The Betterment Experiment – Results

For a little over ten years, I have been contributing to an automated stock investing account, choosing Betterment out of a large and growing field of companies (affectionately referred to as Robo Advisers) that offer similar services.

See Article: Why I Put My Last $100,000 into Betterment

On this page, I’ll keep you up to date with quarterly results, and we’ll also learn more about how Betterment works, and investing in general.

Show Me The Money!

(results as of May 2025 – including dividend reinvestment and after fees)

The blue line in this handy graph shows the results of my real investment at Betterment. I started with $100,000*, and am allowing them to suck in and auto-invest another $1000 from my bank account every month as well as reinvest all dividends, to simulate a pretty typical scenario.

The purple line is my best estimate of my own benefits from Betterment’s tax loss harvesting feature. That depends on your own individual tax situation, but so far I have seen over $121,000 of “tax losses” harvested from this account, which at a marginal tax rate of 40% (state+federal) has added over $48,000 of benefit to my account value which compounds over time (see below), which would bring that line much closer to the top.

The top (grey) line is what would have happened if I had followed the same investment pattern with entirely US stocks through Vanguard’s excellent VTI Exchange-traded fund, and the bottom line is the same scenario if I had bought Vanguard’s equally excellent “Everything Except the US” fund, which goes by the ticker symbol VXUS.

This should help put the 2018, 2020 and 2022-2023 market declines into perspective, which all generated a lot of scary headlines in the financial papers involving the words “plunge” and “worst ever”. This is because newspapers make money off of scaring you, while in fact there is nothing scary at all about a buy-and-hold index fund investment.

New in 2024: Betterment (slightly) Tweaks the Portfolio

Over these first ten years, the Betterment portfolio has fought an interesting battle: US mega cap stocks (like Apple and NVidia) have gone crazy and outperformed both the rest of our economy, and the rest of the world. Meanwhile, bonds have had a slow decade, due to low interest rates. This has handicapped the Betterment allocation relative to a hypothetical helping of purely US stocks. Fighting these macroeconomic trends on the positive side, Betterment’s tax loss harvesting and rebalancing has partially made up some of the difference (see below for details on that harvesting).

In January of 2024, Betterment made a slight change to their default portfolio, going a bit more all-in on the pure US index and reducing the “value tilt”.  Here’s a screenshot of my account’s allocation before and after this change (click for full image):

I also spoke with some of Betterment’s investment management team after this change, who explained some of the other benefits of the new allocation. In short, not only does it bring the portfolio back into line with their original investing goals, but a drop in underlying fund expense ratios also allows for even better potential tax loss harvesting in the future.

Moving back to our regular programming, here’s my account’s performance since the beginning:

A recent screenshot of my “performance” tab. Note that I took out $95k for a charitable donation in late 2020, then replaced exactly the same number of shares when I had the cash in September 2021 (by that time the same shares cost me $135k – another great illustration of why you should always stay invested!)

Why do I think this is a good strategy?

In one word: Simplicity. OK, maybe we could add a second word to that: Efficiency.

After twelve years of writing this blog and hearing from readers of all types, I find that the same question keeps coming up: “What is the single step I can do to get started in investing?”

With no knowledge at all, most people default to keeping their money in a savings account where it will earn them nothing. Others resort to a Wild West financial adviser whose claims and fees exceed his actual financial knowledge. Or speculate in individual stocks and try to time the market. None of these approaches are winners over the long run.

To combat this, I’ve always said “Just buy the Vanguard Total Market Index fund (ticker symbol VTI).” That gives you a near-optimal ownership of hundreds of companies, in single giant, stable, low-fee fund run by an honest company. Over time, this single investment will outperform over 90% of financial advisers and other funds, while letting you sleep well at night.

To improve on VTI, you need to soak up a few more books about investing, general world finance, and asset allocation. And while this has always been my idea of a good time, I have learned that many people have other ideas for their weekends. And even those of us who read these investing books (myself included) often fail to execute the principles properly and consistently.

Betterment combines the (slight) advantages of more advanced investing, with an even simpler experience than you would get with just buying shares of VTI. The worthwhile things they provide, in my opinion, are:

• tax loss harvesting (see below)
• automatic tax-saving coordination between your standard and retirement accounts with Betterment
• really good tools to show you things like, “how much tax would I owe if I sold these shares right now?”, “how much income would my portfolio generate if I retired right now?”, and other useful visualizations
• a very sleek charitable giving system, which makes it easy to donate some of your appreciated shares – giving you a much bigger tax advantage than simply giving cash. More details on this in my 2017 charitable giving article.

In exchange, they charge a fee of 0.25% that is higher than just holding individual index funds, but much lower than standard financial advisors – and yet their investment methods are better than the average advisor, because many of them are commission-based, meaning they make money by steering you towards certain funds).

So in my view, Robo-advisors are a good way to invest for people who want things to run on autopilot.

Hey,  my Betterment account [underperformed or overperformed] the US stock market! Why?

