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How Betterment Anticipates Market Volatility—So You Don’t Have To

How Betterment Anticipates Market Volatility—So You Don’t Have To It’s difficult to endure volatile markets when it affects your investment portfolio. Betterment has automated features in place to help address volatile markets when they occur. If you’ve ever been told to “sit tight and stay the course” when the market is dropping and your investment account is worth less than it was just moments ago, you’re not alone. Financial advisors, including Betterment, love this mantra and repeat it anytime there’s a market downturn—which every investor should be prepared to navigate at some point. But being told to do nothing when your account balance is dropping can feel like an inadequate response. And, unless your investment strategy has been designed from the ground up to anticipate and react to market volatility, you may be right. The reason Betterment advises our customers not to react or adjust their investment strategy during a market downturn is because our entire platform was designed with inevitable downturns of the market in mind. This article will cover how our investment portfolio creation process, ongoing automated account management system, and dynamic advice are designed with market fluctuations in mind, so that you can “sit tight and stay the course” and feel confident it’s actually the right thing to do. Our portfolios are constructed with market volatility in mind Betterment’s portfolio construction process strives to design a portfolio strategy that is diversified, increases value by managing costs, and enables good tax management. Ultimately, our goal is to help you build wealth. This means: Our intent is to create portfolios designed to have a better chance of making money and a lower chance of losing it. At a baseline, our allocation recommendations are based on various assumptions, including a range of possible outcomes, in which we give slightly more weight to potential negative ones, by building in a margin of safety—otherwise known as ‘downside risk’ or uncertainty optimization. So, even before you’ve invested your first dollar, your portfolio has already been designed to account for the market fluctuations you will inevitably experience throughout the course of your investment journey, including situations like the big downturns like 2008 and the more recent market crash in 2020. Furthermore, our risk recommendations consider the amount of time you’ll be invested. For goals with a longer time horizon, we advise that you hold a larger portion of your portfolio in stocks. A portfolio with greater holdings in stocks is more likely to experience losses in the short-term, but is also more likely to generate greater long-term gains. For shorter-term goals, we recommended a lower stock allocation. This helps to avoid large drops in your balance right before you plan to withdraw and use what you’ve saved. All you have to do is: Tell us what you are saving for (your investing goal). Let us know how long you plan to be invested (your time horizon). We take care of the rest. By using your personal assumptions, in conjunction with our general downside risk framework, we’re able to recommend a globally diversified portfolio of stock and bond ETFs that has an initial risk level recommended just for you. Our automated portfolio management features keep you on track during downturns How we construct our globally diversified portfolios and the risk framework we apply to each investor’s specific allocation recommendation is just the starting point. It’s our ongoing and automated portfolio management that provides an additional value-add, especially in times of heightened volatility. Our automated features like allocation adjustments over time, portfolio rebalancing, tax loss harvesting for those who select it, and updated advice when you need it, can help keep your investing goals on track during a downturn. Automated Allocation Adjustments When we ask you to tell us about your investment objective, including how long you plan to be invested for, it helps us choose the appropriate asset allocation for you throughout the course of your investment time horizon, not just in the beginning. For most Betterment goals, we usually recommend that you scale down your risk as your goal’s end date gets closer, which helps to reduce the chance that your balance will drastically fall if the market drops. This is an especially important consideration for an investor who plans to use their funds in the near term. We call this recommendation “auto-adjust” or a goal’s “glidepath”—a gradual reduction of stocks in favor of bonds. And instead of leaving this responsibility up to you, you can opt into our auto-adjust feature in eligible portfolio selections, which means our system monitors your account and adjusts your portfolio’s allocation automatically over time. Automated Portfolio Rebalancing Normal stock market fluctuations will likely cause your actual allocation to drift away from your portfolio target, which is calculated to be the optimal level of risk you should be taking on. We call this process portfolio drift, and though a small amount of drift is perfectly normal—and a mathematical certainty—a large amount of drift could expose your portfolio to unwanted risks. When the market fluctuates, not all of your investments are shifting to the same degree. For example, stocks are generally more volatile than bonds. As you can imagine, a period of sustained volatility could mean a significant shift in how your portfolio is actually allocated, relative to where it should be. Left unchecked, this drift could be harmful to your portfolio’s performance, which is why at Betterment our portfolio management system provides ongoing monitoring of your portfolio in order to determine whether rebalancing is needed once your account balance is at or past the minimum threshold. While we generally use any cash inflows, like deposits or dividends, and outflows, like withdrawals, to help rebalance your portfolio organically over time, when a significant market drop occurs, there might be a need to sell investments that have appreciated and buy investments that have depreciated, in order to adjust your portfolio back to its optimal allocation. Consider an instance where the value of your stock investments has dropped significantly and now your bond investments are overweighted relative to your stocks. Our rebalancing system might be triggered to correct the drift. Not only would our automated rebalancing seek to ensure your portfolio’s allocation is realigned relative to its target, it would also mean buying stocks at their currently cheaper price point, setting you up nicely for any market recovery. Furthermore, if effective rebalancing does require selling investments in a taxable account, the specific shares to be sold are selected tax-efficiently. This is designed with the aim that no short-term gains are realized. We never want the tax impact of maintaining proper diversification to counter the benefits of applying our risk framework. Automated Tax Loss Harvesting Tax Loss Harvesting is a feature that may benefit you most when the market is volatile. After all, if there aren’t any losses in your account, we can’t harvest them. Our automated TLH software monitors your account for opportunities to effectively harvest tax losses that can be used to reduce capital gains that you have realized through other investments in the same tax year. This can potentially reduce your tax bill, thereby increasing your total returns, especially if you have a lot of short-term capital gains, which are taxed at a higher rate than long-term capital gains. And, if you’ve harvested more losses than you have in realized capital gains, you can use up to an additional $3,000 in losses to reduce your taxable income. Any unused losses from the current tax year can be carried over indefinitely and used in subsequent years. Keep in mind, however, that everyone’s tax situation is different—and Tax Loss Harvesting+ may not be suitable for yours. In general, we don’t recommend it if: Your future tax bracket will be higher than your current tax bracket. You can currently realize capital gains at a 0% tax rate. You’re planning to withdraw a large portion of your taxable assets in the next 12 months. You risk causing wash sales due to having substantially identical investments elsewhere. Our dynamic financial advice works for you during market fluctuations Much like the automated features described in the section above, the advice we give our customers is dynamic and updates automatically based on many factors, including market performance. Just as your car’s GPS recommends the best route to take to reach your destination, Betterment recommends a tailored path toward reaching your financial goals. And just as the GPS updates its recommended route based on road conditions and accidents, we update our advice based on various circumstances, such as a market downturn. In addition to recommending a starting risk level tied to your specific objective, we also estimate how much you need to save. In the case of a really big market drop, we might advise you to do something about it, such as make a single lump-sum deposit, which will help keep your portfolio on track. Recognizing that coming up with sizable excess cash can be tough to do, we’ll also suggest a recurring monthly deposit number that may be more realistic. And, if it’s early on in a long-term goal, it’s unlikely you’ll need to change anything significantly, because you still have a lot of time on your side. Conclusion The path to investment growth can be bumpy, and negative or lower than expected returns are bound to make an investor feel uncertain. But, staying disciplined and sticking to your plan can pay off. Betterment’s investing advice has been purpose-built with all the worst and the best the market may throw at us in mind by focusing on three key elements: intentional portfolio construction, automated portfolio features, and advice that reflects market conditions. Feel confident that Betterment’s hard at work, for you, so that you can truly sit tight and stay the course.

