Mindy Yu, CIMA®

See what's in store for our annual portfolio updates Jan 31, 2025 10:00:00 AM Tweaks to Core, Value Tilt, SRI, and Innovative Tech are coming soon. When you pay someone to manage your investing, it's good to know exactly what you're paying for. In one sense, you’re paying for how your shares are bought, sold, and held. Our sophisticated spins on strategies like asset location, for example, can help minimize your taxes and maximize your returns. Then there's the collections of investments themselves, and making sure these portfolios keep up with market conditions. We do this in part by regularly adjusting our portfolios' asset allocations, or the specific weights of asset classes (i.e., stocks and bonds) and subasset classes (large cap stocks, long-term bonds, etc.). Let's quickly walk through our approach to portfolio management, or feel free to skip ahead to preview the upcoming changes. How we evaluate and manage our portfolios It all starts with sizing up asset classes. We run a rigorous, data-driven process to form long-term expectations for both the returns and the risk levels of various classes. From there, we simulate thousands of paths for the market, and average the optimal asset allocations to build more robust portfolio weights. This “Monte Carlo” technique is ideal when random variables are everywhere, such as capital markets. Lastly, it’s important to reiterate that while things like interest rate shifts and federal fiscal policy can drive short-term market volatility, we manage our portfolios based on long-term outlooks. We keep an eye on the short-term, but we don’t chase trends. This year's updates, in a nutshell For starters, we're updating a handful of portfolios, ones we build and manage ourselves. We offer a few others managed by partners like Goldman Sachs and BlackRock—you can check out those allocations in the Betterment app or on our website. This year’s updates, which are much smaller in scope and scale than last year’s, will encompass these portfolios: Core Value Tilt All three Socially Responsible Investing portfolios Innovative Technology Select Betterment Premium-exclusive portfolios Here's what's changing. More U.S. exposure While we don't advise going all-in on American markets, the forecasted risk-adjusted return for the U.S. remains strong in the long run (think: decades) relative to international markets. So similar to last year’s portfolio updates, we’re dialing down the international exposure for most portfolios. Those portfolios will see: Small increases in U.S. stock and bond allocations Small decreases in international emerging market stocks and bonds Small decreases in international developed market bonds More short-term corporate bonds The biggest change this year will be felt by portfolios with larger bond allocations. We expect U.S. short-term, high-quality corporate bonds to offer higher yields without undue increases in long-term risk, so we’re increasing the exposure to them while decreasing the weight of short-term U.S. Treasuries. The yields on these types of treasury bonds, which mature in a year or less, tend to fall right along with interest rates, and a lower interest rate environment is still expected in the long run. New innovation ETF Separately, we’re diversifying the Innovative Technology portfolio by adding a new actively-managed fund. This new ETF builds on themes like AI and biotech while adding more exposure to large-cap stocks and the Information Technology sector (hardware, software, etc.) as a whole. Sit back and enjoy the switch The great thing about technology like ours is that it makes implementing updated portfolios simple. Our automated rebalancing will tax-efficiently transition customers’ portfolios to the new target weights over time. It’s yet another example of how we make it easy to be invested.