Welcome to your first two lessons on investing:

1. Short-term fluctuations (under 10 years) mean almost nothing.
   When investing for lifetime wealth, you need to think about longer time periods than you’re used to. It doesn’t matter what your stock does right after you buy it. What matters is the average price as you sell it off in increments much later in life – which could be 20-80 years from now. For example: Imagine that I went back in time to October 2014, but instead of getting started with Betterment, I bought $100,000 of stock in the video game company Electronic Arts (EA). As luck would have it, those shares would have closed out 2014 worth about $143,000. Does that mean EA is a better investment than VTI? No, it’s just more volatile. In fact, if you had bought EA in 2003 and walked away until December 2015, you would have earned zero returns for the entire twelve year period. The company has never even paid a dividend. Individual stocks are more volatile than the overall index, and yet collectively their returns equal that of the index. Which is a bad tradeoff in my opinion.
2. Your fancy new Betterment account contains more than just US stocks – over the long run this is a good thing!
   The Vanguard fund VTI tracks the majority of US stocks. A Betterment portfolio tracks the majority of the developed world’s stocks. In recent years, the US S&P 500 index has been on a rampage, although mainly because of crazy overperformance of only the biggest and most heavily weighted stocks (Apple, Microsoft, Amazon, Google, Nvidia, Facebook, etc). And meanwhile, most European companies have seen solid earnings but lower stock price multiples. In other words, European stocks have been on sale. So my Betterment portfolio didn’t rise as quickly as the US market. At other times, the reverse happens: US stocks will fall dramatically, while other markets will fall less or even rise. On top of this, international stocks currently pay a much higher dividend yield. For every $100,000 of VTI you own, you’ll get about $1600 in annual dividends. For an equal amount of VXUS, you will get $2880, or almost twice as much. In other words, international stocks are priced at a much more attractive level than US stocks, which in my book is a time to buy.

How about that Tax Loss Harvesting?

One of the features of Betterment is that their computers spend all day looking at the stock market while you are off doing other things. Occasionally, this leads to an opportunity to profit from volatility in the market. Selling some of your stuff to lock in a tax-deductible loss, while buying very similar stuff through other funds so you remain fully invested.

Since I started this account, I have found that this feature works much better than I had expected. Take a look at this recent snapshot from my account :

Betterment has harvested a surprising $121,004 in deductible “losses” on an account with about $466k of taxable money in it.

The value of this is significant: a $121k deduction has saved me over $48,000 in income taxes already, which I have used to buy still more investments. If this $47,000 goes on to earn a conservative 7% ($3300/year), it is more than paying for the fees Betterment charges me (0.25% of $460,000 is over $1000 per year). Forever. And that’s just the passive income from these early years of tax loss harvesting. Then you also get to keep the principal you saved from the loss harvesting.

In other words, in my opinion Betterment costs less than nothing to use due to TLH alone, even before you factor in the benefits of the automatic reallocation, better interface, or other features.

The bottom line is that you save on taxes today but end up with investments which have a lower cost basis. This means you’ll have more taxable gains when you eventually sell them But for many of us, this is years down the road in retirement when we have ditched the full-time salary and thus are in a lower tax bracket.

How this works in practice: So when I file taxes for each year, I can take the Tax Loss Harvesting numbers from Betterment, and chop that amount off of any capital gains I made elsewhere that year. Sometimes those include profits from selling a rental house, or shares pf regular stocks that I sold to buy a new house, or up to $3000 against ordinary income.  Betterment sends you a tax statement that you simply plug into your IRS tax forms, Turbo Tax, or hand to your accountant.

But this is not useful for everyone. For example:

• If you are using Betterment for an IRA rather than a taxable account, there is no such thing as Tax Loss Harvesting.
• If you are in a low income tax bracket right now, you might not have enough potential tax savings to make it worthwhile
• If your income ends up rising even after retirement (as has happened to me and many other early retirees), TLH might be counterproductive if you still have super-high income in the years that you are cashing out your Betterment account. (talk about Champagne Problems!)
• If you have other investments outside of Betterment with similar or identical funds, you might find the IRS disallows Betterment’s harvested losses. To prevent this, I hold different funds in my other accounts (I use Vanguard’s ESGV index fund instead of VTI – similar but different enough to avoid the risk of a wash sale)

Even with the caveats above, it is a cool enough feature – and profitable for many – that I left it enabled since the beginning.

This experiment remains interesting even after quite a few years, so I look forward to years of profits and analysis to come!

Note: To be clear on the background, I did not get paid to write this or any other post, but Betterment does advertise on this site. See the affiliates policy if you’re curious how I handle blog income.

* I chose an allocation of 90% stocks, 10% bonds, which you do by moving a simple slider control on the Betterment website as you set up your account. 

Useful Resources:

The price and dividend payment history of VXUS and VTI, which I used to generate the spreadsheet to make the graph above:

http://www.nasdaq.com/symbol/vxus/historical

http://www.nasdaq.com/symbol/vti/historical

Portfolio Visualizer, a stock market analysis tool I really like, which I use to generate the comparison graph each time I update this article.