Investment Philosophy Overview

 

Its not really a “who’s better” conversation because by and large; investing for the long term has been pretty commoditized through technology. Where we believe we have an edge is our overall approach that encourages good investing behavior on individual and personal level and our focus on taxes, which is the real alpha.

 

 

  • Transparent and intuitive interface. Whether a client has an account that is directly managed with us or not, they have the ability to sync up all of their accounts in one place to get a more visible depiction of their current status

 

  • Automated behavioral guardrails – We put strategic guardrails in place to prevent clients from making decisions that could negatively impact their performance.

 

  • Tax impact preview – that shows clients the potential tax impact of withdrawal or allocation changes.

 

  • Tax loss harvesting – A strategy called which is the practice of selling a security that has experienced a loss. By realizing, or “harvesting” a loss, investors are able to offset taxes on both gains and income. The sold security is replaced by a similar one, maintaining an optimal asset allocation and expected returns.
  • Tax Coordinated Portfolios – With a TCP, you have the potential to increase your portfolio value by an estimated 15% over 30 years. Betterment conducted research that shows Tax-Coordinated PortfolioTM (TCP) can boost after-tax returns by an average of 0.48% each year, which approximately amounts to an extra 15% over 30 years. TCP optimizes and automates a strategy called asset location. It starts by placing your assets that will be taxed highly in your IRAs, which have big tax breaks. Then, it places your lower-taxed assets in your taxable accounts. It does this in a way that keeps your overall allocation the same, while boosting your after-tax returns.

Proven Investment Strategies

 

  • We have proven strategies that have been around for decades and use technology to make them more efficient. Our goals are aligned: to increase your long-term returns. Our investment philosophy is backed by decades of research that comes to an important conclusion: Over the long term, a diversified portfolio of low-cost index funds is likely to outperform a high-cost, actively managed portfolio. We have several portfolio options, and we can help choose which is right for you.

 

  • We seek to achieve higher expected take-home returns for clients. Take-home returns are defined as returns net of fees, taxes, and risk-borne and behavioral mistakes.
  • Clients are typically invested in our core globally diversified, index-tracking portfolio. Our investment team does not seek to add any form of market alpha by stock picking, sector weighting, or market timing. Our allocations are strategic, not tactical. We aim to deliver the higher expected risk-adjusted returns by diversifying client portfolios, using low-cost index-tracking ETFs.
  • Our team does seek individual investor alpha – to help clients improve their performance on a risk-adjusted, after-tax, and after-fee basis. To help achieve this, we manage client portfolios on an individual level, systematizing optimal behaviors such as rebalancing, tax loss harvesting, and goal tracking with minimal effort on the client’s’ part.
  • We monitor investor behaviors and educate clients on decisions and consequences in order to help protect clients from choices that may hinder performance.

 

 

Where in the World Are You Invested?

Our portfolio diversification includes holdings across 102 countries. Explore where your money is invested.

 

KEY TAKEAWAYS

BREAKING DOWN Exchange-Traded Fund (ETF)’s

An ETF is a type of fund that owns the underlying assets (shares of stock, bonds, oil futures, gold bars, foreign currency, etc.) and divides ownership of those assets into shares. The actual investment vehicle structure (such as a corporation or investment trust) will vary by country, and within one country there can be multiple structures that co-exist. Shareholders do not directly own or have any direct claim to the underlying investments in the fund; rather they indirectly own these assets.

ETF shareholders are entitled to a proportion of the profits, such as earned interest or dividends paid, and they may get a residual value in case the fund is liquidated. The ownership of the fund can easily be bought, sold or transferred in much the same was as shares of stock, since ETF shares are traded on public stock exchanges.

