Ben Bakkum, CFA, CFP®

How we make market downturns less scary Apr 7, 2025 12:12:58 PM And how it can benefit your investing’s bottom line. The recent round of tariffs and trade wars have roiled markets, offering the latest example of investing’s inherent volatility. The fact that market drops do happen, and happen with some regularity, means that managing them is not only possible but paramount. "It's not about whether you're right or wrong," the investor George Soros once quipped. "But how much money you make when you're right, and how much you lose when you're wrong." Mitigating losses, in other words, matters just as much as maximizing gains. And this is true for two important reasons: The bigger the loss, the more tempted you may be to sell assets and lock in those losses. The bigger the loss, the less fuel for growth you have when the market does rebound. Point A is psychological, while Point B is mathematical, so let’s take each one separately. In the process, we’ll explain how we build our portfolios to not only weather the storm, but soak up as many rays as possible when the sun shines again. Smoothing out your investing journey Imagine you’re given a choice of rides: one’s a hair-raising roller coaster, the other a bike ride through a series of rolling hills. Sure, thrill seekers may choose the first option, but we think most investors would prefer the latter, especially if the ride in question lasts for decades. So to smooth things out, we diversify. Owning a mix of asset types can help soften the blow on your portfolio when any one particular type underperforms. Our Core portfolio, for example, features a blend of asset types like U.S. stocks and global bonds. The chart below shows how those asset types have performed individually since 2018, compared with the blended approach of a 90% stocks, 10% bonds allocation of Core. As you can see, Core avoids the big losses that individual asset classes experience on the regular. That’s one reason why through all the ups and downs of the past 15 years, it’s delivered 9% composite annual time-weighted returns1, and that’s after fees are accounted for. 1As of 12/31/2024, and inception date 9/7/2011. Composite annual time-weighted returns: 12.7% over 1 year, 7.9% over 5 years, and 7.8% over 10 years. Composite performance calculated based on the dollar-weighted average of actual client time-weighted returns for the Core portfolio at 90/10 allocation, net of fees, includes dividend reinvestment, and excludes the impact of cash flows. Past performance not guaranteed, investing involves risk. Core’s exposure to global bonds and international stocks has also helped its cause, given their outperformance relative to U.S. stocks year-to-date amidst the current market volatility of 2025. A smoother ride can take your money farther Downside protection is all the more important when considering the “math of losses.” We’ll be the first to admit it’s hard math to follow, but it boils down to this: as a portfolio’s losses rack up, the gains required to break even grow exponentially. The chart below illustrates this with losses in blue, and the gains required to be made whole in orange. Notice how their relationship is anything but 1-to-1. This speaks to the previously-mentioned Point B: The bigger your losses, the less fuel for growth you have in the future. Investors call this “volatility drag,” and it’s why we carefully weigh the risk of an investment against its expected returns. By sizing them up together, expressed as the Sharpe ratio, we can help assess whether the reward of any particular asset justifies its risk. This matters because building long-term wealth is a marathon, not a race. It pays to pace yourself. And yet, there will still be bumps in the road Because no amount of downside protection will get rid of market volatility altogether. It’s okay to feel worried during drops. But hopefully, with more information on our portfolio construction and automated tools like tax loss harvesting, you can ride out the storm with a little more peace-of-mind. And if you’re looking for even more reassurance, consider upgrading to Betterment Premium and talking with our team of advisors.

U.S. stocks have been hot, so why bother going global? Jan 7, 2025 1:27:19 PM If you’re feeling S&P envy, you’re not alone. Here’s the case for keeping a little international exposure in your investing. At some point in your investing journey, you may look at your returns and wonder if they could be better. And if you're a Betterment customer? Someone who's been invested in one of our globally-diversified portfolios? Be prepared for one question in particular to creep into your mind: "Wait, why isn’t my Core portfolio keeping up with the S&P 500?" The question comes up from time to time — and the answer largely lies in a little thing called home bias. To better understand it, let's first take a quick tour through the magical world of markets. Hello, world. We're here to invest. We talk a lot about the "market" at Betterment, but in reality there is no one, single market. Instead, a bunch of interconnected markets are spread out across the world. And broadly speaking, from our perspective here in the States, you can place them into one of three buckets: The U.S. market International developed markets (Japan, much of Europe, etc.) International emerging markets (Brazil, India, etc.) The U.S. market is big, but it's far from being the only player in the game. There are still trillions of dollars of assets trading hands in international markets. It's why our Core portfolio, built in part on the idea that more diversification equals less risk, roughly mirrors the relative weights of these players. The U.S. market has been on a tear since 2010. But that's not likely to last forever. So let's switch gears to performance, and how to look at recent trends through a more historical lens. Hello, home bias ("U-S-A! U-S-A!”) American exceptionalism is in our blood; we can't help it. It also shows up in our investing by way of home bias, or the tendency for American investors to favor American markets. And is it any surprise right now? The U.S. economy has recovered from the pandemic far faster, and to a much larger extent, than other countries. The S&P 500, though it doesn’t represent the total U.S. stock market, is composed of the biggest American companies, name brands like Apple and Ford, so it's become shorthand for investing's Team America. And while it’s been surging this decade, international markets cleaned up in the 2000s. Historically-speaking, we take turns in the lead every 5 to 10 years. So what’s an investor to do? The cautionary tale of picking stocks applies here, because we don't advise picking markets either. If you're investing for the long term, the odds are good the U.S. market will hit a rough patch at some point. And in that scenario, a globally-hedged portfolio will very likely smooth out your returns from year to year, making your investing journey feel less like a hair-raising roller coaster. That being said, diversification is a sliding scale. There is no pass/fail, no bad or good. And sometimes, good enough is good enough. Imagine you've been saving for retirement the last 40 years. The difference in annualized returns for an all-U.S. stock portfolio vs. a globally-diversified one (e.g. 60% U.S.) over that time span would have been (drumroll, please): 1.15%. And while 1% makes a difference over time (it’s why we harp on taxes and fees so much), if you've been saving steadily over that time, you're likely in good shape either way. So here's yet another chance to breathe easy. Both options—All-American and Mostly-American—have been reliable roads to long-term wealth in the past 40 years. The numbers, while purely hypothetical and educational in nature, drive home that point. They don’t reflect the performance of Betterment customers, but rather two different ways of constructing a portfolio. We offer several globally-diversified portfolios, each one made up mostly of U.S. equities, and two additional ways to keep your investing even closer to home: Invest in our Flexible Portfolio and reallocate your international exposure to U.S. asset classes. Sign up for Betterment Premium and get access to exclusive investing options like a U.S.-only portfolio. Either way, it’ll be home sweet home (bias).

