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Betterment Office Hours: April 8, 2020

Watch the video from our first Advice and Investing Office Hours and get answers to questions that customers just like you asked our team.

Articles by Adam Grealish
By Adam Grealish Director of Investing, Betterment Published Apr. 20, 2020
Published Apr. 20, 2020
11 min read

Our first Advice and Investing Office Hours happened on April 8, 2020, and featured our Director of Investing Adam Grealish and our Head of Financial Planning Nick Holeman, CFP®.

They covered topics such as market updates, the CARES Act, and answered questions. Check out the video and read the additional questions that were submitted by our customers.

Markets and the Betterment Portfolio

Q: As a retiree, I have selected a 60% stock 40% bond allocation. During the exceptional period of time that the coronavirus pandemic has occurred, I have noticed that this allocation has not provided as much downside protection that I would have hoped for. Apparently, the correlation between stock and bond prices have been stronger than I would have hoped. Looking forward, aside from a less risky allocation (e.g. 50% stock – 50% bond), what strategies would you recommend that might better protect my portfolio?

A: We generally recommend retirement portfolios in retirement take less than 60% stock risk. We also recommend that you continue decreasing that risk throughout retirement.

The biggest risk in retirement is needing to draw on the account when it is down. You can protect yourself by adding a larger cash buffer or lower risk Safety Net goal.

Another option is our BlackRock Income portfolios which serve a slightly different purpose — targeting dividend yield and will still experience price volatility.

Finally, I would encourage you to use our projections to get an idea of the downside risk the portfolio could experience and make sure you feel comfortable.

Q: Any thoughts onto long term expectations of future gains, especially given analysis from Morningstar and Goldman Sachs. These analyses, while bearish in the short term are relatively changed over the long term. Do you believe these analyses and do you have any plans to change your portfolios or guidance in response? In particular, are you changing your posture with regard to international developed and emerging markets?

A: We don’t take tactical views on future returns, ie: what will returns look like next quarter etc. It’s just too hard to get right consistently as evidence has shown. We estimate long-term return forecasts based on what’s implied by the global market. This process is quite similar to how Goldman (and a number of other large financial institutions) generate long-term return forecasts.

Our portfolio is strategic in its asset allocation, which is to say that we don’t make changes based on short-term events in the market. We do update our portfolio as long-term changes and expected returns shift. This tends to happen more slowly and gradually. Ultimately, our goal is to create a portfolio that is balanced across asset classes to deliver as much diversification benefit as possible as the portfolio grows.

Q: How beneficial is Betterment’s level of diversification in times of volatility like this? Not just diversification in terms of companies but also countries and risk premiums such as size and value.

A: In times of stress, it’s an unfortunate fact that assets tend to become more correlated with each other. Like we saw in the slides, all global equity markets are down by roughly the same amount. The biggest diversifier we have seen in the portfolio — and the one we would expect to see — comes from bonds. As we saw in the slides, investment-grade bonds have held up well during this time and continue to add diversification benefits to the portfolio.

Q: What are your best-case and worst-case scenarios for each portfolio type?

A: The best way to see the likely range of outcomes for any portfolio is to use the “Goal Forecaster” tool inside that app. It will show you the range of likely good, bad and average outcomes for a portfolio.

Betterment Product and Features

Q: Has there been a problem with correcting drift >3%? I’ve had 8+ drift in the last couple of weeks that wouldn’t automatically bring my accounts back in line.

A: Whether or not we automatically rebalance your portfolio at >3% drift by selling overweighted securities and buying underweighted securities can depend on the activity in your account. If rebalancing your portfolio would cause short-term capital gains, we typically wait to rebalance so that you don’t end up paying higher taxes on those short-term gains.

Another way you can help to rebalance your portfolio is through cashflow rebalancing. That means, when you make a deposit or withdrawal, we’ll work to rebalance your portfolio with that new change.

Q: For the portfolios I invested, is there an option to limit international exposure?

A: Yes, you can use our Flexible Portfolio option to change the weighting of each ETF in your portfolio. This feature allows you to lower the percentage of international stocks or bonds and increase the percentage of domestic stocks or bonds.

While the Flexible Portfolio gives you the ability to change the weight of the ETFs already in the Betterment Core portfolio (so you could make domestic ETFs weighted higher, and international lower), you aren’t able to choose any stocks or bonds that are not already included.

Q: I don’t quite understand the tax harvesting concept, can you dig into that deeper?

A: The idea of Tax Loss Harvesting is that if you buy a security — in your Betterment portfolio this would be an ETF — and it goes down in value by a substantial amount, our system will sell that ETF at a loss and buy a very similar ETF to replace it. That way, your portfolio is still well-diversified, but you are now able to use that loss to offset capital gains or ordinary income on your taxes.