 

  • Our global portfolio diversifies risk on a number of levels including currency, interest rates, credit risk, monetary policy, and economic growth.
  • One of the fundamentals of good investing is good diversification. But it’s hard to do well.  We have done that work for you—every customer can easily invest in a globally diversified portfolio of up to 12 ETFs.
  • We picked those 12 based on careful consideration. For the bond basket, we needed to balance domestic and international interest rate risk and credit risk; and for our stock basket, we needed an appropriate mix of sectors, countries, and capitalization factors.
  • The result is that our customers can access a portfolio that is invested in 102 countries and in more than 5,000 publicly traded companies across the world—along with exposure to government debt, corporate bonds, securitized debt, and supranational bondswith a range of creditors and interest rate sensitivities.¹

Why go global?

As we mentioned above, it’s hard to diversify well. One problem for do-it-yourself investors is that they tend to home-bias their portfolios. They prefer to invest in companies they are comfortable with—because they know them, or they are close to home. Unfortunately, that means they are less diversified than they should be, and expected performance may suffer.

 

Our portfolio avoids this home bias by reflecting global stock market weights. U.S. stock markets make up about 48% of the world’s investable stock market–the remainder is international developed (43%) and emerging markets (9%). You can see this on the fact sheet for the MSCI All-Country World Index.

By using the world’s markets as its baseline, the portfolio diversifies risk on a number of levels including currency, interest rates, credit risk, monetary policy, and economic growth country by country. Even as economic circumstances may drag down one nation, global diversification decreases the risk that one geographic area alone will drag down your portfolio.

To diversify risk

When we selected our bond basket components, we considered which factors affect bond returns—interest rates risk and credit risk. Then we selected funds that would diversify those risks.

For example, with high-quality domestic U.S. bonds, the risk comes from a potential rise in interest rates, which will cause a fall in value for longer-dated bonds. To diversify away from this specific U.S. interest rate risk,  we picked another bond asset with low correlation—in this case, high-quality international bonds. The particular fund we used, BNDX, hedges out all currency risk; and includes bonds from stable international governments and international issuers, each of which have their own interest rate risk and credit risk.

We also invested a smaller proportion in dollar-denominated emerging market bonds. These tend to have much higher coupons (4.9% at time of publication), but also more volatility in price, as they have a higher exposure to credit risk from international issuers.

To capture growth

Among our various stock basket components, we include international stocks in order to benefit from growth overseas in developed markets, including the U.K., Japan, Germany, France, Australia, and Switzerland. This helps our portfolio maintain similar expected returns as more concentrated domestic portfolios, but with lower risk.

Then with the emerging markets stock component (VWO), we can capture growth in small but expanding markets such as Brazil, India, and China. This further diversifies our portfolio, and should boost expected returns, particularly at higher risk allocations.

Portfolio Diversification by Country

 

Introducing Our Socially Responsible Investing (SRI) Portfolio

We are moving the category forward for socially responsible investors by offering an SRI portfolio that is fully diversified and keeps costs low.

It makes sense that some investors try to align their investments with the values and social ideals that shape their world view. The way you live, the career you choose, and the people you care about align with your personal values; shouldn’t your investments do the same?

Socially responsible investing (SRI) is an approach to investing that reduces exposure to companies that are deemed to have a negative social impact—e.g., companies that profit from poor labor standards or environmental devastation—while increasing exposure to companies that are deemed to have a positive social impact—e.g., companies that foster inclusive workplaces or commit to environmentally sustainable practices.

Today, we’re proud to introduce our first SRI portfolio. Our SRI strategy aims to maintain the diversified, low-fee approach of our core portfolio while increasing investments in companies that meet SRI criteria. The SRI portfolio is available to all clients with no minimum.

To learn more about how and why we’ve built the SRI portfolio, read on to the following sections. Our full approach to our SRI portfolio can be found in the technical white paper here.

Why Are We Developing an SRI Portfolio?

We are dedicated to offering a personalized experience for our clients. This means providing options that help clients align our advice to their personal values.

We decided to develop an SRI portfolio because, currently, there are three major ways that investors attempt to execute an SRI strategy, and none meets an investor’s full needs:

  • Some investors buy SRI mutual funds, settling for unreasonably high fees compared to performance and often losing out on important tax and cost optimization opportunities.
  • Others opt for one of several SRI-specific investment managers whose SRI portfolios may fulfill the investors’ desire for SRI screening but do not always provide proper diversification against risk.
  • Still others try to pick their own basket of SRI investments—a challenging, time-intensive, and inaccessible approach for most everyday investors.

