Betterment Wealthfront Comments

It is important to remember that the numbers presented do not represent the actual performance of Betterment and WealthFront from 2008 (I’m not sure either existed then). They do represent what would have happened in my Fidelity IRA account if I used the recommended allocations (made in 2014) starting in 2008.

The primary purpose was to determine what kind of results one would have achieved by using ETFs and an allocation scheme over the years. My reactions to the results are pretty positive. They tend to support the underlying changes I’m going to make in my own investing strategy.

The results also provide an opportunity to compare the Betterment and WealthFront recommendations. The WealthFront models performed better than the Betterment ones. The best results were in the more conservative models. They performed better in years when the overall markets were down and not as well when the markets were up. An initial $100,000 in 2008 would be worth $123,079 with the WealthFront allocations and $116,737 with the Betterment allocations. The more aggressive allocations would be worth $113,774 with the WealthFront allocations and $107,232 with the Betterment allocations.

The annual return rates varied quite a bit. That’s not unexpected with the major decline in 2008 followed by some very good rebound years. The average return rates were higher with the more aggressive models as expected, but the variances were lower with the more conservative ones. The more important results were that the average annual return rates ranged from 4.3% to 5.5%. This was in spite of including the terrible 2008 year. If the models had started in 2009, the average annual return rates would all have been double digits with the variances half as much.

The SPY ETF (tracks the S&P 500 index) actually outperformed all. It would have returned an annual average of 10.2% over this period. Interestingly the Vanguard Total Market ETF (VTI) had an annual average return rate of 10.9%. Of course hindsight is a wonderful way of investing.

If one allocates funds over a few different investments, one is guaranteed that some individual components will outperform the conglomerate, while others will underperform. Reallocating periodically will take advantage of this phenomenon and implement a dollar cost averaging approach to one’s investments. I think this is a good thing.

A little more in depth look at the recommended allocations shed a bit of light on Betterment’s underperformance. All four scenarios had the Vanguard Total Market ETF (VTI) as a significant component ranging from 11% to 18%. Also, they all had the Vanguard FTSE Developed Market ETF (VEA) also. But Betterment had it as a more sizable allocation (37.5% in one case) and it performed poorly over the period (3.4% average annual return). I suspect that alone explains the performance difference.

I do not consider these performance results to be a factor in deciding between these two alternatives. The scenarios the models were based on are too far removed from reality to be much more than a global view that these investment alternatives are worth considering. I will be revisiting these again.