Investing often resembles a leap into the unknown. Investors select a portfolio, make a deposit, and then patiently await the fruits of their investment. However, the journey ofcompound growthcan be lengthy. According to theRule of 72, it generally takes around ten years for each dollar invested to double in value. This extended timeline can lead to uncertainty, prompting investors to question whether their choices are optimal.
Such doubts are common, particularly when comparing portfolio performance with others. This task, however, is not straightforward. Various factors influence comparisons, including the specific assets within different portfolios and their associated fees and tax implications. Whether evaluating returns against competitors or popular stock indices, understanding how to make meaningful comparisons is essential.
The fundamentals of portfolio return comparison
Since its inception, our Core portfolio has yielded an average annual return of around10%after deducting fees. This figure represents the actual performance of Betterment clients, focusing solely on the portfolio’s results while excluding the effects of deposit and withdrawal timing.
Defining the metrics
As of December 31, 2026, the portfolio’s composite annual returns were calculated as follows:20.1%over one year,9.3%over five years, and10.1%across a decade. These returns reflecttime-weightedperformance, providing a clearer picture by averaging actual client returns, factoring individend reinvestment, and excluding cash flow variations. It is crucial to remember that past performance does not guarantee future results.
So, is a10% returncommendable? The answer varies based on benchmarks. Major stock indices such as theS&P 500andDow Jones Industrial Averageoften dominate market discussions, but they do not present a complete picture. These indices largely omit bonds, which are essential in many investment strategies due to their capacity to mitigate market fluctuations and safeguard capital.
Understanding diversification and its implications
Popular indices tend to overlook international markets. For instance, the S&P typically encompasses less than half of available global stocks. Our portfolios are designed for global diversification, aiming to smooth the investment experience by spreading risk across various markets. Historical trends illustrate that over time, both American and international assets experience periods of varying performance, oscillating every10 to 15 years. Maintaining some international exposure can enhance potential benefits when market dynamics shift.
Keeping perspective during market fluctuations
It can be challenging to stay committed to a strategy when indices like the S&P yield returns of20%in any given year. Feelings offear of missing out(FOMO) can arise, especially when comparing globally diversified investments to others. To navigate this emotional landscape, it is vital to establish relevant benchmarks and expectations.
Evaluating comparative performance
While many firms offer globally diversified portfolios, not all are created equal. Two portfolios might share a similar ratio of stocks to bonds, yet their paths can diverge significantly due to factors liketax optimization, market timing, and management fees. Some investors gauge performance by allocating small amounts to various providers and observing the results over a few months. However, this approach often yields limited insight.
A more effective strategy involves comparing your portfolio to two specific exchange-traded funds (ETFs) that represent broader market segments: theACWIfor stocks and theAGGfor bonds. Within the Betterment platform, you can easily assess your investments against these benchmarks by navigating to the Performance section of your account.
By default, Betterment displays yourTotal return, indicating You can also view this as anAnnualized return, reflecting the average yearly growth rate commonly advertised in investment opportunities.
Such doubts are common, particularly when comparing portfolio performance with others. This task, however, is not straightforward. Various factors influence comparisons, including the specific assets within different portfolios and their associated fees and tax implications. Whether evaluating returns against competitors or popular stock indices, understanding how to make meaningful comparisons is essential.0
Such doubts are common, particularly when comparing portfolio performance with others. This task, however, is not straightforward. Various factors influence comparisons, including the specific assets within different portfolios and their associated fees and tax implications. Whether evaluating returns against competitors or popular stock indices, understanding how to make meaningful comparisons is essential.1