Asset Location Methodology

Socially Responsible Investing Portfolios Methodology

Goldman Sachs Smart Beta Portfolio Methodology

Tax Impact Using Our Cost Basis Accounting Method

Tax Impact Using Our Cost Basis Accounting Method Selecting tax lots efficiently can address and reduce the tax impact of your investments. Selecting tax lots efficiently can address and reduce the tax impact of your investments. When choosing which tax lots of a security to sell, our method factors in both cost basis as well as duration held. When you make a withdrawal for a certain dollar amount from an investment account, your broker converts that amount into shares, and sells that number of shares. Assuming you are not liquidating your entire portfolio, there's a choice to be made as to which of the available shares are sold. Every broker has a default method for choosing those shares, and that method can have massive implications for how the sale is taxed. Betterment's default method seeks to reduce your tax impact when you need to sell shares. Basis reporting 101 The way investment cost basis is reported to the IRS was changed as a result of legislation that followed the financial crisis in 2008. In the simplest terms, your cost basis is what you paid for a security. It’s a key attribute of a “tax lot”—a new one of which is created every time you buy into a security. For example, if you buy $450 of Vanguard Total Stock Market ETF (VTI), and it’s trading at $100, your purchase is recorded as a tax lot of 4.5 shares, with a cost basis of $450 (along with date of purchase.) The cost basis is then used to determine how much gain you’ve realized when you sell a security, and the date is used to determine whether that gain is short or long term. However, there is more than one way to report cost basis, and it’s worthwhile for the individual investor to know what method your broker is using—as it will impact your taxes. Brokers report your cost basis on Form 1099-B, which Betterment makes available electronically to customers each tax season. Tax outcomes through advanced accounting When you buy the same security at different prices over a period of time, and then choose to sell some (but not all) of your position, your tax result will depend on which of the shares in your possession you are deemed to be selling. The default method stipulated by the IRS and typically used by brokers is FIFO (“first in, first out”). With this method, the oldest shares are always sold first. This method is the easiest for brokers to manage, since it allows them to go through your transactions at the end of the year and only then make determinations on which shares you sold (which they must then report to the IRS.) FIFO may get somewhat better results than picking lots at random because it avoids triggering short-term gains if you hold a sufficient number of older shares. As long as shares held for more than 12 months are available, those will be sold first. Since short-term tax rates are typically higher than long-term rates, this method can avoid the worst tax outcomes. However, FIFO's weakness is that it completely ignores whether selling a particular lot will generate a gain or loss. In fact, it's likely to inadvertently favor gains over losses; the longer you've held a share, the more likely it's up overall from when you bought it, whereas a recent purchase might be down from a temporary market dip. Fortunately, the IRS allows brokers to offer investors a different default method in place of FIFO, which selects specific shares by applying a set of rules to whatever lots are available whenever they sell. While Betterment was initially built to use FIFO as the default method, we’ve upgraded our algorithms to support a more sophisticated method of basis reporting, which aims to result in better tax treatment for securities sales in the majority of circumstances. Most importantly, we’ve structured it to replace FIFO as the new default—Betterment customers don’t need to do a thing to benefit from it. Betterment’s TaxMin method When a sale is initiated in a taxable account for part of a particular position, a choice needs to be made about which specific tax lots of that holding will be sold. Our algorithms select which specific tax lots to sell, following a set of rules which we call TaxMin. This method is more granular in its approach, and will aim to improve the tax impact for most transactions, as compared to FIFO. How does the TaxMin method work? Realizing taxable losses instead of gains and allowing short-term gains to mature into long-term gains (which are generally taxed at a lower rate) generally results in a lower tax liability in the long run. Accordingly, TaxMin also considers the cost basis of the lot, with the goal of realizing losses before any gains, regardless of when the shares were bought. Lots are evaluated to be sold in the following order: Short-term losses Long-term losses Long-term gains Short-term gains Generally, we sell shares in a way that is intended to prioritize generating short-term capital losses, then long-term capital losses, followed by long-term capital gains and then lastly, short-term capital gains. The algorithm looks through each category before moving to the next, but within each category, lots with the highest cost basis are targeted first. In the case of a gain, the higher the basis, the smaller the gain, which results in a lower tax burden. In the case of a loss, the opposite is true: the higher the basis, the bigger the loss (which can be beneficial, since losses can be used to offset gains). 1 A simple example If you owned the following lots of the same security, one share each, and wanted to sell one share on July 1, 2021 at the price of $105 per share, you would realize $10 of long term capital gains if you used FIFO. With TaxMin, the same trade would instead realize a $16 short term loss. If you had to sell two shares, FIFO would get you a net $5 long term gain, while TaxMin would result in a $31 short term loss. To be clear, you pay taxes on gains, while losses can help reduce your bill. Purchase Price ($) Purchase Date Gain or Loss ($) FIFO Selling order TaxMin Selling order $95 1/1/20 +10 1 4 $110 6/1/20 -5 2 3 $120 1/1/21 -15 3 2 $100 2/1/21 +5 4 5 $121 3/1/21 -16 5 1 What can you expect? TaxMin automatically works to reduce the tax impact of your investment transactions in a variety of circumstances. Depending on the transaction, the tax-efficiency of various tax-lot selection approaches may vary based on the individual’s specific circumstances (including, but not limited to, tax bracket and presence of other gains or losses.) Note that Betterment is not a tax advisor and your actual tax outcome will depend on your specific tax circumstances—consult a tax advisor for licensed advice specific to your financial situation. Footnote 1 Note that when a customer makes a change resulting in the sale of the entirety of a particular holding in a taxable account (such as a full withdrawal or certain portfolio strategy changes), tax minimization may not apply because all lots will be sold in the transaction.

Cash Reserve Has A Variable APY: What That Means For You

Cash Reserve Has A Variable APY: What That Means For You Interest rates change over time, but at Betterment, we are always working hard to give you competitive rates so you can make the most of your money. Note: mention of Cash Reserve is inclusive of money held in cash goals. Our objectives are aligned with yours: we want to grow your money. Cash Reserve is an account that is different from the savings accounts that you might find at traditional banks. We’re not tied to one specific bank, so we have the opportunity to obtain attractive rates in the marketplace. We use our size and scale to access a network of program banks, and then we use our technology and efficiency to pass rates directly on to you. Is that rate guaranteed? No, it’s variable, and that’s by design. The Federal Funds Rate influences interest rates across all banks. As rates change, so will the Cash Reserve rate. You can feel confident that Betterment is always working to offer you competitive interest rates, no matter what the current rate environment may be. See what the current variable interest rate is for Cash Reserve. Similar to how we select the ETFs in each asset class for your portfolio, we work with a number of program banks to provide you competitive rates. What causes interest rates to change? No matter where you bank, the prevailing interest rate environment will have an impact on your interest rate. The amount banks are willing to pay on deposits is heavily influenced by the Federal Reserve, which sets the rate at which banks can loan money to each other. This is known as the Federal Funds Rate. It’s the rising tide that raises all rates, and the receding tide that can also bring them all down. The Federal Reserve sets a target range for the Federal Funds Rate, rather than aiming for a specific number. Because of this, the Federal Funds Rate can change by a small amount from day to day. However, larger changes to the Federal Funds Rate can occur when the Federal Reserve changes its target range or when the Federal Reserve changes policies. The interest rate you receive on Cash Reserve typically will change as a result of these more significant shifts in the Federal Funds Rate. What will future rates look like? If the Federal Reserve lowers its target range, the interest rate on Cash Reserve will generally change by a similar amount. You can expect this to impact rates at other banks as well.