An investor’s guide to diversification Nov 1, 2024 8:00:00 AM Diversification is an investing strategy that helps reduce risk by allocating investments across various financial assets. Here’s everything you need to know. In 1 minute When you invest too heavily in a single asset, type of asset, or market, your portfolio is more exposed to the risks that come with it. That’s why investors diversify. Diversification means spreading your investments across multiple assets, asset classes, or markets. This aims to do two things: Limit your exposure to specific risks Make your performance more consistent As the market fluctuates, a diverse portfolio generally remains stable. Extreme losses from one asset have less impact—because that asset doesn’t represent your entire portfolio. Maintaining a diversified portfolio forces you to see each asset in relation to the others. Is this asset increasing your exposure to a particular risk? Are you leaning too heavily on one company, industry, asset class, or market? In 5 minutes In this guide, we’ll: Define diversification Explain the benefits of diversification Discuss the potential disadvantages of diversification What is diversification? Financial assets gain or lose value based on different factors. Stocks depend on companies’ performance. Bonds depend on the borrower’s (companies, governments, etc.) ability to pay back loans. Commodities depend on public goods. Real estate depends on property. Entire industries can rise or fall based on government activity. What’s good or bad for one asset may have no effect on another. If you only invest in stocks, your portfolio’s value completely depends on the performance of the companies you invest in. With bonds, changing interest rates or loan defaults could hurt you. And commodities are directly tied to supply and demand. Diversification works to spread your investments across a variety of assets and asset classes, so no single weakness becomes your fatal flaw. The more unrelated your assets, the more diverse your portfolio. So you might invest in some stocks. Some bonds. Some fund commodities. And then if one company has a bad quarterly report, gets negative press, or even goes bankrupt, it won’t tank your entire portfolio. You can make your portfolio more diverse by investing in different assets of the same type—like buying stocks from separate companies. Better yet: companies in separate industries. You can even invest internationally, since foreign markets can potentially be less affected by local downturns. What are the benefits of diversification? There are two main reasons to diversify your portfolio: It can help reduce risk It can provide more consistent performance Here’s how it works. Lower risk Each type of financial asset comes with its own risks. The more you invest in a particular asset, the more vulnerable you are to its risks. Put everything into bonds, for example? Better hope interest rates hold. Distributing your assets distributes your risk. With a diversified portfolio, there are more factors that can negatively affect your performance, but they affect a smaller percentage of your portfolio, so your overall risk is much lower. If 100% of your investments are in a single company and it goes under, your portfolio tanks. But if only 10% of your investments are in that company? The same problem just got a whole lot smaller. Consistent performance The more assets you invest in, the less impact each one has on your portfolio. If your assets are unrelated, their gains and losses depend on different factors, so their performance is unrelated, too. When one loses value, that loss is mitigated by the other assets. And since they’re unrelated, some of your other assets may even increase in value at the same time. Watch the value of a single stock or commodity over time, and you’ll see its value fluctuate significantly. But watch two unrelated stocks or commodities—or one of each—and their collective value fluctuates less. They can offset each other. Diversification can make your portfolio performance less volatile. The gains and losses are smaller, and more predictable. Potential disadvantages of diversification While the benefits are clear, diversification can have a couple drawbacks: It creates a ceiling on potential short-term gains Diverse portfolios may require more maintenance Limits short-term gains Diversification usually means saying goodbye to extremes. Reducing your risk also reduces your potential for extreme short-term gains. Investing heavily in a single asset can mean you’ll see bigger gains over a short period. For some, this is the thrill of investing. With the right research, the right stock, and the right timing, you can strike it rich. But that’s not how it usually goes. Diversification is about playing the long game. You’re trading the all-or-nothing outcomes you can get with a single asset for steady, moderate returns. May require more maintenance As you buy and sell financial assets, diversification requires you (or a broker) to consider how each change affects your portfolio’s diversity. If you sell all of one asset and re-invest in another you already have, you increase the overall risk of your portfolio. Maintaining a diversified portfolio adds another layer to the decision-making process. You have to think about each piece in relation to the whole. A robo advisor or broker can do this for you, but if you’re managing your own portfolio, diversification may take a little more work.

