, composed entirely of bonds, with different income targets that seeks to provide steady income with low risk.
- Goldman Sachs Smart Beta portfolios – This strategy is for investors seeking to outperform a market-cap strategy, despite potential periods of underperformance.
None of our strategies is “best” when evaluated in a vacuum. We offer these strategies to fit an investor’s goal and personal preferences. In financial planning terms, we understand this fit by measuring individualized investment success in precise ways. We’ll dig into this approach in the next section.
Regardless of which strategy you choose, our financial planning advice can continue to work on your behalf when appropriate.
Real investment success is personal.
A key insight in our approach is respecting the difference between the generic value from using a portfolio strategy and the actual, individual-specific results of doing so.
Hypothetically speaking, any two people who invest the same amount of money in the same strategy, at the same time, should earn the same incremental pre-tax return. However, for each individual investor, personal factors like tax rates affect how much of your return you actually take home. Preferences, like how comfortable you are with risk, affect how much you choose to invest, how committed you are in rough markets, and whether or not you feel your earnings are worthwhile.
When analysts compare two funds’ returns, they’re typically doing surface-level analysis. They usually aren’t factoring in the individualized cost, tax, and behavioral losses that actual investors realize. Pursuing the highest possible gross returns is a zero sum game. Everybody involved is competing for the same value—the raw gross returns—and almost nobody wins because they’re all largely locked into the same calculus. When you focus on gross returns, you’re liable to end up suffering the Winner’s Curse.
In contrast, when we focus on increasing value for individual investors, we can find opportunities that can make all parties involved better off:
- We see the older investor who wants to reduce risk sell some of her stocks to the younger investor who has a longer time frame on an open exchange.
- We find an investor wishing to invest in companies with high social responsibility increase demand for better corporate governance.
- We see the retiree who wants a predictable payout sleep better at night because he holds a portfolio of bonds optimized for income.
- We see an investor who strongly wants to outperform the S&P 500 accept the pain of potential underperformance in the interim.
The more we dig deep into what makes for successful investors, the more we confirm our prerogative to help people grow their personal take-home returns. To help maximize the individualized value you get from investing (and in effect, generate the scenarios above) we’re continually improving Betterment to align with the aspects of life that contribute that value. We can sum up these elements of life in four categories.
1. Personal Circumstances
Personal circumstances include facts such as the size of your household, the tax bracket you fall into, and your state of residence. These cold hard data points are part of the foundation for helping to grow your personal take-home returns because they often present specific opportunities.
For instance, a high-rate tax payer in New York may personally be better off investing in New York municipal bonds due to the state tax exemption. This would not make sense for a low-rate tax payer in Texas.
2. Your Goals
Where do you want to be in the future in regards to your finances? Goals are what you want to accomplish with your money, in a general sense.
Two investors with similar circumstances, personalities, and views but with different objectives should have different strategies. Exactly what we intend to spend our money on can have serious implications for the best account type, investment approach, risk level, and ongoing management.
Goals may include pro-social activities like funding charities or improving environmental stewardship. Dedicating money toward a charity, an impact investment, or a socially responsible fund may be the best way of attempting to achieve a social impact goal.
Thus, it is likely optimal for an investor whose goal is to improve social impact, corporate governance, and disproportionately fund ethically focused companies to invest in an SRI or ESG managed portfolio. In order to achieve their goal, they may need to forego some potential investment returns, but this can comfortably be viewed as “spending” toward their goal.
Your personality is who you are and how you behave. Two individuals with the same circumstances, goals, and views may still differ in terms of their personality, especially when it comes to financial or investing matters. Personality traits such as sensation seeking, emotional intelligence, and composure have all been linked to financial and investing behavior. Studies have shown that genes even play a role—the more closely related two individuals are, the more likely they are to take on similar levels of risk. How much absolute loss can you handle before you freak out? How closely do you follow markets? How hands-on do you want to be with your investments? All of these can inform how we help you choose the right portfolio.
For example, an investor who is anxious about stock market risk, is comforted by predictable, consistent returns, and has high sensitivity to short-term capital losses might be best served by an income optimized portfolio.
Income portfolios seek more predictable returns (in the form of coupons), low correlation to stock market movements, and low daily capital volatility. If an investor is more liable to frequently check his or her portfolio, and is more likely to react adversely to day-to-day losses, a steadier balanced portfolio with less chance of abruptly sharp losses will fit the bill.
Investors with the same circumstances, goals, and personalities may hold different views about future risk and reward. They may want to feel a sense of involvement and individuality in their investing, or follow an investment strategy that resonates more strongly with them personally. At Betterment, we aim to provide portfolio and allocation advice in your best interest, which means a portfolio must resonate with you. If you don’t have specific views, then we use the other aspects of your life to formulate a financial plan. But if you do have a view, such as a belief that factor-based investing is better than a passive market cap-based approach, our advice will help you express it within your investing strategy.
For example, research (Vanguard, Research Affiliates, AQR) has shown that smart beta has historically outperformed market capitalization benchmarks over long holding periods. And many investors may be more comfortable with a strategy that doesn’t rely on market capitalizations to determine its portfolio weights.
But, we must be cautious: expressing views can be behaviorally tricky. The pursuit of higher returns can result in lower take-home returns, even in smart beta funds. If the investor is not truly committed to the strategy, their views may be influenced by recent returns, the news, and what they hear from friends and family. Chasing good performance has a strong tendency to lead to lower returns.
So when Betterment customers want to express views, our job as an advisor is to request commitment to a strategy—to offer a subtle, yet important, push to think carefully. One way we do this is to make clear that a strategy such as an aggressive smart beta portfolio strategy may very well underperform market benchmarks, especially for shorter time periods. The factors driving our selected smart beta strategy underperformed the S&P 500 in five of the 17 years from 2000 to 2016 (when you compare performance at year end). Yearly returns calculations based on S&P 500 and factor index data from Bloomberg for the period January 1999 to December 2016.
Personalized portfolio strategies are just the start.
Betterment’s core principles for investing success include helping every customer develop a personalized plan and building in discipline to one’s investing practice. By offering more personalized portfolio strategies that help solve for the important elements of life above, we’re advancing in our goal to fulfill these principles.
- Now you can access a strategy that seeks predictable, consistent income with our income portfolio strategy. Learn more here.
- You can invest in a portfolio designed to outperform a market-cap strategy in the long term using our smart beta portfolio strategy. Learn more here.
- You can express your environmental, social, and corporate governance values by investing in the Betterment SRI portfolio strategy. Learn more here.
Offering more personalized portfolio strategies is just one improvement. We’ll continue to add more features, services, and investment strategies to deliver on our mission of helping you make the most of your money, so you can live better.