How Tax Impact Preview Works

How Tax Impact Preview Works Betterment continues to make investing more transparent and tax-efficient, and empowers you to make smarter financial decisions. Selling securities has tax implications. Typically, these announce themselves the following year, when you get your tax statement. Betterment’s Tax Impact Preview feature provides a real-time tax estimate for a withdrawal or allocation change before you confirm the transaction. Tax Impact Preview potentially lowers your tax bill by showing you key information to make an informed decision. Tax Impact Preview is available to all Betterment customers at no additional cost. How It Works When you initiate a sale of securities (a withdrawal or allocation change), our algorithms first determine which ETFs to sell (rebalancing you in the process, by first selling the overweight components of your portfolio). Within each ETF, our lot selection algorithm, which we call TaxMin, is designed to select the most tax-efficient lots, selling losses first, and short-term gains last. To use Tax Impact Preview, select the “Estimate tax impact” button when you initiate an allocation change or withdrawal, which will give you detailed estimates of expected gains and/or losses, breaking them down by short and long-term. If your transaction results in a net gain, we estimate the maximum tax you might owe. Please note that Tax Impact Preview is not available for all account types, like crypto. Why Estimated? The tax owed is an estimate because the precise tax owed depends on many circumstances specific to you, including your tax bracket and the presence of past and future capital gains or losses for the year across all of your investment accounts. We use the highest applicable rates, to give you an upper-bound estimate. The gains and losses are also estimates as these depend on the exact price that the various ETFs will sell at. If the estimate is done after market close, the prices are sure to move a bit by the time the market opens. Even during the day, a few minutes will pass between the preview and the trades, and prices will shift some, so the estimates will no longer be 100% accurate. Finally, while we are able to factor in wash sale implications from prior purchases in your Betterment account, the estimates could change substantially due to future purchases, and we do not factor in activity in non-Betterment accounts. That is why every number we show you, while useful, is an estimate. Tax Impact Preview is not tax advice, and you should consult a tax professional on how these estimates apply to your individual situation. Why You Should Avoid Short-Term Capital Gains Smart investors take every opportunity to defer a gain from short-term to long-term—it can make a substantive difference in the return from that investment. To demonstrate, let’s assume a long-term rate of 20% and a short-term rate of 40%. A $10,000 investment with a 10% return—or $1,000—will result in a $400 tax if you sell less than a year (365 days or less) after you invested. But if you wait more than a year (366 days or more) to sell, the tax will be only $200.That’s the difference between a 6% and 8% after-tax return. Market timing is usually not a good idea, and most of us know this. Betterment’s Tax Impact Preview is intended to put a real dollar cost on knee-jerk reactions to market volatility (such as withdrawals or allocation changes) to help investors reconsider the critical moment when they are about to deviate from their long-term plan.

How Our Tax Coordination Feature Can Boost Your Returns

How Our Tax Coordination Feature Can Boost Your Returns Our spin on asset location can help shelter retirement investment growth from some taxes. Taxes. You may try to think of them as little as possible, but they’re on our minds a lot. Especially when they relate to investments. That’s because we’re always looking to maximize our customers’ take-home returns—and key to that pursuit is minimizing how big of a bite taxes take. On that front, our Tax Coordination feature is a fully-automated approach to an investment strategy known as asset location—and it’s available at no additional cost. If you’re saving for retirement in more than one type of account, then asset location in general, and our spin on it specifically, can help to increase your after-tax expected returns without taking on additional risk. Here’s how. How Tax Coordination works Many Americans wind up saving for retirement in some combination of three account types: Taxable Tax-deferred (Traditional 401(k) or IRA) Tax-exempt (Roth 401(k) or Roth IRA) Each type of account gets a different tax treatment, and different assets are taxed differently as well. These rules make certain investments a better fit for one account type over another. Returns in IRAs and 401(k)s, for example, don’t get taxed annually, so they generally shelter growth from tax better than a taxable account. We’d rather shield assets that lose more to tax in these types of retirement accounts, assets such as bonds, whose dividends are usually taxed annually and at a high rate. In the taxable account, however, we’d generally prefer to have assets that don’t get taxed as much, assets such as stocks, whose growth in value (“capital gains”) is taxed at a lower rate and crucially only when they’re “realized,” or in other words, when they’re sold at a higher price than what you paid for them. Wisely applying this strategy to a globally-diversified portfolio can get complicated quickly. Check out our full Asset Location methodology if you’re curious what that complexity looks like—or keep reading for more of the simplified explanation. The big picture diversification of asset location When investing in more than one account, many people select the same portfolio in each one. This is easy to do, and when you add everything up, you get the same portfolio, only bigger. To illustrate this approach, here’s what it looks like with a hypothetical asset allocation of 70% stocks and 30% bonds. The different shades of green represent various types of stocks, and the different shades of blue represent various types of bonds. But as long as all the accounts add up to the portfolio we want, each individual account on its own doesn’t have to mirror that portfolio. Each asset can go in the account where it makes the most sense from a tax perspective. As long as we still have the same portfolio when we add up the accounts, we can increase the after-tax expected return without taking on more risk. This is asset location in action, and here’s what it looks like, again for illustrative purposes: This is the same overall portfolio as we originally showed, except we redistributed the assets unevenly to reduce taxes. Note that the aggregate allocation is still a 70/30 split of stocks and bonds. The concept of asset location isn’t new. Advisors and sophisticated do-it-yourself investors have been implementing some version of this strategy for years. But squeezing it for more benefit is very mathematically-complex. It means making necessary adjustments along the way, especially after making deposits to any of the accounts. Our expert-built technology handles all of the complexity in a way that a manual approach just can’t match. Our rigorous research and testing, as outlined in our Asset Location methodology, demonstrates that accounts managed by Tax Coordination are expected to yield meaningfully higher after-tax returns than uncoordinated accounts. How to benefit from Betterment’s Tax Coordination To benefit from from our Tax Coordination feature, you first need to be a Betterment customer with a balance in at least two of the following types of Betterment accounts: Taxable account Tax-deferred account: A Traditional IRA or a Betterment Traditional 401(k) offered by your employer. Tax-exempt account: A Roth IRA or a Betterment Roth 401(k) offered by your employer. Note that you can only include a 401(k) in a goal using Tax Coordination if it’s one we manage on behalf of your current or former employer. If your employer doesn’t currently use Betterment to provide their 401(k) plan, tell them to give us a look at betterment.com/work! If you have an old 401(k) with a previous employer, you can still benefit from our Tax Coordination feature by rolling it over to a Betterment IRA. For step-by-step instructions on how to set up Tax Coordination in your Betterment account, as well as answers to frequently asked questions, head on over to our Help Center. Or if you’re not yet a Betterment customer, get started by signing up today.

