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Make Your Money Hustle: Bond Investing Sep 9, 2024 8:00:00 AM Explore how bonds can diversify your investments, filling the gap between cash and stocks. Bonds can be confusing, but we’re here to simplify them. Here’s the TL;DR: Bonds are loans you give to companies or governments who pay you back with interest. Bonds generally earn more return than high-yield savings accounts while taking on less risk than stocks. Bonds can be bought through several sources, including a broker, the U.S. government, or a diversified ETF like the multiple bond portfolios offered by Betterment. Congrats—you made it past the TL;DR. Next, we’ll dive deeper into how bonds may be able to bring balance to your investments, filling the gap between cash and stocks. In just a few minutes, you’ll walk away knowing: The basics of bonds The benefits of investing in bonds An easy way to buy bonds As interest rates begin to drop, bonds may be a good way to earn extra yield. The basics of bonds No need to read a book about bonds—here are three Q&As that give you the basics. Question 1: What is a bond? Answer: A bond is basically a loan that you provide to an entity such as a business or government that wants to raise money. You can buy and hold a bond directly from the issuer (e.g. buying US Treasury bonds from TreasuryDirect) or choose to buy and sell bonds on the secondary market (e.g. an online broker). Question 2: How does a bond work? Answer: After you “loan” your money to the entity issuing the bond, they agree to: Pay back your principal: The issuer promises to pay your initial money back, aka your principal, by a specified date called the bond’s maturity. Pay you interest: You’ll receive periodic interest payments based on the annual interest rate paid on a bond, called the coupon rate. These interest payments are either distributed to you or reinvested into your investment on a consistent schedule. Question 3: Are there risks to bond investing? Answer: Generally, bonds are less risky than stocks, but that doesn't mean they are without risk. Examples of these risks include: Credit risk: There’s a chance that a bond issuer won’t pay you back. Interest rate risk: There is a chance that the value of the bond will go down as interest rates go up. Long-term bonds have greater interest rate risk than short-term bonds. Most bonds are rated based on the bond issuer's financial strength and ability to pay a bond's principal and interest. Like stock investments, bonds with less risk offer less potential for return (aka lower yields). Less risky bonds include higher-quality bonds (more likely to be paid on time) or bonds with shorter maturities (length until full repayment). The benefits of investing in bonds For investors looking to put some of their cash to work but not wanting to go all-in on the stock market, here are three benefits that bonds can offer, making them complementary to cash and stock. 1) Bonds can help you avoid market volatility Unlike stocks, bonds don’t represent a share of ownership in a company. Because of this, you won’t see the value of a bond increase as much as a stock when a company grows, but you generally also won’t see it decrease as much as a stock when a company struggles. 2) Bonds can help you preserve wealth Bonds, especially short-maturity bonds, can be a good choice to help preserve your money while potentially earning more return than cash in a traditional savings account, money market account, or CD. 3) Bonds can help you generate income Because the entity issuing a bond typically pays the bondholder interest on some regular schedule, they can help generate consistent income with less risk than stock investing. An easy way to buy bonds Most bonds don't trade directly on centralized markets like stocks, making it more challenging to invest in individual bonds. You can buy individual bonds from a broker or directly from the US government, but both of those options require DIY knowledge and time to build a diversified portfolio. An easy way to invest in a diversified portfolio of bonds is to invest in a bond ETF. A bond ETF, or exchange-traded fund, trades on stock exchanges, like a stock ETF. In one purchase, a bond ETF offers investors a way to gain exposure to a diversified portfolio of bonds, which can include government, municipal, corporate, and international bonds. Bond