We recently (in fact, make that always!) talked about the importance of keeping emotions out of investing. We had a key example of behavioral bias this month, with a customer who made a large withdrawal from his account.
After noticing this movement, Jon sent the client a note, which he tends to do when he notices any unusual activity. Our clients are 100% in control of their money, but we find it helps to check in when they make big decisions – whether it’s a withdrawal, large deposit or allocation change.
The guy explained that he was disappointed with Betterment’s return and felt he could get a better result with fidelity mutual funds (FBIOX, PSTDX).
We always encourage clients to do what they think is best – but there are several reasons Jon felt this was a rash decision.
As investors, we should be looking for long-term returns. It’s the only way to build up meaningful wealth. By only focusing on short-term results, we miss an important part of the picture. Over the seven months this client had been with Betterment, these funds did not provide a good basis for comparison:
- PSTDX is supposed to compare well to the S&P500 (which is it’s stated goal), but it has not come close since 2008, likely due to poor active management. In fact, Betterment would have significantly outperformed this fund.
- FBIOX is a biotech fund – quite risky compared to the Betterment portfolio. Fine to have as part of your holdings, but we would encourage diversification (look at what happened to tech funds in 2000, when they collapsed relative to the broad market).
- Returns expectations operate over a long time frame (at least 10 years) and any particular year could be above or below that mean. This client had not even been with Betterment for a year, which is not enough time to see meaningful results.
September has been an interesting month as we experienced gains in the market (hooray!).
We noticed over here at Betterment, however, that withdrawals were up in general. There is logic to this. When we experience poor returns, we worry that we’ve made a bad choice, so are happy to withdraw our money once we break even. It’s a classic bias against taking losses – but ultimately, this approach will not serve you in the long-term.
On that note, Betterment released a returns widget last week based on the real Betterment portfolio. It helps you understand how your account would have performed based on past decisions. It’s pretty neat!
How’d the Market Do? That’s Harder To Answer Than You Think
In taxable investing, your after-tax return—the amount you “take home”—is what’s important. Yet far too many investors focus on market performance. Let’s look at the difference.
Take on More Control with Flexible Portfolios
You may be an experienced investor who enjoys Betterment but would like to change aspects of our recommended portfolios. Enter Flexible Portfolios.
Using Investment Goals at Betterment
Goal-based investing. The idea is prized among financial advisors—and our team at Betterment—but to the everyday investor, it’s often difficult to put into practice.
How would you like to get started?
Your first step toward a smarter investing future starts here.
Create a Betterment account
Go ahead and join the smart, modern way to invest.
See what we can do for you
Tell us a bit about yourself, and we'll show you the benefits of investing with us.
Get a free investing checkup
Help us get a sense of your investing approach and see how you could improve.
Transfer a 401(k) or an IRA
Move an existing retirement account into a Betterment IRA.
Download the mobile app
Enjoy the Betterment experience anywhere on the go.