There are a lot of different things that go into the decision to harvest losses in your account and TLH may not be useful for everyone. Dan Egan, our Managing Director of Behavioral Finance and Investing, recently did a video about how Tax Loss Harvesting can help, and you can find it on our Guide to Stock Market Volatility.

Q: How can I verify that I have a tax-loss harvesting enabled account?

A:  Just log into your Betterment account from a web browser and go to “Settings” in the bottom-left corner. From there, click “Accounts” at the top and you’ll see a column for TLH that will either say “Turn on” or “Turn off” depending on your current setting.

Q: Is there one to one investment advice that Betterment is offering to customers at this time since investment models aren’t one fit for all?

A: Yes, we have two options to speak with our CFP®s. If you have at least $100,000 invested at Betterment, you can opt into our Premium plan which will give you unlimited access to our team of financial advisors. If not, we have one-time advice packages you can purchase that are specific to a variety of different financial situations.

Q: If the market drops and I want to buy in at that drop, how long would it take for my money to be applied if I buy in through my Betterment general investment account?

A: The short answer is up to 1-2 days, depending on what time of day you initiate a deposit. Dan Egan, our head of Behavioral Finance, explains best in our video: How does Betterment move my money?

Q: Why are deposit times varied? Is it possible to have more accurate deposit dates or quicker deposit dates?

A: When you initiate a deposit to Cash Reserve or Investing, it should take about 1-2 days. When you deposit into Betterment Checking, it can take 4-5 days due to standard deposit hold times (speed that up by initiating the transaction (“pushing”) from your bank to Betterment Checking). Check out our new transaction timelines overview.

Q: Are there any tools that allow Betterment to suggest how to split a lump sum of money across various goals?

A: Not at this time, but this feature is on our radar!

Investing Advice

Q: If I was previously looking to move an existing IRA to a new company, would this be a good time or a bad time to entertain this?

A: We don’t believe that the decision to transfer an IRA to a new company should be driven by current market conditions. Yes, your current balance may have dropped, but the investments you purchase in your new IRA may be at a lower price, too.

The factors that should drive your decision to transfer should be fees, investment options, and portfolio management. See our Guide to Rollovers.

Q: Can you further discuss why now might be a good time to get rid of legacy funds?

A: We speak with many customers who are stuck with investments that no longer make sense for them. Sometimes they have high fees, aren’t diversified, or have inappropriate risk levels for their current needs. However, selling out of them would incur significant capital gains taxes. With the recent market drop, many of these investments can be sold with lower tax consequences, or potentially no capital gains taxes at all.

Q: If you have cash, do you recommend contributing more cash to your goals to reduce drift to reduce taxation?

A: What to do with excess cash is always a common question. Depositing it to goals to reduce drift can be an excellent choice. However, it’s not the only choice. We recommend thinking of all the potential things you could use the cash for, and then ranking them. For example, if you don’t have an emergency fund, or have credit card debt, those could be better uses for your excess cash.

Q: Given current market conditions are there benefits/is it wise to have both a 60/40 allocation fund as well as traditional ira/retirement (90/10) allocation fund?

A: Your portfolio risk should always align with your goals and time horizon. If you are saving and investing for retirement and have a 20+ year time horizon, we recommend 90% stocks, 10% bonds. While markets are volatile right now, we still believe this is the appropriate allocation for a long term goal. Plus, any money you invest now for retirement can be viewed as you “buying on a discount” since the price of these investments has dropped.

If you are now saving for a new goal with a shorter time horizon, you might consider investing in a portfolio with a lower risk level. We will recommend an allocation based on the time horizon you set for a new goal.

Q: What do we do with 401k from an employer that laid us off during this crisis?

A: I love that you are being proactive during this tough time. If you don’t need the money right now, then try not to withdraw anything from your 401(k) unless it’s a near last resort. We also don’t recommend making any changes to your portfolio based on short-term market drops. Staying the course and sticking with your long-term approach is usually best.

You could consider rolling it over to an IRA that may have lower costs and less administrative burden if you do need to execute a coronavirus-related distribution.

Q: When creating a funding goal (for example house downpayment or safety net), when I withdraw those funds wouldn’t that trigger a tax penalty since the funds are tied up in stocks/bonds? Trying to figure out if it would be more advantageous to keep saving for those goals in a high yield credit union account to avoid paying the additional taxes for withdrawal before 60+?

A: In a taxable account, when you sell out of a bond or stock portfolio, you do incur taxes on dividends and capital gains. Our Tax Impact Preview can help you get an idea of what the tax impact of a withdrawal would be before you submit a request. But you also incur taxes on interest in that high yield credit union account. There are no early withdrawal penalties in taxable accounts that typically apply to retirement accounts like an IRA or 401(k).

