July 31, 2019 12:00 PM PT

Betterment Returns: What You Need to Know

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Betterment has low fees and is good for beginners. But what about their returns? Let's take a look at this robo-advisor's performance.

Betterment has made it possible for everyone to invest. If you're thinking about trying it out, you're probably wondering how good it really is. Can robo-advisors really do the job better than humans?

We take a look at the strategies Betterment uses and its returns. I've been using Betterment for over 1.5 years now, so I'll be sharing my personal returns as well.

What Is Betterment?

Betterment is a robo-advisor that automatically invests your money for you. The software selects investments for you based on your goals and risk tolerance. It does all the work in buying/selling securities and monitoring your portfolio.

  • Over $14 billion of assets under management
  • 0.25% annual advisory fee (0.40% for Premium service)
  • $0 minimum deposit
  • Globally diversified portfolio of ETFs
  • Automatic rebalancing and tax efficient strategies
  • SIPC insured

Read our detailed Betterment review here.


  • Newbies who don't know how to invest on their own
  • Investors who don't have a lot of capital
  • Hands-off investors
  • Retirement planners investing long term

Betterment Historical Returns

So how well does Betterment really perform? Betterment is transparent with their historical returns, which you can review here.

Betterment compares their portfolio returns to that of an average investor with a professionally managed portfolio.

Their portfolio performance is broken down by the stock allocation. For example, this is the historical performance for their portfolio with 90% stocks.

Betterment claims that investing in a Betterment portfolio since 2004 would have produced a cumulative return of 190.6% (which is an average annual return of 7.3%). This beats out the average private client investor's portfolio, which had a cumulative return of 109.2% over the same time period.

You can play around with Betterment's historical performance chart and see the returns for different portfolios.

My Personal Returns

Now, I'm going to share with you my personal returns over the past 1.5+ years of using Betterment.

I have a Retirement Goal consisting of 90% stocks and 10% bonds. I make auto-deposits each month and automatically reinvest dividends.

Betterment displays your performance in several ways. The time-weighted returns show the total growth of a dollar from the beginning of your investment period.

To date, my cumulative return is 7.1%. The average return per year is 4.3%.

Time-weighted returns can be used for comparison to market benchmarks. This is how my Betterment returns compare to some benchmarks during the same time period:

Betterment's returns may seem poor compared to the S&P 500—a benchmark many investors use. But the S&P only consists of large U.S. publicly traded companies. Betterment diversifies your portfolio globally so that the risk is spread out. You wouldn't want to have all your portfolio invested in U.S. large cap companies. If U.S. stocks were to go down, your assets would plummet too. Diversification helps you avoids extreme losses and gains.

Betterment also calculates your money-weighted returns. This takes into account how your deposits (and withdrawals) affect performance.

Simple Earnings Percent is simply how much you've earned compared to how much you've deposited. Internal Rate of Return also accounts for the timing and size of deposits/withdrawals and their effects, so Betterment recommends using this figure for the most accurate view of your personal performance.

How Much Do You Lose to Fees?

Betterment charges 0.25% annual management fee for their basic advisory service (or 0.40% for the optional Digital Plan). My total fund fee per year is 0.06%. So that's a total of 0.31% being lost to fees per year.

How much does this come out to over the long run? Let's take these assumptions:

  • An initial deposit of $1,000
  • Monthly deposits of $1,000
  • 30-year investment period
  • 7% annual returns

Over the 30 years, you would lose about 5.89% of your returns (or $69k) to fees.

Betterment's average fund fee is 0.07%–0.15%. At the high end, that's 7.52% of your returns being lost to fees (with the same assumptions as above).

Is it worth it? Of course, with a self-directed brokerage, you'd save tens of thousands on management fees. But you would also have to spend time learning about investing and managing your portfolio.

Betterment automates advanced strategies that would take you a lot of time to do on your own. It has a lot of tax-efficient strategies to help you keep more after-tax returns. In my opinion, Betterment's advisory fee is worth it if you want to know that your portfolio is being correctly managed.