Three burning questions for the market in 2025 Jan 7, 2025 10:09:29 AM Are U.S. stocks overvalued? Will AI pan out? Do markets care who’s in the White House? Investors are starting to feel a healthy dose of cognitive dissonance—that grating feeling when two beliefs you hold don't quite line up. On one hand, the U.S. market is soaring on the back of AI optimism and potential tax cuts. And on the other, companies’ stock prices, relative to their actual earnings, are starting to loosely resemble the run-up to the Dotcom bubble of the late 90s. So which belief will win out in 2025: boom or bust? Let's parse this conflicted outlook by examining three questions in particular: Are U.S. stocks overvalued? Will AI pan out? Do markets care who’s in the White House? Are U.S. stocks overvalued? Around this time last year, we said the booming market at the time might keep going if the Fed lowered interest rates in response to cooling inflation. Interest rates did tick down, and boy, did markets take notice. Through the end of November 2024, a 90% stock Betterment Core portfolio returned roughly 17.6% year-to-date. Such a run, however, begs speculation of yet another reversal, a swing of the pendulum toward less frothy valuations and a drawback in portfolio returns. The S&P 500 currently costs about 25 times more than what those companies are expected to bring in over the next 12 months. For comparison, this average “price-to-earnings” ratio over the last 35 years has been 18x. Taking the perspective of a long-term investor, however, these ratios matter less than you may think. So long as you stay invested for more than a few years, chances are the market as a whole may “grow” into its valuation. Remember 2021 when a group of tech-centric, risky stocks were darlings of the pandemic and shot to the moon? Analysts rightly called foul—those kinds of valuations shouldn’t be sustainable. But within a few years the market was setting fresh all-time highs. An investor who had sold or stayed on the sidelines would've missed out on all that growth. So if you’re tempted to sell “high” right now, remember this: On average, investing at all-time highs hasn’t resulted in lower future returns compared to investing on any given trading day. On the contrary, buying when the market has never been higher leads to slightly higher average returns in the long run. You can never be sure exactly when a growth cycle will end. Will AI pan out? A big driver of this bull market has been optimism surrounding artificial intelligence and the big tech companies powering it, like Amazon, Google, and the computer chip-maker Nvidia. They’ve rallied big-time over the last 12 months, and as a result, they make up an increasingly large share of the U.S. and global stock market. A debate, however, surrounds their outperformance and the hoopla around AI in general. Some analysts argue that a good amount of AI investment won’t ultimately prove fruitful, while others foresee significant boosts to productivity and profits. There’s that grating feeling again—the potential of revolutionary upside sitting right next to worries that it’s mostly hype. In the face of uncertainty, all one can do to lower their risk is hedge their bets and diversify. Our portfolios’ stock allocations take this to heart, offering significant exposure to Big Tech, while also investing in European, Japanese, and emerging markets. It’s these less expensive equities that provide a potential buffer in the event AI’s ambitions fall short. Do markets care who’s in the White House? Right now, markets aren’t sure exactly what to make of President-elect Trump’s proposed economic agenda. Promises of corporate tax cuts, while fueling the recent surge in stocks, could in practice increase inflation. Same goes for tariffs and mass deportation. And rising inflation could in turn pause or reverse the recent trend in interest rate cuts. But until more details emerge, or the policies themselves are actually put into practice, we won’t know their full effect. Instead of sitting back and anxiously waiting, we suggest taking a look at the chart below. It shows that markets tend to rise over time regardless of which party holds the presidency. Maintaining a consistent, diversified investment approach is the best way to navigate political and economic cycles. That, and maybe cooling it a bit on your news consumption. So what now? As always, it’s impossible to know exactly how long each growth cycle will last, so consider erring on the side of staying invested. If you find yourself sitting on too much cash, now might be the time to put it to work in the market. You can invest it as a lump sum, which research shows may offer higher potential returns. Or you can sprinkle it into a portfolio over time. Most importantly, however the market performs in 2025, we suggest zooming out and reminding yourself you’re in it for the long haul.