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Understanding Risk

Free To Choose: Why We Let Investors Choose Their Risk Profile

How do Betterment customers choose the level of risk that's right for them?

Articles by Jon

By Jon Stein
CEO & Founder, Betterment  |  Published: March 30, 2010

In response to our post on Cutting Out Middle-Men, one reader asks:

How does Betterment adjust for the varying tiers of taste for risk among different investors without individual consultation offered by middle men?

A good question. How do Betterment customers choose the level of risk that’s right for them?

First, Betterment focuses its customers on the most important choice in investing: the allocation between Stocks and Bonds. Over a long horizon, the allocation accounts for upwards of

90% of the variance in returns (here’s one of multiple sources), which is another way of saying it’s basically all that matters. By focusing on one choice, many customers are able to make better decisions than they might if they were distracted by other, less meaningful choices.

Second, Betterment gives customers tools to help make this choice.  We offer a forecast of future returns based on a customer’s investment allocation and we recommend an allocation based on a customer’s profile and preferences.

Third, we show customers the allocation decisions of others like them.  That’s not only reassuring, it’s also helpful information for deciding how to invest.

All this gives customers the better outcomes they want – without middle-men.

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