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Inside Betterment’s Investment Advice

No other online investment advisor is as intelligent and precise in giving advice—and our advice continually adapts to your progress, helping to keep you and your portfolio on track.

Articles by MP Dunleavey

By MP Dunleavey
  |  Published: February 28, 2014

Betterment's rigorous, technical engine delivers highly customized guidance.

We factor in your age, time horizon, savings rate and specified goals to deliver an asset allocation designed to deliver the best risk-adjusted returns.

One advantage of using Betterment is that we offer sophisticated investment advice tailored to your specific investment goals. Our product is optimized to help you achieve each goal, be it saving for a house down payment, retirement, just growing your wealth, or achieving a steady and safe income in retirement.

We consider your age, goal type, and time horizon to give advice about both asset allocation and required savings rate. And our advice continually adapts to your progress, adjusting recommendations over time as you approach your goal.

Here’s how we do it.

Time + Diversification = Better Advice

There is a massive amount of data, research, and customization that rolls up into the guidance we deliver as you set up your account. To understand all that we’re doing behind the scenes, it might help to envision the interlocking parts of a four-dimensional puzzle, one that incorporates time, risk, diversification of assets and your personal goal.

Risk versus Time

When you invest with Betterment you’ll notice that we don’t give you a risk-tolerance questionnaire. Instead, we ask about time as it pertains to your investments: your age in relation to your goal (with retirement, say) or the time horizon to reach your goal (e.g., three years to save up a Safety Net fund).

Our advice algorithm lets you know your likely range of investing outcomes—in seconds.Knowing your investing horizon, savings rate, and asset allocation, we can project a potential range of outcomes that are likely to occur. If you are investing for a longer period of time, stocks generally have less potential for loss than bonds, and vice versa for the short-term (bonds are typically less volatile than stocks). So our advice suggests an allocation that exposes you to an optimal level of objective risk, without reference to any personal self-assessment, based on the information you provided.

Thus, our advice is carefully calibrated to recommend an optimal asset allocation over your specific time frame and integrate that allocation with the estimated level of saving required to meet your goal. To further personalize, you can adjust your own risk exposure, using the asset allocation slider to ratchet your allocation up or down. If you choose to take on less risk, for example, our advice algorithm immediately shows you a likely range of outcomes with respect to your goal in the accompanying chart, and lets you adjust your savings amount.

Asset Allocation

Betterment’s highly diversified portfolio is a key part of our advice. Our portfolio is globally diversified and is comprised of index-tracking exchange-traded funds (ETFs). We chose these ETFs to offer a mix of economic growth factors that are designed to deliver as much total market performance as possible, while minimizing downside risk.

This optimized portfolio underpins the advice that you get about your goal, including the asset allocation we recommend and the suggested deposit amounts.

Glide paths

When you sign up with Betterment and select a goal, time and diversification are two powerful factors that we take into account when recommending your asset allocation. Thus, the goal you pick isn’t just a name (like “Roth IRA”). Each goal comes with a recommended asset allocation that’s based on your age and/or time horizon. As you approach your goal, we adjust our recommendations to appropriately trade off downside risks with expected returns for the remaining time of your investment. Ultimately, this means that we recommend higher stock allocations when you are further from your goal, and lower stock allocations as you approach your goal.

The Betterment portfolio is not a target-date fund, however, as target-date funds don’t allow you to customize your asset allocation, nor do they provide any investor guidance.

Every time you log in, we provide updated guidance based on how different variables may have shifted, and identify if your account is “off track” so that you can make adjustments to help you reach your goal. By following our advice, you can help reduce the chance you’ll be taking on too much risk at any point in your time horizon.

You are ultimately in control of your own glide path, and Betterment is with you along the way, recommending an optimal asset allocation to help you reach your goal while minimizing downside risk.

Betterment’s advice platform is engineered to provide input on your investment choices that optimize your chances for success—while remaining adaptable to your unique circumstances.

Your goals

When considering our asset allocation advice, there are five general categories:


Depending on the goal you choose, we factor in the amount of your initial deposit (and frequency of scheduled auto-deposits) and your age or time horizon to arrive at specific suggestions that will help keep you on track to meet your goal.

If your current parameters are unlikely to get you to your target, our advice algorithm instantly suggests specific ways you can adjust your plan:

  • You can increase your auto-deposit.
  • You can add or increase a one-time deposit to fund the account.
  • You can adjust the time until your goal is funded.
  • You can tweak several variables at once—including your asset allocation—so you can find the ideal scenario that works for you (e.g. saving more per month versus taking on more risk, etc.).

The Equity Strategy That Anchors Our Advice

Here are our four primary advice strategies that guide our asset allocation recommendations, both when you establish your account and over time.

1. Retirement Goal (tax-advantaged IRAs or other retirement accounts)

All goals are time and risk-sensitive, but when you set up a retirement account with us, our advice aims to balance growth and stability—for pre-retirees and retirees—as you’ll see in the chart below.

Many target-date glide paths dial back on equities steadily and have the least growth potential just when you’ve amassed the bulk of your nest egg. Our retirement glide path, shown below with a retirement date of 65, favors a more aggressive growth strategy, in part because of our sophisticated diversification model, and in part because we respect the fact that life expectancy is going up, and we may want to plan for a longer retirement. (There is now a 42% probability that at least one member of a 35-year-old couple will live to 90!)1

Retirement Advice


Figure above is an example retirement goal.

2. General Investing

If you don’t have a specific goal, and just want to grow your savings, General Investing may be right for you. It has a glide path similar to retirement, but with a floor of 55% equities when you are 65 or older. Thus, the advice for your asset allocation is calibrated to your age, as you see in the chart below. And because the aim here is growth, the strategy is an aggressive one, never dropping below 55% (unless you choose to be more conservative).

General Investing Advice


3. Major Purchase (i.e., saving for a home, wedding, car, or other major expenditure)

As you can see in the chart below, our advice for a major savings goal starts with a high equity allocation when you’re 20 years out, and gradually becomes more conservative—but we keep at least half of the portfolio in stocks until you’re about five years from your goal.

Major Purchase Advice


Advice + Autonomy

The beauty of the Betterment system is that our advice, while readily available, isn’t set in stone. You always have the freedom to change the variables and flex different factors to fit with your overall situation.

  • You can change your stock allocation
  • You can increase or decrease the amount of your deposits
  • You can change your time horizon

In each case, our responsive algorithm will recalculate these new inputs with your overall goal in mind, and let you know whether we think you’re still “On Track” to meet your goal, based on our rigorous internal calculus of your best chance of success.

Using Our Advice or a Live Advisor

How is our advice different from the input you’d get from a live financial advisor? While it’s true that a live advisor can provide a financial plan that incorporates more personal details, and that may feel different than our advice platform, the value of one doesn’t exclude the other.

As people in financial services have noted, the value-add of live advisors is precisely that human touch. But the value of an online investment platform like Betterment is the integration of objective advice with the easy execution of that advice—e.g., savings and risk advice, deposits, reinvesting dividends, rebalancing, and customized asset allocation.

Betterment’s advice incorporates the information you provide in an objective and data-driven way, then gives you an intuitive platform to execute that advice in order to help you reach your financial goals.

1Calculations are based on mortality data from the Society of Actuaries Retirement Participant 2000 Table.

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


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