ETFs aim to provide regular income through interest payments from the underlying bonds and offer the flexibility of buying and selling shares on an exchange throughout the trading day. Make your money hustle with a Betterment bond portfolio We’ve created two types of bond portfolios with different needs in mind: BlackRock Target Income portfolios What is it? The portfolios include a diverse set of bond ETFs with a range of risk levels, helping to mitigate exposure to volatility in the stock market, aiming to preserve wealth, while seeking to generate income. Who is it for? These portfolios may be better suited for investors looking for lower risk compared to stocks, with the option to choose one of four portfolio strategies targeting increasingly higher yields. The portfolio strategy should be selected based on your risk tolerance. Keep in mind, getting more income from a specific target portfolio also means taking on more risk. Goldman Sachs Tax-Smart Bonds portfolio What is it? This portfolio is built by Goldman Sachs using 100% short-term bond ETFs. Betterment then personalizes the portfolio based on your tax situation with the aim of generating after-tax yield. Who is it for? The portfolio is designed for higher-income individuals, especially in the 32% or greater federal tax bracket, looking for a potentially higher after-tax yield than a cash account with less risk than a traditional stock-and-bond investing portfolio. In both portfolios, all interest payments, also called dividends, are automatically reinvested to help grow the portfolio’s value. Ready to be invested? We make it simple to invest in a bond portfolio with three options: Make a one-time deposit. Set up recurring deposits from Betterment Checking or an external account. Schedule recurring transfers from your Betterment Cash Reserve account.

Make Your Money Hustle Dec 22, 2023 12:51:37 PM Whether you’re saving or investing, it’s important to make sure you’re working with a company that puts your money to work. Whether you’re saving or investing, it’s important to make sure you’re working with a company that puts your money to work. Here’s how we do that at Betterment: SAVINGS High-yield cash accounts like Cash Reserve could be a smart hedge during volatile markets—especially for money you’re saving to be used soon. New customers can earn 13x more than the average savings account** with Betterment’s Cash Reserve account. Additionally, while we're not a bank ourselves, we offer up to $2M ($4M for joint accounts) in FDIC insurance through our program banks†, with unlimited withdrawals and no fees (up to $250,000 of coverage for each insurable capacity—e.g., individual or joint—at up to eight program banks), subject to certain conditions. When you’re ready to start investing, you can set up recurring transfers from Cash Reserve directly into a portfolio, which helps you take advantage of dollar cost averaging. Qualifying deposit of $10 required, Terms and conditions apply. For Cash Reserve (“CR”), Betterment LLC only receives compensation from our program banks; Betterment LLC and Betterment Securities do not charge fees on your CR balance. INVESTING Low-cost, ETF-based portfolios make it easy to diversify your investments across thousands of stocks and bonds while keeping costs down. Our Investing and Capital Markets Teams monitor our portfolios, making adjustments when necessary to account for major market changes. We don’t just choose stocks. Our experts review and score assets, and run portfolio simulations against various scenarios to help measure expected long-term performance. As a fiduciary, it’s our job to act in your best interest. We’ll never recommend investments or give you guidance unless we believe it’ll help you reach your financial goals. Automated investing technology can perform multiple sophisticated, time-saving actions on your behalf, helping optimize your money. Automated rebalancing helps keep your portfolio at the preferred risk level as markets fluctuate and assets change in value. And we use deposits and automated dividend reinvestment to rebalance tax-efficiently. Recurring deposits and transfers help you save regularly without having to remember to do so. Just set the amount and frequency, and we handle the rest. Tax Coordination helps us optimize your after-tax returns by strategically holding investments in each account type.

