Benchmarks

The keys to understanding investment performance Understanding investing performance doesn’t have to be a challenge. Here’s how we simplify it for you. In this guide, we look at how we crunch numbers for you and provide two tools to analyze your returns. Plus, see four questions to ask so you understand the overall performance of an investing platform. But first, don’t fall for fallacies: Typical media coverage may skew your perspective. Avoid these two fallacies when looking at your own investing performance. The Dow/S&P 500 Fallacy: Benchmarks like the Dow Jones Industrial Average are popular, but they don’t actually tell you much about the stock market. The Dow only represents 30 US stocks. And the S&P 500 doesn’t give you a full picture of the US market—let alone the global market. The Points Fallacy: It’s common to hear reporters say things like, “Dow loses 500 points.” But it’s far more valuable to look at the percentage change. If the Dow is at 35,000 points, a 500-point drop is less than two percent. That’s not something long-term investors generally need to worry about. Instead of falling for fallacies: To know how you’re performing relative to the market, ask, “Which market?” Many Betterment portfolios are globally-diversified, making the MSCI All Country World Index a better benchmark than the S&P 500 or Dow. How Betterment simplifies looking at performance: We crunch the numbers for you, showing you three aspects of performance. Your combined accounts. We pull together all of your accounts and show their performance as one number. You can also zoom in on the account level. Your total returns. Since changes in the prices of assets in your portfolio are more volatile, and don't tell the full picture, we look at total returns which include price changes and dividends together instead of breaking them out separately. Your long-term timeline. We show your performance over as long a period as possible to help keep you focused on the long term and minimize short-term stress. Two tools to analyze your returns: We don’t encourage frequent monitoring of performance, but when you do want to review performance, we have two tools to help you understand the big picture. Tool #1: Time-weighted return. Time-weighted return is the default return you see on your Betterment accounts. When you invest, you often have deposits made over time. The time-weighted return imagines that all deposits were made on your first day of investing. Why would you want to do this? Because cash coming in and out of your portfolio at different times can distort and complicate your returns due to the nature of the constantly-fluctuating stock market. Also, if you were comparing returns across two different accounts with two different cash flow patterns, you couldn’t be sure if the difference was due to the investments or due to the timing of the cash flows. The time-weighted return can refer to a price-only return or a total return. Price return reflects only the change in the price of the asset, while total return reflects both price and reinvested income. By default, Betterment displays the total return for a more comprehensive view of performance. Tool #2: Internal rate of return. Internal rate of return can be displayed on the performance screen of each account by clicking on the “Show balance details” link. The internal rate of return is affected by each and every instance of cash flow that goes in and out of your portfolio. Cash flows at Betterment can include deposits, withdrawals, dividends, and fees. Internal rate of return does a better job of answering the question, “What are the average returns on the dollars I personally deposited into Betterment?” as opposed to “How well does Betterment design and manage the portfolios I have with them?” Looking beyond returns is important when considering an investing platform or fund. Here are four questions to ask: What are the commissions, trade fees, and assets under management (AUM) fees? How much time and effort are required of you to manage the investments? Does the investing philosophy align with your values? Does the platform offer tax efficiencies such as tax loss harvesting and asset location? (Note: Your stated returns likely won’t take into account any potential value these tools may have added.)

Is the S&P 500 the best investing benchmark? For many investors, the S&P 500 might not be the most accurate benchmark for their portfolio. Let’s find out why. The S&P 500 is an index commonly used by analysts and investors to track the health of the stock market and the general economy. But should you compare your portfolio’s performance to the S&P 500? Here are a few reasons why it may not be the best benchmark. What to remember: The S&P 500 index only includes the leading companies in the United States. If you have a diversified portfolio across global markets and industries, the S&P 500 is not an apples-to-apples comparison. Fast facts: Here are a few things to know about the S&P 500 and the global stock market when considering using an index as a benchmark. The S&P 500 index was launched in 1957 by the credit rating agency Standard and Poor's. The SEC lists six major stock market indexes on their website and there are dozens of indexes used across the world. The S&P 500 index includes 500 leading U.S. companies, representing only about 80% of the U.S. stock market and only about 42% of the global stock market. Additionally, the index is weighted by float-adjusted market capitalization which means that larger companies end up being a larger portion of the index, making it less of an apples-to-apples comparison for the global market. Economists at Goldman Sachs predict that emerging markets will grow at a faster rate than U.S. equities, making the S&P 500 even less of a global index than it is today. What’s the best index to use as a benchmark? It depends. To know which index to compare your portfolio to, you need to ask, “Which markets am I invested in?” Many Betterment portfolios are globally-diversified, making the MSCI All Country World Index (ACWI) a better benchmark than the S&P 500. The ACWI covers 47 global markets in both developed and emerging economies, representing 99% of the investable global equity market. It’s about your goals: It’s also important to remember that benchmark indexes are not designed with your goals in mind. Your personal portfolio at Betterment is meant to meet your goals, not track a general benchmark. As you invest with us, your asset allocation may change to protect your wealth and keep your investments in line with your risk appetite. Next time you see a news article reporting on recent movements of the S&P 500 you can relax knowing that your portfolio is designed for your goals, not the index’s.