Earn Rewards: Sign up now and earn a special reward after your first deposit. See offer details

<title>Dismiss</title>

Betterment

Save, invest, retire

GET — On the App Store

View

Upcoming maintenance: Our website and mobile apps will be unavailable from midnight Saturday to 4am Eastern time on Sunday for routine maintenance.

Introducing Checking

Download our app and gain access to no‑fee, hassle‑free checking.

Introducing Checking! Our no-fee, hassle-free, mobile-first checking account. Learn more

What the CARES Act and market volatility mean for 401(k)s. See resources

<title>Dismiss</title>

Diversification Explained

Diversifying your assets means not “putting all your eggs in one basket,” and asset allocation is the practice of achieving the balance between risk and reward.

Articles by Betterment Editors
By the Editorial Staff Betterment Resource Center Published Nov. 16, 2011
Published Nov. 16, 2011
2 min read

There’s a handy little story on the SEC website that helps explain it:

Have you ever noticed that street vendors often sell seemingly unrelated products – such as umbrellas and sunglasses? Initially, that may seem odd. After all, when would a person buy both items at the same time? Probably never – and that’s the point. Street vendors know that when it’s raining, it’s easier to sell umbrellas but harder to sell sunglasses. And when it’s sunny, the reverse is true. By selling both items- in other words, by diversifying the product line – the vendor can reduce the risk of losing money on any given day.

Before I delve into the trade-offs of different allocations, it’s helpful to outline how this works in a Betterment account.

Eight ETFs

A diversified portfolio should be diversified at two levels: between asset categories and within asset categories. All Betterment customers invest in the same portfolio – a blend of stock and bond index exchange-traded funds (ETFs) that are efficient, liquid, and provide conservatively balanced exposure. They encompass thousands of companies in the US and overseas.

We’ve taken care of this decision, because frankly, it’s complex, time-consuming, and really, really hard to get right. Our investment advisory panel, made up of industry experts including economics professors and CFAs, took a critical eye to the stocks out there and selected the best mix of assets for someone looking for steady, long-term growth (which should be all of us!).

Two Baskets

In a nutshell – these assets make up our two baskets “Treasury Bonds” and “Stock Market”.

When you deposit money with Betterment, it is seamlessly invested in a blend of the two.

One Handy Dial

Betterment gives you control over the next level of diversification: the proportion of your money invested in each of these baskets. Setting the allocation between these two portfolios is the single investment choice Betterment customers make. It’s important because if you don’t include enough risk in your portfolio, your investments may not earn a large enough return to meet your goal. Too much risk and the money for your goal may not be there when you need it.

Help! How do I make such an important decision?

Don’t worry, tell us what your goal is, how much you need and when you think you will need it (as well as extra contributions you think you can make over time, such as regular auto-deposit). Betterment will make a recommendation for your asset allocation.

Recommended Content

View All Resources

What A Trip To The Casino Can Teach You About Investing And Risk

Learn the ins and outs of how gambling works from a quantitative investor, and use it to your advantage in investing for the long term.

Should Your Small Business Offer a 401(k) Plan?

When deciding on employee benefits, it can be hard to determine which are right for your small business. These days, more employers are recognizing the importance of financial wellness and how it attracts and retains top talent.

Assessing a Portfolio’s Diversification

Guidance on diversification to help you make portfolio changes, knowing the potential impact to the future performance of your investments.

Explore your first goal

Cash Reserve

Our high-yield account built to help you earn more on every dollar you save.

Safety Net

This is a great place to start—an emergency fund for life's unplanned hiccups. A safety net is a conservative portfolio.

Retirement

Whether it's a long way off or just around the corner, we'll help you save for the retirement you deserve.

General Investing

If you want to invest and build wealth over time, then this is the goal for you. This is an excellent goal type for unknown future needs or money you plan to pass to future generations.

See details and disclosure for Betterment's articles and FAQs.