How Betterment’s tech helps you manage your money Nov 1, 2024 6:00:00 AM 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, there are some things humans simply can’t do as well as algorithms. The big idea: Here at Betterment, we’re all about automated investing—using technology with human experts at the helm—to manage your money smarter and help you meet your financial goals. How does it work? Robo-advisors use algorithms and automation to optimize your investments faster than a human can. They 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. The result: you spend less time managing your finances and more time enjoying your life, while Betterment focuses on your specific reasons for saving, adjusting your risk based on your timeline and target amount. Plus, robo-advisors cost less to operate. 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, which translates to savings for you. Learn more about how much it costs to save, spend and invest with Betterment. A winning combination of human expertise and technology: Automation is what Betterment is 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. Four big benefits (just for starters): No more idle cash: We automatically reinvest dividends, even purchasing fractions of shares on your behalf, so you don’t miss out on potential market returns. A focus on the future: Nobody knows the future. And that makes financial planning tough. Your situation can change at any time but 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. Anticipating taxes: 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. Factoring in 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 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. Additional advice is always available: At Betterment, we automate what we can and complement our automated advice with access to our financial planning experts through our Premium plan, which offers unlimited calls and emails with our team of CFP® professionals. You can also schedule a call with an advisor to assist with a rollover or help with your initial account setup. 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.

Three ways to put your bonus to work Feb 9, 2024 9:15:00 AM Cash windfalls can have the power to supercharge your savings goals. Year-end bonuses are a blessing. And while there’s no guarantee you’ll get one—just ask Clark Griswold—if you do, they can have the power to supercharge your savings goals. So while you wait for that bonus cash, read up on three ways to handle small cash windfalls such as these. Go 50/50: Treat yourself now and save for the future Let’s address the elephant in the room: A lot of us spend the bulk of our bonuses. But there’s a psychological workaround to this temptation: Think of yourself as two people. There’s “present-day” you, flush with cash and eyeing a few items on your wish list. Then there’s “future” you and all of their dreams for major purchases or financial freedom. Since both of you can rightly lay claim to your bonus, the only fair thing to do is split it 50-50. So go ahead: Splurge guilt-free with one half of your bonus, and save the other half. Tax-savvy saving: Use your bonus to get a tax break A lot of companies withhold taxes on bonuses at the IRS-recommended rate of 22%. Less commonly, some companies lump it in with your regular paycheck, and your regular withholding rate applies. Either way, and contrary to popular belief, bonuses aren’t taxed at a higher rate. But seeing your bonus shrink due to any amount of taxes is still rough. Thankfully, you may able to minimize your tax hit with the help of a tax-advantaged retirement account: Boost your 401(k) contributions. In some cases, companies allow employees to make 401(k) contributions with their bonuses. If that’s the case for you, consider funneling “future” you’s half of your bonus into your traditional or Roth 401(k), up to the IRS limits. Traditional for a tax break now, Roth for a tax break later. Max out your IRA. Depending on how much income you make, you may be eligible to deduct traditional IRA contributions from your taxes and/or contribute after-tax dollars to a Roth IRA for a tax break later. Better yet, you have until Tax Day of 2025 to max out your 2024 IRA! Stash the cash: Start earning interest today Tax breaks aren’t the end-all, be-all, of course. In some scenarios, saving your bonus in a high-yield cash account like our Cash Reserve account might take priority. If you lack an emergency fund, for example, or if you’re planning for a major purchase in the near future. However you save or invest your bonus, rest easy knowing you’re striking a good balance between today and tomorrow. Unless your bonus came in the form of jelly, in which case you’re on your own, Clark.

