- KEY TAKEAWAYS
Betterment's portfolio is designed to help customers achieve the optimal expected returns at every level of risk from their investments.
Next, we use a variety of strategies—including automation—to make sure investors keep as much of those returns as possible.
Remember when you got your first paycheck? That was probably the first moment when you saw the sizable difference between what you earned and what you actually took home.
There's a parallel to investing here. Often, there is a gap between the amount your portfolio earns (your investment returns) – and what actually lands into your pocket (your investor returns). But unlike the withholdings from your paycheck, that investment gap is something you can mitigate.
Betterment is designed to help you keep those investor returns that can be (and often are) gobbled up by excessive fees, poor investor behavior (i.e. market timing or undiversified risk), and other inefficiencies like poor tax strategies.
In fact, that's the fundamental reason Betterment exists: To offer you a better, more effective and ultimately more rewarding way to invest.
While this number depends greatly on how you choose to invest elsewhere, we estimate that you can potentially keep an additional 2.66% of your investor returns each year by using Betterment.
First, we start with the basic concept of passive investing, rather than active management.
Innovative research by Rick Ferri, CFA, founder of Portfolio Solutions, and Betterment's Alex Benke, CFP, published in the peer-reviewed Journal of Indexes in January 2014, demonstrated that over a 15-year period, an all index-fund portfolio outperformed a portfolio of active funds 83% of the time. The median annual shortfall of the losing active portfolios was -1.25%, and the average was -1.01%.
Passive investing is growing in popularity, but the vast majority of investments in the U.S. are still in actively managed funds. Recent research from Deutsche Bank showed that active mutual funds had market share of 76.2% in 2013, down from more than 95% in 1998. We select only low-cost index-tracking ETFs, making the Betterment portfolio the right vehicle to capture the average 1.01% advantage found by Ferri and Benke.1
You can view the full white paper here.
Another benefit to investing with Betterment is smart, automated rebalancing – a key ingredient for optimal portfolio performance. When portfolios drift, it usually means you are taking on risk that you had not planned to take and that could hurt your performance over time. Rebalancing puts you back on the efficient frontier. Our sophisticated approach to rebalancing uses your portfolio’s dividends and other deposits to rebalance by buying underweight assets and uses withdrawals to sell overweight assets. If rebalancing in a taxable account requires selling shares, our TaxMin service attempts to minimize the taxes incurred.
One study found that rebalancing increased returns by about 0.40%.2The primary benefit of rebalancing, however, is that it controls risk in your portfolio and can significantly reduce measures of risk – volatility and the expected maximum drawdown.
Lastly, we are doing something that no other online investment manager is doing: We have built specific behavioral guardrails and nudges which help you be a better investor (sometimes despite yourself!)
Over the last decade, much research has been devoted to the role of behavior in investing. It turns out that bad behavior (like trying to time the market or reacting to temporary market news) hurts returns – a lot. We've put a lot of thought into helping you avoid that kind of behavior penalty. On average, a Betterment customer kept an extra 1.25% of returns as compared to an average investor, our analysis showed.
So when you add up the total potential Betterment advantage to you, it's quantifiably better.
1Some other investment companies cite the index-fund advantage as being closer to 2.1%. While this figure has credible research behind it – we consider this data to be dated and a poor comparison for contemporary investing. The study which found the 2.1% gap looked at data from 1979-1998 and compared mutual funds to the Vanguard 500 Index. Our research (view the white paper here) compared an all-index fund portfolio to 5,000 portfolios of randomly selected, comparable actively managed funds over a 16-year period (1997 to 2012).
2Swensen, David, Unconventional Success, 2005, pp. 195-96. The 0.40% was calculated using investment portfolios from TIAA-CREF participant data from year-end 1992 to year-end 2002. The finding that rebalancing improves raw returns is sensitive to the time period studied and the performance of assets during that period. Past performance does not guarantee future results, and the likelihood of investment outcomes are hypothetical in nature.
Betterment is the largest independent robo-advisor, helping people to better manage, protect, and grow their wealth through smarter technology. With more than 250,000 customers and over $9 billion in assets under management, the service offers a globally diversified portfolio of ETFs, designed to help provide you with the best possible expected returns for retirement planning, building wealth, and other savings goals. Betterment also helps customers get on track for a comfortable retirement with RetireGuide™, a retirement planning tool that lets people know how much they should save and if they are investing correctly.
Betterment is a CNBC Disruptor 50 and Webby award winner, and it has been featured in the New York Times, Forbes, and the Wall Street Journal. Betterment helps people to achieve a smarter financial future with minimal effort and for a fraction of the cost of traditional financial services. Learn more here.