Investing resembles a journey through uncharted waters. You select a portfolio, commit your funds, and patiently await the results. However, the process ofcompound growthcan feel slow. TheRule of 72suggests it typically takes about a decade for any invested dollar to double in value. This lengthy timeline may lead to doubts about whether better returns could be achieved.
It is natural to evaluate your financial decisions. During this process, you might compare your investment’s performance against various benchmarks.
However, this practice can become complicated due to numerous factors such as portfolio composition, associated fees, and tax implications. Understanding how to make sense of these comparisons is crucial when assessing results against competing funds or popular stock indices.
Table of Contents:
Establishing a fair comparison framework
For context, our Core portfolio has generated an average annual return of approximately10% after feessince its inception. These returns are calculated based on the actual performance of Betterment clients, excluding the timing of deposits and withdrawals. This method emphasizes the portfolio’s growth trajectory rather than individual investor behavior.
But how does this 10% figure compare? The answer largely depends on the benchmarks you choose. Major stock indices like theS&P 500andDow Jonesoften dominate financial headlines. However, they fail to provide a complete picture, as they tend to exclude bonds, a critical component of many investment strategies aimed at reducing volatility and preserving capital.
The importance of bonds in your portfolio
Despite their lower yields, incorporating bonds into your investment strategy is essential for effective risk management. Additionally, popular indices often overlook international markets. For instance, the S&P 500 represents less than half of all investable stocks globally. In contrast, our portfolios are designed to be globally diversified, providing broader exposure that can lead to more stable long-term growth.
History indicates that American and international assets alternate in performance every 10 to 15 years. By maintaining a modest allocation to international investments, you position yourself to capitalize on market shifts when they occur. However, it is easy to feel anxious during periods when domestic indices report substantial gains, such as a 20% increase in one year, leading to feelings offear of missing out(FOMO).
Comparative analysis: more than just numbers
While many providers offer globally diversified portfolios, it is important to understand that even portfolios with similar stock-to-bond ratios can yield vastly different outcomes. Factors such as tax optimization, timing of market entry, and management fees all play crucial roles in determining Some investors may gauge a provider’s effectiveness by allocating small amounts across multiple platforms and comparing results after a few months. This approach can be misleading and fail to capture the true essence of investment performance.
Effective benchmarks for portfolio performance
For more accurate comparisons, consider utilizing exchange-traded funds (ETFs) that track broad market indices, such asACWIfor stocks andAGGfor bonds. You can easily measure how your Betterment portfolio performs against these benchmarks by accessing the Performance section of your account. Here, you can view your portfolio’s total return over time and assess your annualized return, which expresses growth on a yearly basis.
Maintaining perspective in your investment journey
While comparison can sometimes steal joy, periodically assessing your investment returns is a wise practice. Doing this once or twice a year is sufficient to maintain an informed overview without succumbing to the pitfalls of constant comparison. Avoid the trap of juxtaposing your globally diversified investments against a narrowly focused portfolio or relying on a small sample size for your comparisons.
To assist you in navigating these complexities, we have integrated relevant comparison tools within the Betterment app, making it easier to evaluate your investments effectively. The gradual nature of compound growth may feel tedious at times, but it also provides ample opportunity to deepen your understanding of investment fundamentals. Ultimately, knowledge and patience are vital components of successful investing.