Q: My rebalancing is set to appropriately aggressive. I am 34. should I keep it that way, or set it up for auto rebalancing on all 3 accounts? Roth IRA, Major purchase, and safety net. Also, should I continue contributing to these monthly as of right now?

A: To make sure your risk tolerance is in line with this “appropriately aggressive” classification, I would take a look at the risk statistics associated with your portfolios (click into your goal, then “Holdings” then “Adjust” in blue, below where it says your % of stocks). Obviously no one wants their portfolio to lose value, but if you’re comfortable with the downside one-year return statistic on this page, then I think it makes sense to keep your allocation the way it is. If not, you can certainly change your allocation to one that is more in line with the risk statistics you’re comfortable with.

For your second question, we’ve done a write-up on recent market volatility. Also, we’ve created some short, useful videos on this subject which you can find on our Guide to Stock Market Volatility. I would certainly continue to save in your Safety Net and Retirement goals at this point. And if you can still contribute monthly from a cash flow perspective, it’s a good strategy to do so for your major purchase goal, too. Again, just make sure you’re comfortable with the risk statistics we’re displaying.

Q: We have extra money now from the stimulus check and our tax refund. Does it make sense to invest that now in a non-retirement account like a joint taxable instead of a normal savings account?

A: It’s great that you are trying to be proactive with your stimulus check and tax refund. We have a full write-up about this. But in general, if you already have enough cash to pay the bills and have a fully-funded emergency fund, then investing it probably makes more sense in the long-term. Historically stocks and bonds have outperformed cash.

Taxes, Stimulus, and Federal Reserve Actions

Q: Does funding SEP IRA have to happen at the same time as filing taxes? (given the new deadline)

A: SEP contributions must be made by the filing deadline which has now been extended until July 15th. If you choose to file for another extension to October 15th, you can defer your SEP contribution until Oct 15th. You can file before you make your SEP contribution as long as you actually make the contribution by your applicable July 15th/Oct 15th deadline.

Q: If I am planning on investing the stimulus check, how do you recommend it be invested?

A: We recommend you address financial needs in this order, based on your need:

Chart showing that you should cover your checking account expenses first, then make minimum debt payments, then pay off high interest debt, then build an emergency fund, and then lastly, save for retirement

We also outline advice for using your stimulus check in this article.

Q: Can you explain the stimulus amount payments?

A: Check out the chart below. If you file taxes as Single, and make <$100k per year in income (AGI), you’ll receive a stimulus check of $1,200. If you file as Head of Household, have 1 child and make <$150k, that check jumps to $1,800 (+$500 per additional dependent). Married Filing Joint (0 children) making <$200k collectively, receive $2,400. Married Filing Joint with 1 child receives $2,900 (+500 per additional dependent). These checks reduce in size for higher incomes. We’ve written more about this, or you can check out the IRS website.

Graph showing how much the check will be for each filing status and # of dependents

Q: If you are self-employed, will the stimulus check increase what you owe in taxes in 2021? For the self-employed entitled to the $10k grant, when are those checks scheduled to be sent and how much money is available?

A: Economic impact payments of up to $1,200 for each individual ($2,400 for a joint tax return) plus $500 for each eligible child are considered to be nontaxable income. This is true for employees as well as self-employed individuals. The initial payment in the next couple of weeks is based on your filing status, income, and dependents as you filed your 2019 tax return ( 2018 tax return if you have not filed 2019 yet). When filing your 2020 tax return in 2021, you will have another opportunity to increase your payment if you did not receive the maximum amount. However, there is no risk of having to repay any of the economic impact payments back to the IRS as part of your 2020 tax return.

For the information on the $10k loan advance opportunity, check out the U.S. Small Business Administration’s website.

Q: Is it possible that the mortgage rates will go much lower than the current rate level? Is it a good time to refi?

A: Of course, it’s hard to predict where mortgage rates will go. Generally, mortgage rates are pretty low compared to history. It’s hard to say if they will go lower in the future. Refinancing really comes down to lowering the all-in cost of your mortgage. A lower rate is one component. You also need to consider the costs of refinancing — including title insurance and an appraisal — and how long you plan to stay in the house to reap the benefit of the lower rate.

Q: My employer provides 401k and can’t do in-service distribution. Will an IRA apply to me?

A: I am sorry to hear that your employer will not allow for an in-service distribution. I believe you may be referring to the new rules for taking a CRD (corona related distribution) from your 401(k). The same CRD requirements also apply to an IRA. You can take up to $100,000 from your IRA without being subject to the normal 10% early distribution penalty. Although the taxable portion of the CRD will be treated as regular income, it can be spread over three years for tax purposes. The distribution can also be repaid within three years to avoid taxation.

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The information provided by Betterment is educational only and is not tax advice.

Contributing authors

Nick Holeman, CFP®
Head of Financial Planning, Betterment
This article is part of
Original content by Betterment

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