Betterment Portfolio vs. S&P 500

[goldgrasshopper]

I have an accumulated 10K (@ $100 weekly) in a Betterment Roth IRA with a 90% Stock / 10% Bond mix and I've compared it to the S&P 500 for the past year. I am disappointed here, I was expecting their funds to at least match the index, at least that's how I've also heard people position Betterment. With Betterment, I can only allocate Stock vs Bond mixes, where can I find a similar solution that more closely follows the index?

[Derrian]

Just out of curiosity why are you expecting a 90%/10% betterment portfolio to beat 100% SP 500? The allocations are different in that the SP 590 does not have bonds. Additionally, betterment allocates a portion to international markets which the index does not. You could compare the two using one of vanguards 2060 target date funds which have a similar equity/bond allocations.

If you want to follow the index, why not just invest in the index and add total us bond funds?

[goldgrasshopper]

The disparity gets worse with a 100% Stock mix thru Betterment.

Are there any recommended services similar to Betterment for strictly investing in index funds?

[Heckler]

"Our portfolio includes stock ETFs that efficiently capture the broad U.S. stock market, and international developed and emerging markets. Your money is invested in literally thousands of companies instantly. Exactly how much of your portfolio is made up of which stocks depends on the exact allocation you choose" - Betterment site


So, assuming you have globally diversified holdings through betterment (or anywhere else!), your performance will never match SP500.  When US large cap goes up, Europe may stay flat and Asia go down.

This will give lower returns, but also protect you from major market crashes like 2008 US market - Canada didn't fare so badly that year.

[erutio]

The disparity gets worse with a 100% Stock mix thru Betterment.

Are there any recommended services similar to Betterment for strictly investing in index funds?

Vanguard?

[Heckler]

No, Vanguard is not the answer.

Understanding your Index investments is.

https://www.bogleheads.org/wiki/Getting_started

https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

[goldgrasshopper]

Thanks for feedback, I need to do my homework.

[AdrianC]

This will give lower returns, but also protect you from major market crashes like 2008 US market - Canada didn't fare so badly that year.

We diversify to hopefully give higher returns than a single index over the long term, not lower returns. Perhaps that is what you meant?

The Betterment portfolio is a diversified portfolio of index funds, with rebalancing and tax loss selling.

[Gonzo]

If you want to match the performance of the S&P 500, then buy a suitable index fund.  Are you still going to want to match the performance of the S&P 500 if it underperforms a diversified portfolio for several years?

[Retire-Canada]

The goal of diversification is not higher returns - it's lower volatility. That can lead to a higher withdrawal rate, which is a benefit to aspiring FIRE investors.

[AdrianC]

The goal of diversification is not higher returns - it's lower volatility. That can lead to a higher withdrawal rate, which is a benefit to aspiring FIRE investors.

Looks like you guys need to tell Betterment how they're doing it wrong.

Betterment:
Global diversification, maximum efficiency

Building on decades of Nobel-prize winning research, we aim to achieve the best investor returns possible.

Our portfolio is maximally diversified, and comprises low-cost, liquid, index-tracking, exchange-traded funds, or ETFs. We use tax-efficient algorithms and automate optimal behavior to maximize your ability to grow your money.

[Retire-Canada]

Looks like you guys need to tell Betterment how they're doing it wrong.

It's called marketing. As long as people are giving them their money to manage they are doing it right.

In finance, diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk. A common path towards diversification is to reduce risk or volatility by investing in a variety of assets. If asset prices do not change in perfect synchrony, a diversified portfolio will have less variance than the weighted average variance of its constituent assets, and often less volatility than the least volatile of its constituents.

Diversification is one of two general techniques for reducing investment risk.

Return expectations while diversifying

If the prior expectations of the returns on all assets in the portfolio are identical, the expected return on a diversified portfolio will be identical to that on an undiversified portfolio. Some assets will do better than others; but since one does not know in advance which assets will perform better, this fact cannot be exploited in advance. The return on a diversified portfolio can never exceed that of the top-performing investment, and indeed will always be lower than the highest return (unless all returns are identical). Conversely, the diversified portfolio's return will always be higher than that of the worst-performing investment. So by diversifying, one loses the chance of having invested solely in the single asset that comes out best, but one also avoids having invested solely in the asset that comes out worst. That is the role of diversification: it narrows the range of possible outcomes. Diversification need not either help or hurt expected returns, unless the alternative non-diversified portfolio has a higher expected return.

