This answer was sufficient, but not at all detailed, so I thought it would be useful to elaborate in a blog post as I figure this customer probably isn’t the only one wondering…
First up, it’s difficult to talk in general terms about Betterment’s “performance” because each investor’s performance is going to be different. You may know that the average return of the Betterment portfolio is 7.86% (assuming average customer allocation of 70% stocks and 30% bonds) but there are a number of factors at play in each individual account.
When you started investing; when you made large deposits or withdrawals; your allocation; and how long you’ve been investing, are all factors that will affect your return. Over the long term, you would hope for returns to match the market —
— but here are some reasons you might see a gap on your analysis charts in the short term:
1. The Betterment Portfolio:
The Betterment portfolio is not the same as the S&P. It’s more diversified with 35% international exposure and has a mild small cap and value stock tilt, because of the long-term outperformance of these factors. This is why you’ll see a difference between the S&P’s performance and your account’s performance.
Bonds are a stabilizing influence in your investment. They help to buffer against large losses when the market heads south (and have been known to move up when the market moves down). On the flipside, when the market shoots up you may experience slower growth than the market. That is the whole point of bonds: to lower risk (hurrah!), but that comes with slower growth too (boo!).
When you set your goal, you made a decision on allocation between stocks and bonds. It was based on the time to your goal and your risk tolerance (remember that?). So if you have a higher percentage of bonds in your portfolio, it’s probably because you need the money soonish, and can’t afford losses. Growth might look slower right now, but the important thing is that the money is there when you need it.
The analysis chart displays results from the moment you opened your account by default. Try moving the slider for different time frames. You will notice that the chart starts to look different.
When I look at my Betterment account from September last year, the S&P is doing better than my “rainy day” goal of 70% stocks / 30% bonds, but my rainy day goal is doing better than a benchmark 50% / 50% allocation strategy.
If I move the slider to April of this year, suddenly the S&P is showing the lowest return, my goal is in the middle, and the 50% bonds allocation is doing the best. Makes sense – the markets have suffered lately and bonds provided growth.
4. Long term:
I know I bang on about investing for the long term – but it’s just so important in investing! We’ve become used to instant gratification that we forget that some things can’t be rushed. It’s helpful to look at the analysis tab to understand your account’s performance, but the short-term view won’t provide you with any meaningful data.
Going back to my account – my 70%/30% allocation is an aggressive strategy. I don’t plan on touching that money any time soon, and I have a moderate risk tolerance. So looking at my account’s performance since September last year (a mere 9 months) isn’t relevant to me. It’s like checking on a roast beef 10 minutes in – of course it’s still pink!
There’s value in understanding the workings of your account and we encourage our customers to dig around and look at all the information we provide on their portfolio. Just keep your long-term strategy in mind if the squiggly lines aren’t where you want them to be.
This article was published on May 31, 2012