The latest update to our Core portfolio strategy Jan 2, 2024 10:38:57 AM Learn more about the changes we believe will help improve long-term risk-adjusted returns. Betterment serves as a fiduciary, acting in our clients’ best interests. We monitor our portfolios and review the underlying investments on a regular basis to optimize portfolios and help you achieve your investment goals. As part of this process, we’ve made changes to our Core portfolio strategy that we believe will help improve long-term risk-adjusted returns. How we evaluate and manage our portfolios The Betterment Investment Committee monitors and reviews the underlying inputs used to construct our portfolios, including running simulations to gauge expected long-term performance. Our capital market assumptions (CMAs) represent our long-term expectations for the return and risk of various asset classes. These CMAs help inform how we allocate across different asset classes in our portfolios, and power our platform’s advice tools What’s changed in the Core portfolio? Our updated CMAs indicate a shift in the expected risk-return profile of certain asset classes, suggesting a reallocation of target exposures with the Core portfolio going forward. Here’s what that means: Within our equities basket Dialed down exposure to emerging markets stocks while increasing exposure to U.S. stocks. With increasing geopolitical risks, we believe this shift can help reduce potential losses, especially for portfolios holding fewer stocks relative to bonds. This change also brings us closer to MSCI All Country World Index (MSCI ACWI, our stock allocation benchmark as described below) Reduced the emphasis on U.S. value stocks (“value tilt”), shifting toward U.S. stock exposure weighted by market capitalization. Over time, we’ve observed gradual compression in the value factor premium as markets have become more efficient. We expect this adjustment to help reduce risk and more closely align the Core portfolio with our custom benchmark indices (described below). Within our fixed income basket Reduced exposure to both emerging markets and international developed bonds, while increasing exposure to U.S. bonds. Similar to our stock allocations, we expect this to mitigate potential downside risk for more conservative allocations. Increased allocations to inflation-protected U.S. bonds. This update will help shield clients with more conservative portfolios from potential erosion risk on savings—providing protection against market drawdowns, rising interest rates, and other macroeconomic events that could have negative short-term consequences. This change can be particularly relevant for customers in retirement, since inflation can meaningfully eat away at the value of your money over time. Developing a “benchmark aware” portfolio strategy In an evolution of our investment process, we’ve also updated our Core portfolio construction methodology to become more “benchmark aware.” This means we now calibrate our exposures based on a custom benchmark. The custom benchmark we have selected is composed of (1) the MSCI All Country World Index (MSCI ACWI), (2) the Bloomberg Global Aggregate Bond index, and (3) at low risk levels, the ICE US Treasury 1-3 Year Index. This custom benchmark has varying risk levels that correspond to the Core portfolio allocations we support for a variety of investor risk tolerances. Introducing the Value Tilt portfolio strategy For customers who favor the potential benefits and associated risks in value investing, we’re introducing a new portfolio option: Value Tilt. The Value Tilt portfolio strategy maintains the same historical track record as the Core portfolio strategy, up until the 2024 changes where this becomes a new strategy. While this portfolio includes the same thematic asset allocation changes as the Core portfolio strategy, it maintains explicit weighting towards U.S. value stocks. An expansion of our portfolio options, Value Tilt is available for all goals, new and old. You can select it within your account. What does all this mean for you? No action is required from you to transition to the updated Core portfolio allocations. We’ll manage your Core portfolio tax-efficiently and put your cash flows (such as deposits, withdrawals, dividends, contributions, and distributions) to work to assist with the transition, moving your portfolio towards the updated target allocation. Our algorithms will automatically work to reduce any drift between your positions and the updated target allocation, by (1) first purchasing those funds where your portfolio is underweight when investing dividends and deposits and (2) first selling those funds where your portfolio is overweight, when generating cash for withdrawals. If you’ve enabled tax loss harvesting, we’ll use those opportunities to reduce drift as well. We do not expect any tax impact in IRAs, 401(k)s, and HSAs. Considering potential tax impact For taxable goals, while the trade-off between expected returns and tax impact is unique to each client (and depends on factors such as your investing time horizon and financial situation), most customers should see minimal changes to their taxes as a result of this transition. That’s because we’re taking a gradual approach with the portfolio migration and using cash flows to transition taxable accounts. If you would rather be invested in one of our other managed ETF portfolio strategies or wish to have value exposure in your portfolio, you have the option of selecting any of these strategies, along with the Value Tilt portfolio, on our platform. Betterment is regularly monitoring your investments so that you don’t have to. Learn more about our investment philosophy and process.