The Betterment Portfolio Strategy

Four Ways We Can Help Limit the Tax Impact Of Your Investments

Four Ways We Can Help Limit the Tax Impact Of Your Investments Betterment has a variety of processes in place to help limit the impact of your investments on your tax bill, depending on your situation. Let’s demystify these powerful strategies. We know that the medley of account types can make it challenging for you to decide which account to contribute to or withdraw from at any given time. Let’s dive right in to get a further understanding of: What accounts are available and why you might choose them The benefits of receiving dividends Betterment’s powerful tax-sensitive features How Are Different Investment Accounts Taxed? Taxable Accounts Taxable investment accounts are typically the easiest to set up and have the least amount of restrictions. Although you can easily contribute and withdraw at any time from the account, there are trade-offs. A taxable account is funded with after-tax dollars, and any capital gains you incur by selling assets, as well as any dividends you receive, are taxable on an annual basis. While there is no deferral of income like in a retirement plan, there are special tax benefits only available in taxable accounts such as reduced rates on long-term gains, qualified dividends, and municipal bond income. Key Considerations You would like the option to withdraw at any time with no IRS penalties. You already contributed the maximum amount to all tax-advantaged retirement accounts. Traditional Accounts Traditional accounts include Traditional IRAs, Traditional 401(k)s, Traditional 403(b)s, Traditional 457 Governmental Plans, and Traditional Thrift Savings Plans (TSPs). Traditional investment accounts for retirement are generally funded with pre-tax dollars. The investment income received is deferred until the time of distribution from the plan. Assuming all the contributions are funded with pre-tax dollars, the distributions are fully taxable as ordinary income. For investors under age 59.5, there may be an additional 10% early withdrawal penalty unless an exemption applies. Key Considerations You expect your tax rate to be lower in retirement than it is now. You recognize and accept the possibility of an early withdrawal penalty. Roth Accounts This includes Roth IRAs, Roth 401(k)s, Roth 403(b)s, Roth 457 Governmental Plans, and Roth Thrift Saving Plans (TSPs). Roth type investment accounts for retirement are always funded with after-tax dollars. Qualified distributions are tax-free. For investors under age 59.5, there may be ordinary income taxes on earnings and an additional 10% early withdrawal penalty on the earnings unless an exemption applies. Key Considerations You expect your tax rate to be higher in retirement than it is right now. You expect your modified adjusted gross income (AGI) to be below $140k (or $208k filing jointly). You desire the option to withdraw contributions without being taxed. You recognize the possibility of a penalty on earnings withdrawn early. Beyond account type decisions, we also use your dividends to keep your tax impact as small as possible. Four Ways Betterment Helps You Limit Your Tax Impact We use any additional cash to rebalance your portfolio When your account receives any cash—whether through a dividend or deposit—we automatically identify how to use the money to help you get back to your target weighting for each asset class. Dividends are your portion of a company’s earnings. Not all companies pay dividends, but as a Betterment investor, you almost always receive some because your money is invested across thousands of companies in the world. Your dividends are an essential ingredient in our tax-efficient rebalancing process. When you receive a dividend into your Betterment account, you are not only making money as an investor—your portfolio is also getting a quick micro-rebalance that aims to help keep your tax bill down at the end of the year. And, when market movements cause your portfolio’s actual allocation to drift away from your target allocation, we automatically use any incoming dividends or deposits to buy more shares of the lagging part of your portfolio. This helps to get the portfolio back to its target asset allocation without having to sell off shares. This is a sophisticated financial planning technique that traditionally has only been available to larger accounts, but our automation makes it possible to do it with any size account. Performance of S&P 500 With Dividends Reinvested Source: Bloomberg. Performance is provided for illustrative purposes to represent broad market returns for [asset classes] that may not be used in all Betterment portfolios. The [asset class] performance is not attributable to any actual Betterment portfolio nor does it reflect any specific Betterment performance. As such, it is not net of any management fees. The performance of specific funds used for each asset class in the Betterment portfolio will differ from the performance of the broad market index returns reflected here. Past performance is not indicative of future results. You cannot invest directly in the index. Content is meant for educational purposes and not intended to be taken as advice or a recommendation for any specific investment product or strategy. We “harvest” investment losses Tax loss harvesting can lower your tax bill by “harvesting” investment losses for tax reporting purposes while keeping you fully invested. When selling an investment that has increased in value, you will owe taxes on the gains, known as capital gains tax. Fortunately, the tax code considers your gains and losses across all your investments together when assessing capital gains tax, which means that any losses (even in other investments) will reduce your gains and your tax bill. In fact, if losses outpace gains in a tax year, you can eliminate your capital gains bill entirely. Any losses leftover can be used to reduce your taxable income by up to $3,000. Finally, any losses not used in the current tax year can be carried over indefinitely to reduce capital gains and taxable income in subsequent years. So how do you do it? When an investment drops below its initial value—something that is very likely to happen to even the best investment at some point during your investment horizon—you sell that investment to realize a loss for tax purposes and buy a related investment to maintain your market exposure. Ideally, you would buy back the same investment you just sold. After all, you still think it’s a good investment. However, IRS rules prevent you from recognizing the tax loss if you buy back the same investment within 30 days of the sale. So, in order to keep your overall investment exposure, you buy a related but different investment. Think of selling Coke stock and then buying Pepsi stock. Overall, tax loss harvesting can help lower your tax bill by recognizing losses while keeping your overall market exposure. At Betterment, all you have to do is turn on Tax Loss Harvesting+ in your account. We use asset location to your advantage Asset location is a strategy where you put your most tax-inefficient investments (usually bonds) into a tax-efficient account (IRA or 401k) while maintaining your overall portfolio mix. For example, an investor may be saving for retirement in both an IRA and taxable account and has an overall portfolio mix of 60% stocks and 40% bonds. Instead of holding a 60/40 mix in both accounts, an investor using an asset location strategy would put tax-inefficient bonds in the IRA and put more tax-efficient stocks in the taxable account. In doing so, interest income from bonds—which is normally treated as ordinary income and subject to a higher tax rate—is shielded from taxes in the IRA. Meanwhile, qualified dividends from stocks in the taxable account are taxed at a lower rate, capital gains tax rates instead of ordinary income tax rates. The entire portfolio still maintains the 60/40 mix, but the underlying accounts have moved assets between each other to lower the portfolio’s tax burden. We use ETFs instead of mutual funds Have you ever paid capital gain taxes on a mutual fund that was down over the year? This frustrating situation happens when the fund sells investments inside the fund for a gain, even if the overall fund lost value. IRS rules mandate that the tax on these gains is passed through to the end investor, you. While the same rule applies to exchange traded funds (ETFs), the ETF fund structure makes such tax bills much less likely. In most cases, you can find ETFs with investment strategies that are similar or identical to a mutual fund, often with lower fees.

Meet the Innovative Technology Portfolio

Meet the Innovative Technology Portfolio If you believe in the power of tech to blaze new trails, you can now tailor your investing to track the companies leading the way. The most valuable companies of today aren’t the same bunch as 20 years ago. With each generation comes new challengers and new categories (Hello, Big Tech). And while we can’t really predict the next class of top performers, innovation will likely come from parts of the economy that use technology in new and exciting applications, industries like: semiconductors clean energy virtual reality artificial intelligence nanotechnology This dynamic led us to create the Innovative Technology portfolio. What is the Innovative Technology Portfolio? The portfolio increases your exposure to companies pioneering the technology mentioned above and more. These innovations carry the potential to reshape the way we work and play, and in the process shape the market’s next generation of high-performing companies. Using the Core portfolio as its foundation, the Innovative Technology portfolio is built to generate long-term returns with a diversified, low-cost approach, but with increased exposure to risk. It contains many of the same investments as Core, but swaps specific exposures to value stocks with an allocation to the SPDR S&P Kensho New Economies Composite ETF (Ticker: KOMP). For a more in-depth look at the portfolio’s methodology, skip over to its disclosure. How are pioneering companies selected? The Kensho index that KOMP tracks uses a special branch of artificial intelligence called Natural Language Processing to screen regulatory data and identify companies helping drive the Fourth Industrial Revolution. After picking companies across 22 categories, each is combined into the overall index and weighted according to their risk and return profiles. Why might you choose this portfolio over Betterment’s Core portfolio? We built the Innovative Technology portfolio to perform more or less the same as an equivalent stock/bond allocation of the Core portfolio. It may, however, outperform or underperform depending on the return experience of KOMP and the companies this fund tracks. So, if you believe the emerging tech of today will drive the returns of tomorrow—and are willing to take on some additional risk to make that bet— this is a portfolio made with you in mind. Risk and early adoption can tend to go hand-in-hand, after all. Why invest in innovation with Betterment? Full disclosure: we’re a little biased when it comes to making bets on new frontiers and the plucky companies exploring them. We may be the largest independent digital investment advisor now, but the category barely existed when we opened shop in 2008. Innovative tech is in our DNA, so if you choose to invest in it with Betterment, you not only get our professional portfolio management tools, you get an advisor with first-hand experience in the field of first movers.

