Investing Terms Explained
Here at Betterment, we automate all the good stuff to keep your account purring. Because you don’t deal with these things on a day-to-day basis, you might be unsure about what’s actually happening behind the scenes.
Here are some terms you will hear used in conjunction with any well-managed portfolio (feel free to throw a few around at the next cocktail party):
Diversification
Diversifying your assets means not “putting all your eggs in one basket”. A diversified portfolio should be diversified at two levels: between asset categories and within asset categories. I’m intrigued and want to read more!
Asset Allocation
Asset allocation is an individual choice based on what you need, how long you have, and how comfortable you are with risk. At Betterment, asset allocation is based on your choice of balance between stocks and bonds. When selecting your asset allocation, it’s best to think about your savings plan in real-world terms. Are you saving for college, a down payment on a house or business, or are you getting married? Show me some examples.
Rebalancing
Rebalancing is recognized as smart practice in investing. It realigns your portfolio back to its original asset allocation. A portfolio is rebalanced by selling “extra” stocks and buying more bonds to recreate the original stock/bond ratio, for example.
At Betterment, we rebalance your portfolio dynamically and efficiently as you invest. Every time you receive a dividend or deposit more money, we invest it into the part of the portfolio that needs rebalancing. For the most part, this negates the need to sell stocks or bonds to balance out the portfolio. It’s an extremely tax efficient way to rebalance.
Rebalancing prevents you from making the classic behavioral mistake of buying high and selling low. It takes emotion out of the equation because you adjust your portfolio to its original state, regardless of whether the market’s up or down. It also protects you from unwittingly taking on more risk than you intended. Tell me more about this!
Dollar Cost Averaging
Dollar cost averaging is the practice of regularly investing a fixed amount of money regardless of market activity. This strategy lowers the average cost per share of an investment and eliminates the risk of a single investment at the wrong time. How does it do that?
Behavioral Economics
The way we manage money is inherently psychological, meaning that even when we know the right things to do, we don’t always do them. How can I overcome this cursed behavior of mine?!
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