The Betterment Core portfolio strategy Mar 25, 2024 10:00:00 AM We continually improve our portfolio construction methodology over time in line with our research-focused investment philosophy. TABLE OF CONTENTS Introduction Global Diversification and Asset Allocation Portfolio Optimization Tax Management Using Municipal Bonds The Value Tilt Portfolio Strategy Innovative Technology Portfolio Strategy Conclusion Citations I. Introduction Betterment builds investment portfolios designed to help you make the most of your money so you can live the life you want. Our investment philosophy forms the basis for how we pursue that objective: Betterment uses real-world evidence and systematic decision-making to help increase our customers’ wealth. In building our platform and offering individualized advice, Betterment’s philosophy is actualized by our five investing principles. Regardless of one’s assets or specific situation, Betterment believes all investors should: Make a personalized plan. Build in discipline. Maintain diversification. Balance cost and value. Manage taxes. To align with Betterment’s investing principles, a portfolio strategy must enable personalized planning and built-in discipline for investors. The Betterment Core portfolio strategy contains 101 individualized risk levels (each with a different percentage of the portfolio invested in stocks vs. bonds, informed by your financial goals, time horizon and risk tolerance), in part, because that level of granularity in allocation management provides the flexibility to align to multiple goals with different timelines and circumstances. In this guide to the Betterment Core portfolio strategy construction process, our goal is to demonstrate how the methodology, in both its application and development, embodies Betterment’s investing principles. When developing a portfolio strategy, any investment manager faces two main tasks: asset class selection and portfolio optimization. Fund selection is also guided by our investing principles, and is covered separately in our Investment Selection Methodology paper. II. Global Diversification and Asset Allocation An optimal asset allocation is one that lies on the efficient frontier, which is a set of portfolios that seek to achieve the maximum objective for any given feasible level of risk. The objective of most long-term portfolio strategies is to maximize return for a given level of risk, which is measured in terms of volatility—the dispersion of those returns. In line with our investment philosophy of making systematic decisions backed by research, Betterment’s asset allocation is based on a theory by economist Harry Markowitz called Modern Portfolio Theory.1 A major tenet of Modern Portfolio Theory is that any asset included in a portfolio should not be assessed by itself, but rather, its potential risk and return should be analyzed as a contribution to the whole portfolio. Modern Portfolio Theory seeks to maximize expected return given an expected risk level or, equivalently, minimize expected risk given an expected return. Other forms of portfolio construction may legitimately pursue other objectives, such as optimizing for income, or minimizing loss of principal. Asset Classes Selected for Betterment’s Core Portfolio Strategy The Betterment Core portfolio strategy’s asset allocation starts with a universe of investable assets, which for us could be thought of as the “global market portfolio.”2 To capture the exposures of the asset classes for the global market portfolio, Betterment evaluates available exchange-traded funds (ETFs) that represent each class in the theoretical market portfolio. We base our asset class selection on ETFs because this aligns portfolio construction with our investment selection methodology. Betterment’s portfolios are constructed of the following asset classes: Equities U.S. equities International developed market equities Emerging market equities Bonds U.S. short-term treasury bonds U.S. inflation-protected bonds U.S. investment-grade bonds U.S. municipal bonds International developed market bonds Emerging market bonds We select U.S. and international developed market equities as a core part of the portfolio. Historically, equities exhibit a high degree of volatility, but provide some degree of inflation protection. Even though significant historical drawdowns, such as the global financial crisis in 2008 and pandemic outbreak in 2020, demonstrate the possible risk of investing in equities, longer-term historical data and our forward expected returns calculations suggest that developed market equities remain a core part of any asset allocation aimed at achieving positive returns. This is because, over the long term, developed market equities have tended to outperform bonds on a risk-adjusted basis. To achieve a global market portfolio, we also include equities from less developed economies, called emerging markets. Generally, emerging market equities tend to be more volatile than U.S. and international developed equities. And while our research shows high correlation between this asset class and developed market equities, their inclusion on a risk-adjusted basis is important for global diversification. Note that Betterment excludes frontier markets, which are even