This ^^^ is a reasonable explanation of how diversification affects returns.

[AdrianC]

Looks like you guys need to tell Betterment how they're doing it wrong.

It's called marketing. As long as people are giving them their money to manage they are doing it right.

What's your asset allocation, if you don't mind me asking?

[Retire-Canada]

What's your asset allocation, if you don't mind me asking?

My AA:

- 100% equities
-- Canada = 30%
-- US = 50%
-- Int'l Developed = 10%
-- Int'l Emerging Markets = 10%

[Dicey]

Nice to see this topic in discussion. Betterment's main "advantage" is tax-loss harvesting. So few people need it enough to make it worth the price they're paying for the "service".

Hint: if your portfolio is small, say sub-$500k, there are probably better and most certainly cheaper options out there. Still in five-figure range? Fuggedaboudit.

[AdrianC]

My AA:

- 100% equities
-- Canada = 30%
-- US = 50%
-- Int'l Developed = 10%
-- Int'l Emerging Markets = 10%

Nice. Global diversification.

We can't back test the Canadian piece in Portfolio Charts. Substituting for US TSM:
80% TSM /10% Dev /10% Em
CAGR 6.5%

100% TSM
CAGR 5.9%

Same standard deviation.

Better returns through diversification, yes?

[PizzaSteve]

If you decide to leave Betterment to self manage your asset allocations with ETFs or index funds, and don't go with Vanguard, take the time to click on a few broker sites first and ask them what incentives they are offering.  You can get up to $2500 in cash or tens of thousands of frequent flyer miles from the typical discount brokers for opening an account, depending on the balance moved.  They don't discriminate against someone who may just buy 100% VTI and let it sit.  It might not hurt to tell. Betterment you are thinking of leaving and see if they will rebate fees for a while.  These guys have become a bit like Cable/Sat TV providers.  You need to threaten leaving or switch sometimes to get the full value from low cost index investing. 

From what I read though, you might be better off with vanguard directly and a simple 3 fund approach.

[Retire-Canada]

Better returns through diversification, yes?

That's faulty logic. Reread the reference text posted above it explains the relationship between diversification/volatility and returns pretty well.

The fact that an average return is better than the return of one component of the total portfolio isn't surprising it's a mathematical certainty barring the special case where all asset classes provide the exact same return. This is the whole point of being diversified - you select a number of asset classes that are not highly correlated so that you get average return that's got lower volatility.

So sure in any diversified portfolio after the fact you can grab one asset class and say the overall portfolio did better than X. However, you'll also be able to grab a different asset class and say the overall portfolio did worse than Y. Your diversified portfolio didn't give you the best possible return of the component asset classes, but it didn't give you the worst either. You got the average and lower volatility assuming you selected assets that are not highly correlated.

Nobody would select a 50 stocks / 50 bonds portfolio because they figured they'd out perform a higher % of stocks in the long term. That said portfolio planning is a statistical analysis process. So you may find there is a sample of data were 50/50 did better than 90/10. That's not evidence that 50/50 offers higher returns in the general case.

[AdrianC]

Better returns through diversification, yes?

That's faulty logic.

No it's not, it's just a real-world illustration of diversification at work.

We are on the same page but talking past each other, I think.

I'm trying to help our OP friend here from making a rookie mistake of comparing his diversified portfolio with a single index over a very short time period, and giving up on diversification.

While we save for retirement we diversify in order to get better long term returns than the worst performing asset. We don't know which one will be the worst performing. Could be the S&P500. If OP switches to the S&P500 and it is the worst performer after 30 years he'll wish he stayed with the diversified portfolio.

The Betterment portfolio was not developed by their marketing department. It is based on decades of research. You might not like the value tilts and all. Fair enough, but it is based on academic research. For the rookie who otherwise would not be diversified the Betterment fee can be worthwhile.

[Retire-Canada]

While we save for retirement we diversify in order to get better long term returns than the worst performing asset.

We agree on this ^^^. The key is that bolded qualification statement on the end.