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Our portfolio was developed to withstand market downturns : INVESTMENT

We saw it recently a considerable drop– or in other words, a drawdown – on the stock exchange. In fact, it’s big enough to push US equity markets in the first direction Bear market in over ten years.

While the past decade has been generally great for investors, there have been some bumps along the way – like in 2018, when both the Dow and S&P 500 performed worst in December since 1931.

If you see that your investments are losing value, this can lead to fears or concerns. However, it is important to remember that any long-term investor will suffer short-term losses at some point.

Let’s go out there together

There will always be ups and downs

Even in a good year, your portfolio can suffer losses. Let’s take a look at how Betterment’s diversified 75% equity portfolio would have developed over the past 16 years, assuming our current portfolio.

The graph below shows the largest drawdown of the portfolio within each year in red and the total return for each year in blue. As you can see, although the portfolio ended three times as often with positive returns than the year with negative returns, the portfolio had negative returns at some point every year.

Betterment’s 75% equity portfolio – annual returns and biggest drawdowns

Betterment's 75% equity portfolio - annual returns and biggest drawdowns

Source: Returns data from Xignite. Calculations through improvement. The data range from January 1, 2004 to January 1, 2020. The historical performance figures of the Betterment portfolio are based on a backtest of the ETFs or indices that were recorded by each asset class in a Betterment IRA portfolio from March 2020. All percentage returns include the betterment fee (0.25%) and the cost of the underlying ETFs. All values ​​are nominal. The portfolio that was tested back assumes daily portfolio balancing at market prices. Past performance is not a guide to future results. You can find out more about these calculations here.

Despite an average drawdown of 12% and four years with drawdowns of more than 15%, the portfolio achieved an average annual return of + 8.2%. Even when things seemed worst during the year 2008 financial crisisthe portfolio’s largest drawdown was more extreme than the actual final loss for this year.

We designed our portfolios with a view to drawdowns

Betterment has over 100 portfolios to choose from – but don’t worry, we recommend the right risk for each of your investment objectives. Our recommendations take into account both the time you invest in and the possibility that market losses may occur during this period.

For goals with a longer time horizon, we recommend that you hold a larger portion of your portfolio in stocks. A portfolio with more shares is more likely to suffer losses in the short term, but will also generate greater profits in the long term.

For short-term goals, we recommend a lower share allocation. In this way you can avoid large credit losses before you want to use the saved data.

As the end date of your goal approaches, we recommend that you reduce your risk – we can do the same for you – to reduce the likelihood that your account balance will drop drastically as the market falls.

Below we show the performance of three betterment portfolios at different risk levels: 90% stocks, 50% stocks and 10% stocks. First, let’s look at returns over a shorter period of time, a snapshot since the beginning of the year that ends on March 17, 2020. Stock markets fell significantly in early 2020 and, as expected, the lower risk portfolio (10% equities) had a lower drawdown than the higher risk portfolios during that period.

Return on the improvement portfolio at various risk levels (January 1, 2020 – March 17, 2020)

Returns of the betterment portfolio at different risk levels

Source: Returns data from Xignite. Calculations through improvement. The data range from January 1, 2020 to March 17, 2020. The historical performance figures of the Betterment portfolio are based on a backtest of the ETFs or indices that were recorded by each asset class in a Betterment IRA portfolio from March 2020. All percentage returns include the betterment fee (0.25%) and the cost of the underlying ETFs. All values ​​are nominal. The portfolio that was tested back assumes daily portfolio balancing at market prices. Past performance is not a guide to future results. You can find out more about these calculations here.

Next, let’s look at the returns on our portfolios from early 2004 through March 17, 2020. As expected, the 90% higher risk portfolio grows faster than the 10% equity portfolio. There are also larger and longer periods of negative returns.

Returns of the betterment portfolio at different risk levels (January 1, 2004 – March 17, 2020)

Return on the improvement portfolio at various risk levels.png

Source: Returns data from Xignite. Calculations through improvement. The data range from January 1, 2004 to March 17, 2020. The historical performance figures of the Betterment portfolio are based on a backtest of the ETFs or indices that were recorded by each asset class in a Betterment IRA portfolio from March 2020. All percentage returns include the betterment fee (0.25%) and the cost of the underlying ETFs. All values ​​are nominal. The portfolio that was tested back assumes daily portfolio balancing at market prices. Past performance is not a guide to future results. You can find out more about these calculations here.

If you focus on a short period like early 2020, you might be tempted to believe that 10% equity allocation is a better investment than 50% or 90% portfolios. However, if you consider a longer window of time, it’s clear that the 10% portfolio lacks the potential for higher returns seen in higher risk portfolios.

You can achieve your goals despite market slumps

The road to investment growth can be bumpy, and negative returns inevitably make an investor feel insecure. But staying disciplined and sticking to your plan can pay off.

Consider a hypothetical 30-year-old customer who started a retirement goal in 2004 with an initial balance of $ 10,000 and ongoing monthly automatic deposits of $ 350. Below we show the projected growth of the target along with the actual daily credit the customer would have had over the 16 year period.

By 2008, the retirement goal would have outperformed the projected median result, but due to the financial crisis in 2008, the balance would have decreased by up to 45%.

Retirement goal – projected vs. actual balance

Estimated retirement goal compared to actual balance

Source: Returns data from Xignite. Calculations through improvement. The data range from January 1, 2004 to March 17, 2020. The historical performance figures of the Betterment portfolio are based on a backtest of the ETFs or indices that were recorded by each asset class in a Betterment IRA portfolio from March 2020. All percentage returns include the betterment fee (0.25%) and the cost of the underlying ETFs. All values ​​are nominal. The portfolio that was tested back assumes daily portfolio balancing at market prices. Past performance is not a guide to future results. You can find out more about these calculations here. The target projections are based on the age target of a 30 year old on January 1, 2004 with a starting balance of $ 10,000 and a monthly deposit of $ 350. The monthly deposit is made on the first of every month. The target has a target allocation of 90% for the duration of the period under consideration. The average projected equilibrium is derived from the mean projected result.

This hypothetical investor would probably have been concerned that his portfolio would fall below our average forecast result – and that’s understandable. However, since they continued to make their monthly automatic deposits and the markets finally recovered, the investor would also have found that his balance was exactly back to our forecasts.

The recent market downturn brings the equilibrium below our average forecast earnings, but remains within our forecast return range. We saw from previous market downturns that sticking to an investment plan paid off. Hopefully, this historical context can provide some certainty to investors who are staying on course and waiting for their funds to recover over time.

Our advice: focus on the future

A sudden drop in stock markets, as we are currently experiencing it, usually leads to scary headlines and panic among investors. Although a certain sense of fear is perfectly normal, it is important to remember that a temporary slowdown in the markets does not mean that they will continue to fall forever.

If you need help shrinking, keep in mind that bad markets offer productive opportunities to reap tax losses, postpone your investments with less tax ramifications, or make a one-time deposit to rebalance your portfolio.

We are working hard to bring you closer to achieving your goals, both when the markets go up and when the markets go down.


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