Take on More Control with Flexible Portfolios

ETF Selection For Portfolio Construction: A Methodology

ETF Selection For Portfolio Construction: A Methodology TABLE OF CONTENTS Why ETFs Total Annual Cost of Ownership Mitigating Market Impact Conclusion 1. Why ETFs? When constructing a portfolio, Betterment focuses on exchange traded funds (“ETFs”) securities with generally low-costs and high liquidity. An ETF is a security that generally tracks a broad-market stock or bond index or a basket of assets just like an index mutual fund, but trades just like a stock on a listed exchange. By design, index ETFs closely track their benchmarks—such as the S&P 500 or the Dow Jones Industrial Average—and are bought and sold like stocks throughout the day. ETFs have certain structural advantages when compared to mutual funds. These include: A. Clear Goals and Mandates Betterment generally selects ETFs that have mandates to passively track broad-market benchmark indexes. A passive mandate explicitly restricts the fund administrator to the singular goal of replicating a benchmark rather than making active investment decisions constituting market timing, building concentration in either a single name, group of names, or themes in an effort to beat the fund’s underlying benchmark. Adherence to this mandate ensures the same level of investment diversification as the benchmark indexes, makes performance more predictable, and reduces idiosyncratic risk associated with active manager decisions. B. Intraday Availability ETFs are transactable during all open market hours just like any other stock. As such, they are heavily traded by the full spectrum of equity market participants including market makers, short-term traders, buy-and-hold investors, and fund administrators themselves creating and redeeming units as needed (or increasing or decreasing the supply of ETFs based on market demand). This diverse trading activity leads to most ETFs carrying low liquidity premiums (or lower costs to transact due to competition from readily available market participants pushing prices downward) and equity-like transaction times irrespective of the underlying holdings of each fund. This generally makes ETFs fairly liquid, which makes them cheaper and easier to trade on-demand for activities like creating a new portfolio or rebalancing an existing one. C. Low Fee Structures Because most benchmarks update constituents (i.e., the specific stocks and related weights that make up a broad-market index) fairly infrequently, passive index-tracking ETFs also register lower annual turnover (or the rate a fund tends to transact its holdings) and thus fewer associated costs are passed through to investors. In addition, ETFs are generally managed by their administrators as a single share class that holds all assets as a single entity. This structure naturally lends itself as a defense against administrators practicing fee discrimination across the spectrum of available investors. With only one share class, ETFs are investor-type agnostic. The result is that ETF administrators provide the same exposures and low fees to the entire spectrum of potential buyers. D. Tax Efficiency In the case when a fund (irrespective of its specific structure) sells holdings that have experienced capital appreciation, the capital gains generated from those sales must, by law, be accrued and distributed to shareholders by year-end in the form of distributions. These distributions increase tax liabilities for all of the fund’s shareholders. With respect to these distributions, ETFs offer a significant tax advantage for shareholders over mutual funds. Because mutual funds are not exchange traded, the only available counterparty available for a buyer or seller is the fund administrator. When a shareholder in a mutual fund wishes to liquidate their holdings in the fund, the fund’s administrator must sell securities in order to generate the cash required to satisfy the redemption request. These redemption-driven sales generate capital gains that lead to distributions for not just the redeeming investor, but all shareholders in the fund. Mutual funds thus effectively socialize the fund’s tax liability to all shareholders, leading to passive, long-term investors having to help pay a tax bill for all intermediate (and potentially short-term) shareholder transactions. Because ETFs are exchange traded, the entire market serves as potential counterparties to a buyer or seller. When a shareholder in an ETF wishes to liquidate their holdings in the fund, they simply sell their shares to another investor just like that of a single company’s equity shares. The resulting transaction would only generate a capital gain or loss for the seller and not all investors in the fund. In addition, ETFs enjoy a slight advantage when it comes to taxation on dividends paid out to investors. After the passing of the Jobs and Growth Tax Relief Reconciliation Act of 2003, certain qualified dividend payments from corporations to investors are only subject to the lower long-term capital gains tax rather than standard income tax (which is still in force for ordinary, non-qualified dividends). Qualified dividends have to be paid by a domestic corporation (or foreign corporation listed on a domestic stock exchange) and must be held by both the investor and the fund for 61 of the 120 days surrounding the dividend payout date. As a result of active mutual funds’ higher turnover, a higher percentage of dividends paid out to their investors violate the holding period requirement and increase investor tax profiles. E. Investment Flexibility The maturation and growth of the global ETF market over the past few decades has led to the development of an immense spectrum of products covering different asset classes, markets, styles, and geographies. The result is a robust market of potential portfolio components which are versatile, extremely liquid, and easily substitutable. Despite all the advantages of ETFs, it is still important to note that not all ETFs are exactly alike or equally beneficial to an investor. Betterment’s investment selection process seeks to select ETFs that provide exposure to the desired asset classes with the least amount of difference between underlying asset class behavior and portfolio performance. In other words, we attempt to minimize the “frictions” (the collection of systematic and idiosyncratic factors that lead to performance deviations) between ETFs and their benchmarks. Betterment’s measure of these frictions is summarized as the “total annual cost of ownership”, or TACO: a composition of all relevant frictions used to rank and select ETF candidates for the Betterment portfolio. 2. Total Annual Cost of Ownership (TACO) The total annual cost of ownership (TACO) is Betterment’s fund scoring method, used to rate funds for inclusion in the Betterment portfolio. TACO takes into account an ETF’s transactional and liquidity costs as well as costs associated with holding funds. In addition to TACO, Betterment also considers certain other qualitative factors of ETFs, including but not limited to, whether the ETF fulfills a desired portfolio mandate and/or exposure. TACO is determined by two components, a fund’s cost-to-trade and cost-to-hold. The first, cost-to-trade, represents the cost associated with trading in and out of funds during the course of regular investing activities, such as rebalancing, cash inflows or withdrawals, and tax loss harvesting. Cost-to-trade is generally influenced by two factors: Volume: A measure of how many shares change hands each day. Bid-ask spread: The difference between the price at which you can buy a security and the price at which you can sell the same security at any given time. The second component, cost-to-hold, represents the annual costs associated with owning the fund and is generally influenced by these two factors: Expense ratios: Fund expenses imposed by an ETF administrator. Tracking difference: The deviation in performance from the fund’s benchmark index. Let’s review the specific inputs to each component in more detail: Cost-to-Trade: Volume and Bid-Ask Spread Volume: Volume is a historical measure of how many shares may change hands each day. This helps assess how easy it might be to find a buyer or seller in the future. This is important because it tends to indicate the availability of counterparties to buy (e.g., when Betterment is selling ETFs) and sell (e.g., when Betterment is buying ETFs). The more shares of an ETF Betterment needs to buy on behalf of our client, the more volume is needed to complete the trades without impacting market prices. As such, we measure average market volume for each ETF as a percentage of Betterment’s normal trading activity. Funds with low average daily trading volume compared to Betterment’s trading volume will have a higher cost, because Betterment’s higher trading volume is more likely to influence market prices. Bid-Ask Spread: Generally market transactions are associated with two prices: the price at which people are willing to sell a security, and the price others are willing to pay to buy it. The difference between these two numbers is known as the bid-ask spread, and can be expressed in currency or percentage terms. For example, a trader may be happy to sell a share at $100.02, but only wishes to buy it at $99.98. The bid-ask currency spread here is $.04, which coincidentally also represents a bid-ask percentage of 0.04%. In this example, if you were to buy a share, and immediately sell it, you’d end up with 0.04% less due to the spread. This is how traders and market makers make money—by providing liquid access to markets for small margins. Generally, heavily traded securities with more competitive counterparties willing to transact will carry lower bid-ask spreads. Unlike the expense ratio, the degree to which you care about bid-ask spread likely depends on how actively you trade. Buy-and-hold investors typically care about it less compared to active traders, because they will accrue significantly fewer transactions over their intended investment horizons. Minimizing these costs is beneficial to building an efficient portfolio which is why Betterment attempts to select ETFs with narrower bid-ask spreads. Cost-to-Hold: Expense Ratio and Tracking Difference Expense Ratio: An expense ratio is the set percentage of the price of a single share paid by shareholders to the fund administrators every year. ETFs often collect these fees from the dividends passed through from the underlying assets to holders of the security, which result in lower total returns to shareholders. Tracking Difference: Tracking difference is the underperformance or outperformance of a fund relative to the benchmark index it seeks to track. Funds may deviate from their benchmark indexes for a number of reasons, including any trades with respect to the fund’s holdings, deviations in weights between fund holdings and the benchmark index, and rebates from securities lending. It’s important to note that, over any given period, tracking difference isn’t necessarily negative; in some periods, it could lead to outperformance. However, tracking difference can introduce systematic deviation in the long-term returns of the overall portfolio when compared purely with a comparable basket of benchmark indexes other than ETFs. Finding TACO We calculate TACO as the sum of the above components: TACO = "Cost-to-Trade" + "Cost-to-Hold" As mentioned above, cost-to-trade estimates the costs associated with buying and selling funds in the open market. This amount is weighted to appropriately represent the aggregate investing activities of the average Betterment client in terms of cash flows, rebalances, and tax loss harvests. The cost-to-hold represents our expectations of the annual costs an investor will incur from owning a fund. Expense ratio makes up the majority of this cost, as it is the most explicit and often the largest cost associated with holding a fund. We also account for tracking difference between the fund and its benchmark index. In many cases, cost-to-hold, which includes an ETF’s expense ratio, will be the dominant factor in the total cost calculations. Of course, one can’t hold a security without first purchasing it, so we must also account for transaction costs, which we accomplish with our cost-to-trade component. 3. Minimizing Market Impact Market impact, or the change in price caused by an investor buying or selling a fund, is incorporated into Betterment’s total cost number through the cost-to-trade component. This is specifically through the interaction of bid-ask spreads and volume. However, we take additional considerations to control for market impact when evaluating our universe of investable funds. A key factor in Betterment’s decision-making is whether the ETF has relatively high levels of existing assets under management and average daily traded volumes. This helps to ensure that Betterment’s trading activity and holdings will not dominate the security’s natural market efficiency, which could either drive the price of the ETF up or down when trading. We define market impact for any given investment vehicle as the Betterment platform’s relative size (RSRS) in two key areas. Our share of the fund’s assets under managements is calculated quite simply as RS of AUM = ('AUM of Betterment' / 'AUM of ETF') while our share of the fund’s daily traded volume is calculated as RS Vol = ('Vol of Betterment' / 'Vol of ETF') ETFs without an appropriate level of assets or daily trade volume might lead to a situation where Betterment’s activity on behalf of clients moves the existing market for the security. In an attempt to avoid potentially negative effects upon our investors, we generally do not consider ETFs with smaller asset bases and limited trading activity unless some other extenuating factor is present. Conclusion As with any investment, ETFs are subject to market risk, including the possible loss of principal. The value of any portfolio will fluctuate with the value of the underlying securities. ETFs may trade for less than their net asset value (NAV). There is always a risk that an ETF will not meet its stated objective on any given trading day. Betterment reviews its asset selection analysis on a periodic basis to assess: the validity of existing selections, potential changes by fund administrators (raising or lowering expense ratios), and changes in specific ETF market factors (including tighter bid-ask spreads, lower tracking differences, growing asset bases, or reduced selection-driven market impact). Betterment also considers the tax implications of portfolio selection changes and estimates the net benefit of transitioning between investment vehicles for our clients. We use the ETFs that result from this process in our allocation advice that is based on your investment horizon, balance, and goal. For the details on our allocation advice, please see Betterment’s Goal Allocation Recommendation Methodology.

