Never put all your eggs in one basket, but how many baskets is too many?
Before I go too far, I would like to state that I am not a professional investor by any means. I just started investing a little over a year ago and since then have been drawn into it. I have read some interesting articles and blogs and stories about investing wisely and investing poorly and this article is just a way to share some of those thoughts.
So many of you have probably heard of automated investing by now, but if you haven't it's the idea of having a financial advisor that is replaced by an algorithm (fancy word for mathematical equation). Sites like Betterment, Wealthfront, FutureAdvisor, SigFig, and many more draw in investors with the promise of hands-off investing for a small fee. Basically you give them your money and they will allocate it to different bonds, funds or ETF’s (diversify) based on their algorithm. You don’t have to know or learn a single fact of investing but still become an investor through these providers.
This is a great tool for people with busy schedules or beginners in the market or for those who simply have no desire to manage their own portfolios. I myself, started with Betterment. I had no idea how to invest wisely and thought that a company like Betterment or FutureAdvisor would definitely achieve better results than I ever could. I found out that they primarily purchase ETF’s and bond funds and allocate different percentages of your investment based on your goal and term and create a completely diversified portfolio. Betterment would split up my contribution into about 10-12 different investments.
To me, this seemed like a no-brainer, to be able to completely automate my investing and have someone more qualified and more knowledgeable in the field manage those funds for me, why not sign up. I also wanted the best of the robo-advisors, so I searched the net and kept finding Betterment to be one of the favorites and chose to create an account with them.
It was later though as I was continuously learning more and more about investing that I questioned the over-diversification of those funds and the return I was getting on my investment. With Betterment I was diversified between Stocks and Bonds, National and International holdings, REIT’s and all manner of different investments. This was great because no one sector of the market could wipe me out, but it also limited my returns. With Betterment I did not see a great return, I was below 4% for the year. For the same year, had I invested in Vanguard’s VTSAX, I would have seen a return of over 12%. This is with a 100% stock allocation on Betterment’s side.
I later saw a tool Betterment had available to backtest their performance from 2004 to 2014. In this 10-year span, if you had a 100% stock allocation in Betterment, you would have achieved an annualized return of about 7.3%. With VTSAX from Vanguard, you would have received an additional 1.2% annually for a total annualized return of 8.55%.
Vanguard’s VTSAX fund is also a diversified fund; it is the entire US Stock Market. Whilst it does not expose you to bonds and international equities, it keeps you diversified so that no one collapse of company or sector of the market destroys your savings.
I did not intend for this article to sound like I’m picking on Betterment, they were just the company I had experience with. I do like their idea but for me they do seem to be over-diversified. I can get better returns by simply buying into diverse mutual funds through Vanguard. I understand the better returns limit my choices to national stocks but if on average they outperform international stocks, why do we need to have exposure to the international side. Again, these are my personal thoughts and as I stated before, I am very new to investing so I may sound extremely idiotic, and if I do, please provide constructive feedback and correct me where I have faltered.