smaller than emerging markets, due to their widely varying definition, extreme volatility, small contribution to global market capitalization, and cost to access. The Betterment Core portfolio strategy incorporates bond exposure because, historically, bonds have a low correlation with equities, and they remain an important way to dial down the overall risk of a portfolio. To promote diversification and leverage various risk and reward tradeoffs, the Betterment Core portfolio strategy includes exposure to several asset classes of bonds. Asset Classes Excluded from the Betterment Core Portfolio Strategy While Modern Portfolio Theory would have us craft a portfolio to represent the total market, including all available asset classes, we exclude some asset classes whose cost and/or lack of data outweighs the potential benefit gained from their inclusion. The Betterment Core portfolio construction process excludes commodities and natural resources asset classes. Specifically, while commodities represent an investable asset class in the global financial market, we have excluded commodities ETFs because of their low contribution to a global stock/bond portfolio's risk-adjusted return. In addition, real estate investment trusts (REITs), which tend to be well marketed as a separate asset class, are not explicitly included in the Core portfolio strategy. Betterment does provide exposure to real estate, but as a sector within equities. Adding additional real estate exposure by including a REIT asset class would overweight the exposure to real estate relative to the overall market. Incorporating awareness of a benchmark Before 2024, we managed the Core portfolio strategy in a “benchmark agnostic” manner, meaning we did not incorporate consideration of global stock and bond indices in our portfolio optimization, though we have always sought to optimize the expected risk-adjusted return of the portfolios we construct for clients. The “risk” element of this statement represents volatility and the related drawdown potential of the portfolio, but it could also represent the risk in the deviation of the portfolio’s performance relative to a benchmark. In an evolution of our investment process, in 2024 we updated our portfolio construction methodology to become “benchmark aware,” as we now calibrate our exposures based on a custom benchmark that expresses our preference for diversifying across global stocks and bonds. A benchmark, which comes in the form of a broad-based market index or a combination of indices, serves as a reference point when approaching asset allocation, understanding investment performance, and aligning the expectations of portfolio managers and clients. In our case, we created a custom benchmark that most closely aligns with our future expectations for global markets. The custom benchmark we have selected is composed of (1) the MSCI All Country World stock index (MSCI ACWI), (2) the Bloomberg Global Aggregate Bond index, and (3) at low risk levels, the ICE US Treasury 1-3 Year Index. Our custom benchmark is composed of 101 risk levels of varying percentage weightings of the stock and bond indexes, which correspond to the 101 risk level allocations in our Core portfolio. At low risk levels (allocations that are less than 40% stocks), we layer an allocation to the ICE US Treasury 1-3 Year index, which represents short-term bonds, into the blended benchmark. We believe that incorporating this custom benchmark into our process reinforces the discipline of carefully evaluating the ways in which our portfolios’ performance could veer from global market indices and deviate from our clients’ expectations. We have customized the benchmark with 101 risk levels so that it serves clients’ varying investment goals and risk tolerances. As we will explore in the following section, establishing a benchmark allows us to apply constraints to our portfolio optimization that ensures the portfolio strategy’s asset allocation does not vary significantly from the geographic and market-capitalization size exposures of a sound benchmark. Our benchmark selection also makes explicit that the portfolio strategy delivers global diversification rather than the more narrowly concentrated and home-biased exposures of other possible benchmarks such as the S&P 500. III. Portfolio Optimization As an asset manager, we fine-tune the investments our clients hold with us, seeking to maximize return potential for the appropriate amount of risk each client can tolerate. We base this effort on a foundation of established techniques in the industry and our own rigorous research and analysis. While most asset managers offer a limited set of model portfolios at a defined risk scale, the Betterment Core portfolio strategy is designed to give customers more granularity and control over how much risk they want to take on. Instead of offering a conventional set of three portfolio choices—aggressive, moderate, and conservative—our portfolio optimization methods enable the Core portfolio strategy to contain 101 different risk levels. Optimizing Portfolios Modern Portfolio Theory requires estimating variables such as expected-returns, covariances, and volatilities to optimize for portfolios that sit along an efficient frontier. We refer to these