I hope you’ve not been too spooked over the last two weeks on trade tariff wars, the Fed’s decision on interest rates, the Jeffrey Epstein saga (oh my – if you haven’t followed this case, see link below), or far right nationalism. Hang in there! Here are a few articles over the last two weeks that are worthy reads:
‘Weaponized’ Currency and Mining Limits: China’s Responses to Trump Take Shape – This is great if you want to learn how China’s currency moves affect our country.
4 Reasons Parents Don’t Discuss Money (and Why They Should) – A quick note to encourage you to talk to your kids about money.
The Fed Just Cut Interest Rates. Here’s What That Means for You. – I’ve got several questions on what interest rates mean for the everyday person, and the article shares the relevancy for you.
Jeff Epstein saga – Sad. Juicy. A reminder of what NOT to do.
Now, many of you have asked about several experiments I’ve run over the last few years and some lessons learned. So, here is a tale of one…
Four years ago, I decided to open a Betterment account. I wanted to test the waters and see how my money would perform in a roboadvisor account. After all, I’m a big fan of ETFs and I wanted to experiment with a platform that touted its expertise as an automated financial advisor. If you need a refresher on ETFs or roboadvisors, check out my dancing videos (make sure you scroll down). You might recall that I did a check-up on my Betterment account one year after I started investing and I was disappointed in the results.
However, I told myself that I would allow my experiment to last over a period of years in order to have a more definitive view in hopes of saving you the time (and money) of your own experimentation. Well, you’ve been asking for an update and I have one:
My Betterment experience has exposed a fundamental truth - I could have done better just investing in the S&P Index. My portfolio only made an annualized return of 3.2% over the last 4 years, compared with the S&P 500’s annualized return of 10.6%.
Look at how my portfolio compares to the performance of the S&P 500 Index and the All World Stock Markets Index.
Now, it’s worth sharing a few observations to help you think about your own strategy:
My Betterment portfoliom, labeled in the above chart at “Build Welath,” was 90% invested in a diversified pool of ETF stocks, both domestic and international, and 10% invested in bonds. The Betterment platform automatically chose the specific ETFs on my behalf while I chose the percentage allocation to stocks and bonds. Clearly, the U.S. market performed much better than its international brethren. In thinking through where you will invest assets that complement a 401k plan, or another retirement plan where you may have the bulk of your assets sit, think about how your total asset diversification. Said another way, please ensure that you consider how each additional investment adds to (or takes away from) how your assets are diversified.
If we factor in the fees associated with the account, my annualized return is chopped from 3.2% to 2.8%. Please, please, please pay attention to the fees associated with your account. Fees cost me $67 – while this amount might seem small, fees do have real implications on your portfolio over time, and the amount you pay in fees definitely correlates directly to the amount of money you have invested.
I chose to only invest $50 per month in my Betterment account because I viewed this amount as a reasonable amount of money to experiment with, and I wouldn’t miss it too much. Over my four years, the amount equates to $2,550. When you do your own experimentation, please ensure that you are comfortable with your level of exposure when you want to try new products and services. Everyone’s level is different – yours may be $50 overall or $10,000. You can always invest more money at a later date if you feel more comfortable. You do not want to be salty about losing large sums of money because then you’ll never experiment again.
So, now that my experiment is over. I will be removing my money from Betterment and putting it into my regaular Schwab brokerage account to invest it in an ETF that only tracks one U.S. market index, like the S&P 500. In doing so, I am slightly increasing my overall asset exposure to the U.S. market, and I am happy with this decision.
Have you had a different or noteworthy experience with a roboadvisor? Please leave a comment below.