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4 Betterment Investing Options If You Have a Low Risk Tolerance

If you’re an investor with low risk tolerance, Betterment has options that can help move forward your investing and savings goals, mediating between potential returns and your desired risk level.

Articles by Sebastian Rollén

By Sebastian Rollén
Quantitative Investing Associate, Betterment  |  Published: April 19, 2019

Depending on how you feel about risk tolerance, you may want to find alternatives to higher-risk investments during market volatility.

Betterment has four options that can help you invest or save with low-risk: Safety Net, General Investing, our Flexible Portfolio, or Betterment Everyday™ Savings.

One of the more hazy concepts to quantify in behavioral investing is the concept of risk tolerance. Though it’s clear that people in general like to win more than they like to lose, there is also a well-known phenomenon that some people are more risk averse than others.

Some investors are content to endure losses of more than half of their investment portfolio if they believe that the potential reward is high enough. Others may feel uneasy with even a loss of one percent.

In general, we expect that investors who take more risk can often gain higher returns, but that doesn’t mean seeking a low-risk portfolio is the wrong move. On the contrary, steadily investing in a low-risk portfolio can be an appropriate strategy if it’s an approach you can stick with for the long-term. Betterment’s tools can help you determine the amount of risk that’s right for your financial goals and how much you should save to help reach them.

If recent market volatility has made you rethink your risk tolerance, here are four options at Betterment that can offer lower risk.

Safety Net

Betterment’s Safety Net goal is designed with the specific purpose of building you a financial emergency fund. We recommend that you think of this as a pot of money you save for an emergency, such as a temporary loss of employment or a large unexpected expense.

After you decide how much money to put into your safety net goal, we invest the money into a 15% stock/85% bond ETF portfolio. While this portfolio is riskier than the 0% stock portfolio, it’s likely a more appropriate allocation for your emergency fund as it can be better at combating a hidden risk to your savings goal: inflation.

As my colleague Dan Egan wrote recently, “At least a market crash has the decency of showing up in your balance. Inflation doesn’t tell you that it’s cost you”. A Safety Net goal can offer the opportunity to potentially exceed inflation while seeking to give you a buffer for rainy days.

General Investing using Betterment’s Portfolio at Low Stock Allocation

Another option is to set your own stock allocation with Betterment’s allocation slider.

For every financial goal you set, Betterment recommends a target stock allocation but lets you adjust it from 0% to 100% stocks. Whatever allocation you choose, Betterment will help you along the way. As you move the slider, we will inform you whether your choice is “Very Conservative”, “Appropriately Conservative”, “Moderate”, “Appropriately Aggressive” or “Too Aggressive”.

While we don’t recommend that you change your allocation too drastically one way or the other, feel free to try out different allocations in our preview mode to find the portfolio that’s right for you.

Using Flexible Portfolios to Choose Assets

We build portfolios that balance a number of different asset classes—like US bonds and international stocks—to achieve a high level of diversification. However, if you want to change exposures to specific asset classes, Flexible Portfolios allows you to make changes to your allocation, and you can choose to only hold what are typically low volatility assets.

Another valid use of a Flexible Portfolio is to adjust to high concentrations in your holdings outside of Betterment. For example, if you have a large investment in US bonds in an outside account, you could use a Flexible Portfolio to shift your allocation at Betterment towards more international bonds and away from US bonds.

A Flexible Portfolio starts with the Betterment Portfolio Strategy as a baseline, and then we allow you to tune the specific allocation to your preferences. While we don’t recommend you make asset class changes, if you have specific views, you could choose only assets that generally have less volatility.

However, you should note that we have specific guidelines for appropriate uses of Flexible Portfolios, and generally, our recommendation is to only decrease risk by adjusting your allocation using your goal slider.

As you change the allocation, we will analyze the holdings and inform you whether the risk of the portfolio is suited for your goal, as well as whether the portfolio is adequately diversified.

Betterment Everyday™ Savings

If you just can’t bear to invest your cash, even if it’s in a low-risk portfolio, then consider using Betterment Everyday™ Savings. It’s a way to save while earning one of the highest yields available in the marketplace—up to * APY. You’ll have the ability to easily transfer your savings to any of your investment goals when you’re ready to take on more risk, but keep in mind that the transfer can take up to two business days to complete. Not only does our savings vehicle earn a high rate, it also has FDIC insurance up to $1,000,000†.

Conclusion

Investing can be an emotional experience for even the most seasoned investor. Choosing a portfolio that you can stick with can be particularly important to reaching your financial goals. No matter which of the savings or investing options above you may choose, Betterment will give you advice and support to help you reach your investment goals.


Betterment Everyday Savings

* The annual percentage yield (“APY”) on the deposit balances in Betterment Everyday Savings (“Savings”) is and represents the weighted average of the APY on deposit balances at the banks participating in Savings (the “Program Banks”) and is current as of . This APY is variable and subject to change daily. Deposit balances are not allocated equally among the participating Program Banks. A minimum deposit of $10 is required, but there is no minimum balance required to be maintained. The APY cited above is a promotional APY available only to customers who join the waiting list for Betterment Everyday Checking. The APY on deposit balances of customers who choose not to join the Betterment Everyday Checking waiting list is less than the promotional rate, and is as of , subject to change daily. Betterment Securities will receive fees in connection with deposit balances earning the non-promotional APY. See current APY. The promotional APY is available through the end of the year and may be extended in Betterment’s sole discretion. The APY available to a customer may be lower if that customer designates a bank or banks as ineligible to receive deposits.

See Betterment’s Form ADV Part II and Terms and Conditions for additional information on the deposit allocation methodology.

 Betterment Everyday Savings (“Savings”) is offered by Betterment LLC. Clients of Betterment LLC may participate in Savings through their brokerage account held at Betterment Securities. Neither Betterment LLC nor any of its affiliates is a bank. Through Savings, clients’ funds are deposited into one or more banks (“Program Banks“) where the funds earn a variable interest rate and are eligible for FDIC insurance.  Savings provides Betterment clients with the opportunity to earn interest on cash intended to purchase securities with through Betterment LLC and Betterment Securities. Savings should not be viewed as a long-term investment option.

Funds held in brokerage accounts while in transit to Program Banks are not eligible for FDIC insurance. Funds deposited into Savings are eligible for up to of FDIC insurance once the funds reach one or more Program Banks (up to $250,000 each at  up to four Program Banks). Even if there are more than four Program Banks, Clients will not necessarily have deposits allocated in a manner that will provide FDIC insurance above . The FDIC calculates the insurance limits based on all accounts held in the same insurable capacity at a bank, not just cash in Savings. If clients elect to exclude one or more Program Banks from receiving deposits the amount of FDIC insurance available through Savings may be lower. Clients are responsible for monitoring their total assets at each Program Bank, including existing deposits held at Program Banks outside of Savings, to ensure FDIC insurance limits are not exceeded, which could result in some funds being uninsured.  For more information on FDIC insurance please visit www.FDIC.gov. Deposits held in Program Banks are not protected by SIPC For more information see the full terms and conditions and Betterment LLC’s Form ADV Part II.

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