variables as capital market assumptions (CMAs), and they provide quantitative inputs for our process to derive favorable asset class weights for the portfolio strategy. While we could use historical averages to estimate future returns, this is inherently unreliable because historical returns do not necessarily represent future expectations. A better way is to utilize the Capital Asset Pricing Model (CAPM) along with a utility function which allows us to optimize for the portfolio with a higher return for the risk that the investor is willing to accept. Computing Forward-Looking Return Inputs Under CAPM assumptions, the global market portfolio is the optimal portfolio. Since we know the weights of the global market portfolio and can reasonably estimate the covariance of those assets, we can recover the returns implied by the market.3 This relationship gives rise to the equation for reverse optimization: μ = λ Σ ωmarket Where μ is the return vector, λ is the risk aversion parameter, Σ is the covariance matrix, and ωmarket is the weights of the assets in the global market portfolio.5 By using CAPM, the expected return is essentially determined to be proportional to the asset’s contribution to the overall portfolio risk. It’s called a reverse optimization because the weights are taken as a given and this implies the returns that investors are expecting. While CAPM is an elegant theory, it does rely on a number of limiting assumptions: e.g., a one period model, a frictionless and efficient market, and the assumption that all investors are rational mean-variance optimizers.4 In order to complete the equation above and compute the expected returns using reverse optimization, we need the covariance matrix as an input. This matrix mathematically describes the relationships of every asset with each other as well as the volatility risk of the assets themselves. In another more recent evolution of our investment process, we also attempt to increase the robustness of our CMAs by averaging in the estimates of expected returns and volatilities published by large asset managers such as BlackRock, Vanguard, and State Street Global Advisors. We weight the contribution of their figures to our final estimates based on our judgment of the external provider’s methodology. Constrained optimization for stock-heavy portfolios After formulating our CMAs for each of the asset classes we favor for inclusion in the Betterment Core portfolio strategy, we then solve for target portfolio allocation weights (the specific set of asset classes and the relative distribution among those asset classes in which a portfolio will be invested), with the range of possible solutions constrained by limiting the deviation from the composition of the custom benchmark. To robustly estimate the weights that best balance risk and return, we first generate several thousand random samples of 15 years of expected returns for the selected asset classes based on our latest CMAs, assuming a multivariate normal distribution. For each sample of 15 years of simulated expected return data, we find a set of allocation weights subject to constraints that provide the best risk-return trade-off, expressed as the portfolio’s Sharpe ratio, i.e., the ratio of its return to its volatility. Averaging the allocation weights across the thousands of return samples gives a single set of allocation weights optimized to perform in the face of a wide range of market scenarios (a “target allocation”). The constraints are imposed to make the portfolio weights more benchmark-aware by setting maximum and minimum limits to some asset class weights. These constraints reflect our judgment of how far the composition of geographic regions within the portfolio’s stock and bond allocations should differ from the breakdown of the indices used in the benchmark before the risk of significantly varied performance between the portfolio strategy and the benchmark becomes untenable. For example, the share of the portfolio’s stock allocation assigned to international developed stocks should not be profoundly different from the share of international developed stocks within the MSCI ACWI. We implement caps on the weights of emerging market stocks and bonds, which are often projected to have high returns in our CMAs, and set minimum thresholds for U.S. stocks and bonds. This approach not only ensures our portfolio aligns more closely with the benchmark, but it also mitigates the risk of disproportionately allocating to certain high expected return asset classes. Constrained optimization for bond-heavy portfolios For versions of the Core portfolio strategy that have more than or equal to 60% allocation to bonds, the optimization approach differs in that expected returns are maximized for target volatilities assigned to each risk level. These volatility targets are determined by considering the volatility of the equivalent benchmark. Manually established constraints are designed to manage risk relative to the benchmark, instituting a declining trend in emerging market stock and bond exposures as stock allocations (i.e., the risk level) decreases. Meaning that investors with more conservative risk tolerances have reduced exposures to emerging market stocks and bonds because emerging markets