How Betterment Manages Risks in Your Portfolio

How Betterment Manages Risks in Your Portfolio Betterment’s tools can keep you on track with the best chance of reaching your goals. Investing always involves some level of risk. But you should always have control over how much risk you take on. When your goals are decades away, it's easier to invest in riskier assets. The closer you get to reaching your goals, the more you may want to play it safe. Betterment’s tools can help manage risk and keep you on track toward your goals. In this guide, we’ll: Explain how Betterment provides allocation advice Talk about determining your personal risk level Walk through some of Betterment’s automated tools that help you manage risk Take a look at low-risk portfolios The key to managing your risk: asset allocation Risk is inherent to investing, and to some degree risk is good. High risk, high reward, right? What’s important is how you manage your risk. You want your investments to grow as the market fluctuates. One major way investors manage risk is through diversification. You’ve likely heard the old cliche, “Don’t put all your eggs in one basket.” This is the same reasoning investors use. We diversify our investments, putting our eggs in various baskets, so to speak. This way if one investment fails, we don’t lose everything. But how do you choose which baskets to put your eggs in? And how many eggs do you put in those baskets? Investors have a name for this process: asset allocation. Asset allocation involves splitting up your investment dollars across several types of financial assets (like stocks and bonds). Together these investments form your portfolio. A good portfolio will have your investment dollars in the right baskets: protecting you from extreme loss when the markets perform poorly, yet leaving you open to windfalls when the market does well. If that sounds complicated, there’s good news: Betterment will automatically recommend how to allocate your investments based on your individual goals. How Betterment provides allocation advice At Betterment, our recommendations start with your financial goals. Each of your financial goals—whether it’s a vacation or retirement—gets its own allocation of stocks and bonds. Next we look at your investment horizon, a fancy term for “when you need the money and how you’ll withdraw it.” It’s like a timeline. How long will you invest for? Will you take it out all at once, or a little bit at a time? For a down payment goal, you might withdraw the entire investment after 10 years once you’ve hit your savings mark. But when you retire, you’ll probably withdraw from your retirement account gradually over the course of years. What if you don’t have a defined goal? If you’re investing without a timeline or target amount, we’ll use your age to set your investment horizon with a default target date of your 65th birthday. We’ll assume you’ll withdraw from it like a retirement account, but maintain a slightly riskier portfolio even when you hit the target date, since you haven’t decided when you'll liquidate those investments. But you’re not a “default” person. So why would you want a default investment plan? That’s why you should have a goal. When we know your goal and time horizon, we can determine the best risk level by assessing possible outcomes across a range of bad to average markets. Our projection model includes many possible futures, weighted by how likely we believe each to be. By some standards, we err on the side of caution with a fairly conservative allocation model. Our mission is to help you get to your goal through steady saving and appropriate allocation, rather than taking on unnecessary risk. How much risk should you take on? Your investment horizon is one of the most important factors in determining your risk level. The more time you have to reach your investing goals, the more risk you can afford to safely take. So generally speaking, the closer you are to reaching your goal, the less risk your portfolio should be exposed to. This is why we use the Betterment auto-adjust—a glide path (aka formula) used for asset allocation that becomes more conservative as your target date approaches. We adjust the recommended allocation and portfolio weights of the glide path based on your specific goal and time horizon. Want to take a more aggressive approach? More conservative? That’s totally ok. You’re in control. You always have the final say on your allocation, and we can show you the likely outcomes. Our quantitative approach helps us establish a set of recommended risk ranges based on your goals. If you choose to deviate from our risk guidance, we’ll provide you with feedback on the potential implications. Take more risk than we recommend, and we’ll tell you we believe your approach is “too aggressive” given your goal and time horizon. Even if you care about the downsides less than the average outcome, we’ll still caution you against taking on more risk, because it can be very difficult to recover from losses in a portfolio flagged as “too aggressive.” On the other hand, if you choose a lower risk level than our “conservative” band, we'll label your choice “very conservative.” A downside to taking a lower risk level is you may need to save more. You should choose a level of risk that’s aligned with your ability to stay the course. An allocation is only optimal if you’re able to commit to it in both good markets and bad ones. To ensure you’re comfortable with the short-term risk in your portfolio, we present both extremely good and extremely poor return scenarios for your selection over a one-year period. How Betterment automatically optimizes your risk An advantage of investing with Betterment is that our technology works behind the scenes to automatically manage your risk in a variety of ways, including auto-adjusted allocation and rebalancing. Auto-adjusted allocation For most goals, the ideal allocation will change as you near your goal. We use automation to make those adjustments as efficient and tax-friendly as possible. Deposits, withdrawals, and dividends can help us guide your portfolio toward the target allocation, without having to sell any assets. If we do need to sell any of your investments, our tax-smart technology minimizes the potential tax impact. First we look for shares that have losses. These can offset other taxes. Then we sell shares with the smallest embedded gains (and smallest potential taxes). Betterment’s auto-adjusted allocation not only saves you time, but it also gives you a smooth, tax-efficient path from higher risk to lower risk. Rebalancing Over time, individual assets in a diversified portfolio move up and down in value, drifting away from the target weights that help achieve proper diversification. The difference between your target allocation and the actual weights in your current portfolio is called portfolio drift. A high drift may expose you to more (or less) risk than you intended when you set the target allocation. Betterment automatically monitors your account for rebalancing opportunities to reduce drift, although rebalancing will likely not occur at a lower account balance. There are several different methods depending on the circumstances: Cash flow rebalancing generally occurs when cash flows going into or out of the portfolio are already happening. We use inflows (like deposits and dividend reinvestments) to buy asset classes that are under-weight. This reduces the need to sell, which in turn reduces capital gains taxes. And we use outflows (like withdrawals) by seeking to first sell asset classes that are overweight. Sell/buy rebalancing reshuffles assets that are already in the portfolio. When cash flows can’t keep your portfolio’s drift within 3% percentage points (or 5% percentage points for portfolios that contain mutual funds), we try to sell just enough of overweight asset classes to buy underweight asset classes and reduce the drift to zero. A couple exceptions exist, and those are when we attempt to avoid realizing short term capital gains within taxable accounts or wash sales. Allocation change rebalancing occurs when you change your target allocation. This sells securities and could possibly realize capital gains, but we still utilize our tax minimization algorithm to help reduce the tax impact. We’ll let you know the potential tax impact before you confirm your allocation change. Once you confirm it, we’ll rebalance to your new target with minimized drift. How Betterment reduces risk in portfolios Short-term US treasuries and short-term high quality bonds can help reduce risk in portfolios. At a certain point, however, including assets such as these in a portfolio no longer improves returns for the amount of risk taken. For Betterment, this point is our 43% stock portfolio. Portfolios with a stock allocation of 43% or more don’t incorporate these exposures. We include our U.S. Ultra-Short Income ETF and our U.S. Short-Term Treasury Bond ETF in the portfolio at stock allocations below 43% for both the IRA and taxable versions of the Betterment Core portfolio strategy. If your portfolio includes no stocks (meaning you allocated 100% bonds), we can take the hint. You likely don’t want to worry about market volatility. So in that case, we recommend that you invest everything in these ETFs. At 100% bonds and 0% stocks, a Betterment Core portfolio consists of 80% U.S. short-term treasury bonds and 20% U.S. short-term high quality bonds. Increase the stock allocation in your portfolio, and we’ll decrease the allocation to these exposures. Reach the 43% stock allocation threshold, and we’ll remove these two funds from the recommended portfolio. At that allocation, they decrease expected returns given the desired risk of the overall portfolio. Short-term U.S. treasuries generally have lower volatility (any price swings are quite mild) and smaller drawdowns (shorter, less significant periods of loss). The same can be said for short-term high quality bonds, but they are slightly more volatile. It’s also worth noting that these two asset classes don’t always go down at exactly the same time. By combining the two, we’re able to produce a two-fund portfolio with a higher potential yield while maintaining relatively lower volatility. As with other assets, the returns for assets such as high quality bonds include both the possibility of price returns and income yield. Generally, price returns are expected to be minimal, with the primary form of returns coming from the income yield. The yields you receive from the ETFs in Betterment’s 100% bond portfolio are the actual yields of the underlying assets after fees. Since we’re investing directly in funds that are paying prevailing market rates, you can feel confident that the yield you receive is fair and in line with prevailing rates.