Betterment Strategies to Increase Returns

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Now that we've gone over Betterment's performance, let's talk about the strategies Betterment uses to help increase your returns.

Diversified Portfolio

Betterment uses the Modern Portfolio Theory. You get a fully diversified portfolio of U.S. and international stocks and bonds. Your funds are invested in up to 13 different asset classes. This spreads out the risk should one area fail.

My portfolio's holdings break down as follows:

Diversification is meant to achieve average returns with less risk. It hedges against extreme losses and gains. So you get more certain, average returns.

Betterment's asset classes include:

  • U.S. Total Market
  • U.S. Large Cap
  • U.S. Mid Cap
  • U.S. Small Cap
  • International Developed Market Stocks
  • International Emerging Market Stocks
  • U.S. Short-Term Treasury Bonds
  • U.S. Short-Term Investment-Grade Bonds
  • U.S. Inflation Protected Bonds
  • U.S. Municipal Bonds
  • U.S. High Quality Bonds
  • International Developed Market Bonds
  • International Emerging Market Bonds

Tax Loss Harvesting

This advanced strategy aims to reduce your taxable income. Betterment provides automatic tax loss harvesting to all investors at no extra cost (for Taxable accounts only).

Tax loss harvesting (TLH) works by using investment losses to offset gains. If certain investments are experiencing losses, Betterment will sell them so that you can realize the loss on your tax return (reducing your taxable income). With the proceeds from the sell, Betterment will buy new similar assets to bring your portfolio back into balance.

This graph shows how Tax Loss Harvesting provided an additional 0.77% in returns over a 13-year period.

Note that while TLH helps you save on taxes now, you'll eventually have to pay. New assets are bought whenever securities are sold. Those assets will hopefully grow, and when you eventually withdraw, you'll be taxed on your earnings.

Even though Tax Loss Harvesting is available to all investors at all balances, not everyone will benefit from it. Betterment doesn't recommend enabling this feature if:

  • You're currently in a low income tax bracket and can realize capital gains at 0% tax rate.
  • You expect to be in a higher tax bracket in the future, since TLH defers your taxes to a later date.
  • You plan to withdraw a large portion of your taxable assets in the next 12 months.

Tax Coordination

This strategy is available if you have more than one type of account with Betterment. It increases your after-tax returns by allocating your assets between taxable accounts and retirement accounts.

You need at least 2 of the following account types for your Retirement Goal:

  • Individual Taxable Account
  • Tax-deferred account (Traditional IRA or SEP IRA)
  • Tax-exempt account (Roth IRA)

Your portfolio is made up of stocks and bonds, which are taxed differently. For example, municipal bonds are tax-free, while dividend earnings from stocks are taxed at your regular income tax rate.

Betterment will automatically put your most highly taxed assets into your accounts with tax breaks (like IRAs). Assets with lower taxes will be put into the standard taxable account. Your overall allocation will stay the same and in line to your goals. But it reduces how much tax you'll need to pay.

Betterment's research shows that this strategy can increase your after-tax returns by 0.48% per year, which comes out to an extra 15% over 30 years.

How Betterment Returns Compare

Lastly, let's take a look at how Betterment's returns compare to Wealthfront—another popular robo-advisor. Both companies are transparent with their performance.

Here's Wealthfront's historical performance for a risk score of 9.0. It has an annual return of 8.02% since November 2011.

Betterment's 90% stocks portfolio returned an annual return of 9.3% for the same time period.

Betterment performed a little better, but the two robo-advisors are both top choices. Read more in our detailed comparison.

Bottom Line

Betterment's low advisory fee and $0 minimum makes it one of the best robo-advisors for anyone. With its automated advanced tax-efficient strategies, you can trust that Betterment is working hard to help you keep more after-tax returns.

Just keep in mind that as with any investment, there is risk that you'll lose money too. It's best if you're holding the investments for a longer period of time so you can ride out the ups and downs of the market.

Disclaimer: Opinions expressed here are author's alone. Please support CreditDonkey on our mission to help you make savvy decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

More from CreditDonkey:

Betterment Review

Betterment vs Wealthfront

Best Investment Apps for Beginners


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