tend to have more volatility and downside-risk relative to more established markets. Additionally, as the stock allocation percentage decreases, we taper the share of international and U.S. aggregate bonds within the overall bond allocation, and increase the share of short-term Treasury, short-term investment grade, and inflation-protected bonds. This reflects our view that investors with more conservative risk tolerances should have increased exposure to short-term Treasury, short-term investment grade, and inflation-protected bonds relative to riskier areas of fixed income. The lower available risk levels of the Core portfolio strategy demonstrate capital preservation objectives, as the shorter-term fixed income exposures likely possess less credit and duration risk. Clients invested in the Core portfolio at conservative allocation levels will likely therefore not experience as significant drawdowns in the event of waves of defaults or upward swings in interest rates. Inflation-protected securities also help buffer the lower risk levels from upward drafts in inflation. IV. Tax Management Using Municipal Bonds For investors with taxable accounts, portfolio returns may be further improved on an after-tax basis by utilizing municipal bonds. This is because the interest from municipal bonds is exempt from federal income tax. To take advantage of this, the Betterment Core portfolio strategy in taxable accounts is also tilted toward municipal bonds because interest from municipal bonds is exempt from federal income tax, which can further optimize portfolio returns. Other types of bonds remain for diversification reasons, but the overall bond tax profile is improved by tilting towards municipal bonds. For investors in states with some of the highest tax rates—New York and California—Betterment can optionally replace the municipal bond allocation with a more narrow set of bonds for that specific state, further saving the investor on state taxes. Betterment customers who live in NY or CA can contact customer support to take advantage of state specific municipal bonds. V. The Value Tilt Portfolio Strategy Existing Betterment customers may recall that historically the Core portfolio strategy held a tilt to value companies, or businesses that appear to be potentially undervalued based on metrics such as price to earnings ratios. The latest iteration of the Core portfolio strategy, however, has deprecated this explicit tilt that was expressed via large-, mid-, and small-capitalization U.S. value stock ETFs, while maintaining some exposure to value companies through broad market U.S. stock funds. We no longer favor allocating to value stock ETFs within the Core portfolio strategy in large part as a result of our adoption of a broad market benchmark, which highlights the idiosyncratic nature of such tilts, sometimes referred to as “off benchmark bets.” We believe our chosen benchmark that represents stocks through the MSCI ACWI, which holds a more neutral weighting to value stocks, more closely aligns with the risk and return expectations of Betterment’s diverse range of client types across individuals, financial advisors, and 401(k) plan sponsors. Additionally, as markets have grown more efficient and value factor investing more popularized, potentially compressing the value premium, we have a marginally less favorable view of the forward-looking, risk-adjusted return profile of the exposure. That being said, we have not entirely lost conviction in the research supporting the prudence of value investing. The value factor’s deep academic roots drove decisions to incorporate the value tilt into Betterment’s portfolios from the company’s earliest days. For investors who wish to remain invested in a value strategy, we have added the Value Tilt portfolio strategy, a separate option from the Core portfolio strategy to our investing offering. The Value Tilt portfolio strategy maintains the Core portfolio strategy’s global diversification across stocks and bonds while including a sleeve within the stock allocation of large-, mid-, and small-capitalization U.S. value funds. We calibrated the size of the value fund exposure based on a certain target historical tracking error to the backtested performance of the latest version of the Core portfolio strategy. Based on this approach, investors should expect the Value Tilt portfolio strategy to generally perform similarly to Core, with the potential to under- or outperform based on the return of U.S. value stocks. With the option to select between the Value Tilt portfolio strategy or a Core now without an explicit allocation to value, the investment flexibility of the Betterment platform has improved. VI. Innovative Technology Portfolio Strategy In 2021, Betterment launched the Innovative Technology portfolio strategy to provide access to the thematic trend of technological innovation. The premise of investing in this theme is that your investments incorporate exposure to the companies that are seeking to shape the next industrial revolution. Similar to the Value Tilt portfolio, the Core portfolio strategy is used as the foundation of construction for the Innovative Technology portfolio. With this portfolio strategy, we calibrated the size of the innovative technology