How Betterment’s Tech Helps You Manage Your Money

How Betterment’s Tech Helps You Manage Your Money Our human experts harness the power of technology to help you reach your financial goals. Here’s how. When you’re trying to make the most of your money and plan for the future, financial advisors are really helpful. But there are some things humans simply can’t do as well as algorithms. And investing is an area where automation and digital tools can help improve your outcomes and make advanced strategies more accessible. Here at Betterment, we’re all about using technology—with human experts at the helm—to manage your money smarter and help you meet your financial goals. In this guide, we’ll Explore the concept of a “robo-advisor” Talk about Betterment’s human approach to technology Share how we help your investing avoid idle cash Share how our tech helps you plan for the future Show how you can access additional advice A quick primer on the rise of robo-advisors There’s a word for the investment firms who first used technology in new and exciting ways in the service of everyday investors: robo-advisors. By letting their human experts and technology do what each does best, robo-advisors provide some key benefits: Optimized time. Robo-advisors use algorithms and automation to do all the busy work, optimizing your investments faster than a human can. The result: you spend less time managing your finances and more time enjoying your life. Lower fees. Because of their efficiency, robo-advisors cost less to operate, which translates to savings for you. While the specific fees vary from one robo-advisor to the next, they all tend to be a fraction of what it costs to work with a traditional investment manager. Lower barriers to entry. Almost anyone with Internet access can use a robo-advisor. No special expertise required. And you don’t need a big minimum investment to get started. Personalized recommendations. Robo-advisors help you focus on your specific reasons for saving, adjusting your risk based on your timeline and target amount. Robo-advisors do the heavy lifting behind the scenes, managing all the data analysis and adapting investment expertise to fit your circumstances. All you need to do is fill in the gaps with details about your financial goals. If you have the time to research, implement and routinely manage your own investment strategy, you still can, but you don’t have to. That’s the beauty of working with a robo-advisor. The experience is as hands-on as you want it to be. Or you can relax in the knowledge your investments are in good hands, so you can simply live your life. How we combine human expertise with technology Automation is what we’re known for. But our team of financial experts is our secret sauce. They research, prototype, and implement all the advice and activity that you see in your account. Our algorithms and tools are built on the expertise of traders, quantitative researchers, tax experts, CFP® professionals, behavioral scientists, and more. Then we use technology to help accurately and consistently execute your investment strategy. Our automated processes manage your portfolio, monitoring for opportunities to rebalance and then rebalancing once accounts cross a $50 threshold if it drifts too far from your target allocation, and executing any tax strategies you’ve enabled. Technology also lets us put all of your deposits to work and avoid idle cash. Keep reading for more on that. How we automate to help you avoid the cost of idle cash Cash is an essential part of our financial lives. You can’t pay for this week’s groceries with stock, after all. And it may reassure you to keep your emergency fund in cash, although we’d politely point out you have other options to consider there. But there’s little benefit to letting cash sit idle in your investing accounts. That’s because it’s missing out on potential market returns, while at the same time losing value in times of inflation, which is most times. This double whammy can mean serious setbacks in achieving long-term investing success. That’s why we use technology to invest every penny of yours put toward a portfolio of ETFs. Here’s how: We automatically reinvest the dividends your investments pay out. Dividends are the cash earnings companies regularly distribute to shareholders. We purchase fractions of shares on your behalf, meaning if you deposit enough money to purchase 2 ⅔ shares of an ETF, that’s exactly how many shares you’ll get. For years, many investing firms would round up or down to the nearest whole share and leave the remaining cash idle in your account. Speaking of other brokerage firms, you may still have investing accounts with some. So what’s an investor to do in that case? Well, if you connect these external accounts to Betterment, we can highlight each of your external portfolio’s total idle cash. We hope this information is a starting point that helps you decide whether it’s worth it to transfer that money to a different firm. How we help you plan for the future Nobody knows the future. And that makes financial planning tough. Your situation can change at any time. And we can’t predict how external factors like markets, inflation, or tax rates may shift. But that doesn’t mean you should give up and stop planning. Our tools and advice can help you see how various changes could affect your goals. We show you a range of potential outcomes so you can make more informed decisions. We estimate how market performance may affect your investments Financial experts use many different methods to estimate future returns of a portfolio. Many financial calculators simply assume a constant average return. This is usually based on historical returns of a benchmark, like the S&P 500 index. But there are several problems with assumptions like this: You aren’t usually invested exactly like the benchmark. Different mixes of stocks and bonds or other assets in your portfolio will result in different ranges of outcomes. You probably have multiple financial goals, each with their own time horizons. The different risk allocations for each goal shouldn’t have the same returns assumption. Assumptions based on a historical estimate are sensitive to the time horizon used to calculate them. At Betterment, we’ve made three improvements to this method to make more accurate estimates: We use a return estimate for the specific portfolio you select for each goal. For example, our estimate for a 90% stock portfolio is different from our estimate for an 85% stock portfolio. Each is based on the asset classes you actually hold. We factor market volatility into our estimates. This produces the range of returns you see on the goal forecaster. For example, our savings estimates assume a somewhat conservative 40th percentile outcome (60% chance of success) rather than the simple average (50% chance of success). We assume that a risk-free component of expected returns can vary over time. When interest rates rise (or fall), so should your expected returns. We consider the impact of tax rates We may not be able to predict future tax rates, but we can be pretty sure that certain incomes and account types will be subject to some taxes. This becomes especially relevant in retirement planning, where taxes affect which account types are most valuable to you (such as a traditional IRA or Roth IRA) and your current and future income. Here’s how we estimate tax rates for your accounts: We use the latest tax data available. We always update federal tax information on January 1. State tax rate information is harder to come by, but we update it as soon as possible. Historically, that has been six to twelve months into the year. Tax bracket ranges are typically adjusted for inflation, so we assume that inflation by itself will not cause major changes to your tax rate. Your income will likely be different in the future, and that will affect your tax rate. So we use income increases due to inflation and typical salary growth to estimate what your future tax rate might be. We allow tax deduction and dependent overrides, which can affect your personal rate. We plan ahead for inflation We don’t know how inflation will change, but we can reference known historical ranges, as well as targets set by fiscal policy. The most important thing is to factor in some inflation—especially for long-term goals like retirement—because we know it won’t be zero. We currently assume a 2% inflation rate in our retirement planning advice and in our safe withdrawal advice, which is what the Fed currently targets. Getting additional advice At Betterment, we automate what we can, and leave the rest to humans. Machines are ideal for rule-based decisions, calculations at scale, and data-aggregation. But people are usually better at complex decisions, abstract thoughts, and flexibility in logic and inputs. Human advisors are much better at behavioral coaching, building advice models, and dealing with complex financial situations. So we complement our automated advice with access to our financial planning experts through advice packages or our Premium plan, which offers unlimited calls and emails with our team of CFP® professionals. Whether you need a one-time consultation or ongoing support, you can always discuss your unique financial situations with one of our licensed financial professionals. Managing your money with Betterment Our mission is to empower you to make the most of your money, so you can live better. Sometimes the best way to do that is with human creativity and critical thought. Sometimes it’s with machine automation and precision. Usually, it takes a healthy dose of both.