We set out to do better for SRI investors. You should not have to choose between holding an SRI portfolio and following a low-cost, diversified investment strategy with tax optimization in order to make sure your investments reflect your personal values.

 

The SRI portfolio is designed to achieve this balance. It allows socially conscious investors to express that preference in their portfolios without sacrificing the aspects of advice that protect their returns the most: proper diversification, tax optimization, and cost control.

What Is Our Approach to SRI?

While SRI has been around for decades, especially for institutions like churches and labor unions, the SRI funds available to individual investors have really only emerged in the last 20 to 30 years. And most of these SRI products have been actively-managed mutual funds with high fees. Only recently have lower cost options, like ETFs for SRI, emerged in the market.

As we developed our SRI Portfolio, we analyzed all low-cost SRI funds available, searching for products that could replace components of our core strategy without disrupting the diversification or cost of the overall portfolio.

We found that the only asset class (i.e., portfolio component) that we could confidently replace with an SRI alternative today is the U.S. large-capitalization stock allocation. Other asset classes, such as value, small-cap, and international stocks and bonds are not replaced with an SRI alternative in our portfolio either because an acceptable alternative doesn’t yet exist or because the respective fund’s fees or liquidity make for a prohibitively high cost to you, the customer.

While just one asset class is affected in our SRI portfolio compared to the core portfolio, that change has an outsized impact on the social responsibility of your overall portfolio. For one, many investors are most concerned about the social responsibility of the largest U.S. companies in their portfolios, which often set standards for acceptable corporate behavior that other companies try to emulate. In our SRI portfolio, stocks (but not bonds) of companies like Exxon, Chevron, Philip Morris, Wells Fargo, Wal-Mart, and Pfizer may be excluded because they are deemed not to meet social responsibility criteria. Other companies deemed to have strong social responsibility practices, such as Microsoft, Google, Proctor & Gamble, Merck, Coca-Cola, Intel, Cisco, Disney, and IBM may make up a larger portion of the SRI portfolio than they do for core portfolio. In addition, a major reason why there are no acceptable SRI alternatives for other asset classes is that the demand for these products has not been sufficient to encourage fund managers to create them. By electing SRI portfolio, you signal to the investing world that there is a demand for high quality SRI investment options and may help to encourage the development of well-diversified, low-cost SRI funds in a wider variety of asset classes.

If you’re interested in a more quantitative understanding of how the SRI portfolio compares to our core portfolio in terms of social responsibility, you can review the SRI ratings published by MSCI (see below). MSCI’s ratings for the SRI funds used in the SRI portfolio are higher than the ratings for the funds used in the portfolio..

MSCI ESG Quality Scores: 
US Large Cap Equity Holdings in the Portfolio vs. ETF tickers in the SRI Portfolio
Portfolio – US Large Cap DSI KLD
5.039 6.34 8.01

Let’s Make Investing More Socially Responsible

As you review our new SRI portfolio, you might ask yourself, “Is it more important that my portfolio is well-diversified with reasonable costs, or should my money be exclusively invested in SRI funds, regardless of the cost or level of diversification?”

This is an insightful question that gets to the heart of the tradeoffs involved in socially responsible investing today. Currently, most accessible SRI approaches make investors choose between a well-diversified, low-cost portfolio and an inadequately diversified and/or higher cost portfolio comprised of SRI funds.

Diversification and controlled costs are investing fundamentals that all investors—SRI or not—deserve. They’re principles that live at the heart of fiduciary advice. The only reason other SRI solutions settle for higher costs and less diversification is because the industry isn’t challenged to offer something better. We believe we can create a future that does not ask SRI investors to choose.

Today, our SRI portfolio reflects a 42% improvement to social responsibility scores for our U.S. large-cap holdings when compared to our core portfolio. In the future, we will improve our SRI portfolio even further, iterating and adding new SRI funds that satisfy our cost and diversification requirements as they become available.

 

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