fund exposure based on a certain target historical tracking error to the backtested performance of the latest version of the Core portfolio strategy. Through this process, the Innovative Technology portfolio maintains the same globally diversified, low-cost approach that is found in Betterment’s investment philosophy. The portfolio however has increased exposure to risk given that innovation requires a long-term view, and may face uncertainties along the way. It may outperform or underperform depending on the return experience of the innovative technology fund exposure and the thematic landscape. VII. Conclusion After setting the strategic weight of assets in the Betterment Core portfolio strategy, the next step in implementing the portfolio construction process is Betterment’s investment selection, which selects the appropriate ETFs for the respective asset exposure in a generally low-cost, tax-efficient way. In keeping with our philosophy, that process, like the portfolio construction process, is executed in a systematic, rules-based way, taking into account the cost of the fund and the liquidity of the fund. Beyond ticker selection is our established process for allocation management—how we advise downgrading risk over time—and our methodology for automatic asset location, which we call Tax Coordination. Finally, our overlay features of automated rebalancing and tax-loss harvesting are designed to be used to help further maximize individualized, after-tax returns. Together these processes put our principles into action, to help each and every Betterment customer maximize value while invested at Betterment and when they take their money home. VIII. Citations 1 Markowitz, H., "Portfolio Selection".The Journal of Finance, Vol. 7, No. 1. (Mar., 1952), pp. 77-91. 2 Black F. and Litterman R., Asset Allocation Combining Investor Views with Market Equilibrium, Journal of Fixed Income, Vol. 1, No. 2. (Sep., 1991), pp. 7-18. Black F. and Litterman R., Global Portfolio Optimization, Financial Analysts Journal, Vol. 48, No. 5 (Sep. - Oct., 1992), pp. 28-43. 3 Litterman, B. (2004) Modern Investment Management: An Equilibrium Approach. 4 Note that the risk aversion parameter is essentially a free parameter. 5 Ilmnen, A., Expected Returns.

How Betterment Manages Risks in Your Portfolio Dec 20, 2024 12:00:00 AM 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. Our automated tools aim 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 is designed to minimize 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). 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 ETF portfolio is called portfolio drift. We define portfolio drift as the total absolute deviation of each super asset class from its target, divided by two. These super asset classes are US Bonds, International Bonds, Emerging Markets Bonds, US Stocks, International Stocks, and Emerging Markets Stocks. 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. There are several different methods depending on the circumstances: First, in response to cash flows such as deposits, withdrawals, and dividend reinvestments, Betterment buys underweight holdings and sells overweight holdings. This reactive 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 potential capital gains taxes. And we use outflows (like withdrawals) by seeking to first sell asset classes that are overweight. Second, if cash flows are not sufficient to keep a client’s portfolio drift within its applicable drift tolerance (such parameters as disclosed in Betterment’s Form ADV), automated rebalancing sells overweight holdings in order to buy underweight ones, aligning the portfolio more closely with its target allocation. This proactive rebalancing reshuffles assets that are already in the portfolio, and requires a minimum portfolio balance (clients can review the estimated balance at www.betterment.com/legal/portfolio-minimum). The rebalancing algorithm is also calibrated to avoid frequent small rebalance transactions and to seek tax efficient outcomes, such as helping to reduce wash sales and minimizing short-term capital gains. 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. If you are an Advised client, rebalancing in your account may function differently depending on the customizations your Advisor has selected for your portfolio. We recommend reaching out to your Advisor for further details. For more information, please review our rebalancing disclosures. How Betterment reduces risk in portfolios Investments like short-term US treasuries 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 60% stock portfolio. Portfolios with a stock allocation of 60% 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 60% 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 60% U.S. short-term treasury bonds, 20% U.S. short-term high quality bonds, and 20% inflation protected bonds. Increase the stock allocation in your portfolio, and we’ll decrease the allocation to these exposures. Reach the 60% stock allocation threshold, and we’ll remove these 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 asset classes don’t always go down at exactly the same time. By combining these asset classes, we’re able to produce a 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.