How Socially Responsible Investing Connects to Your Values

How Socially Responsible Investing Connects to Your Values Learn more about this increasingly-popular category of investments and our approach to it. Socially responsible investing—or SRI for short—is an increasingly popular option for people looking to invest in companies that are striving to create a positive social and environmental impact on the world. With SRI, everyday investors can influence markets and invest in the change they want to see. This category of investing is booming with a total of $35 trillion in assets according to Bloomberg—and it goes by many names: Environmental, Social, and Governance (ESG) investing Sustainable investing Values-based investing No matter what it’s called, though, SRI is built on the same idea. It considers both a company’s returns and its impact on the world. In this guide, we’ll summarize our approach to SRI as well as address questions on the performance of the category in general. Meet our SRI portfolios How the $VOTE fund is shaking up shareholder activism How SRI’s performance stacks up Meet our SRI portfolios Using the principles of SRI, you can buy into like-minded organizations via hundreds or even thousands of stocks, funds, and portfolios. But we try to make investing simple at Betterment. So we did the legwork for you and built three impact-focused SRI portfolios to choose from, one designed for a broad impact and two others tuned specifically to climate and social criteria. All three are diversified, cost-efficient, and built for the long-term, just like our Core portfolio. Broad Impact A popular choice for anyone interested in overall change, Broad Impact increases your exposure to companies that rank highly on all ESG criteria. We use the Core Portfolio as a foundation and replace the market capitalization funds (standard funds based on the size of companies) with SRI alternatives in four classes: U.S. Stocks; Emerging Market Stocks; Developed Market Stocks; U.S. High Quality Bonds and U.S. Corporate Bonds. We also increase the proportion of stocks of companies deemed to have strong social responsibility practices, brands you might recognize such as Intel, Cisco, and Disney. Climate Impact The portfolio for the eco-conscious investor, Climate Impact, uses funds that include stocks with more climate-conscious alternatives and divest from owners of fossil fuel reserves. A global green bond fund is also included in the construction of this portfolio. This puts the focus on companies working to lower carbon emissions and fund green projects. Social Impact The portfolio for the equality-minded investor, Social Impact, uses Broad Impact as a foundation while adding two funds, one focused on gender diversity ($SHE) and another on minority empowerment ($NACP). These two funds are some of the only ones of their kind. The NACP fund, in fact, is the only ETF of its kind. We won’t go into the full methodology of these portfolios here. To sum up our approach, we analyze hundreds of low-cost ETFs and choose funds that have an ESG mandate. These funds may, for example, be focused on selecting companies that rank highly on ESG factor scores from a data provider such as MSCI, an industry-leading provider of financial data and ESG analytics that has served the financial industry for more than 40 years. The funds that are incorporated into Betterment’s SRI portfolios not only meet these criteria but also maintain our signature diversification and cost considerations. Finally, our team of investing experts is never satisfied. It’s why Betterment’s SRI offering continues to evolve since we first introduced it in 2017. We continue to search for new funds and updated standards that increase impact and deliver better performance. For an example of this evolution, look no further than $VOTE, a groundbreaking fund that’s included in all of our SRI portfolios. How the $VOTE fund is shaking up shareholder activism On the surface, the $VOTE ETF looks a lot like a garden variety index fund tracking the S&P 500. Behind the scenes, however, it represents an innovative approach to pushing companies toward environmental and social practices. How? Through a process called “proxy voting.” Purchasing stock in a company grants you not just a share of its potential profits, but also the right to vote on certain aspects of its decision-making at annual shareholder meetings. If you hold stock of a company through an index fund, however, the fund technically holds this right. The rise of index fund investing has meant a lot of this power goes untapped. That started to change in 2021, when the investment firm Engine No. 1 launched $VOTE with the aim of harnessing indexes for shareholder activism. The firm stunned the corporate world that year by persuading a majority of ExxonMobile shareholders—despite only holding just .02% of the company’s shares itself—to install three new board members in the name of reducing the energy company’s carbon footprint. With each new investment in $VOTE, the potential for more headlines grows. By tracking the highest-valued companies proportionately (aka market cap weighted) and charging a management fee of only .05%—among the lowest in the industry—$VOTE is designed for mass adoption. How SRI’s performance stacks up Speaking of performance, it’s a frequently asked and totally reasonable question when it comes to socially responsible investing in general. Does trying to do right by the world through your investments limit their potential for growth? The answer is becoming increasingly clear: not likely. According to a survey of 1,141 peer-reviewed papers and other similar meta-reviews, the performance of SRI funds has “on average been indistinguishable from conventional investing.” And while the researchers note that “finance is not a static field, so it is likely that these propositions will evolve,” they also found evidence that socially responsible investing may offer “downside” protection in times of social or economic crisis such as pandemics. Investing in a better world There was a time when SRI was barely on the radar of everyday investors. If you did know about it, you likely had one of two options: Spend a good amount of time researching individual stocks for a DIY SRI portfolio. Spend a handsome amount to buy into one of the few funds on the market. Thankfully, those days are in the past. It’s never been easier and is becoming more affordable to express your values through your investing. And we’re proud to help to make it possible. At Betterment, there’s no separate tier of access for our SRI portfolios. All of our customers can choose socially responsible investing at the same simplified management fee. If you’re ready to give socially responsible investing a try, we’re ready.

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