Betterment Resources | Original Content by Financial Experts

How we make market downturns less scary Jan 29, 2026 4:30:00 AM And how it can benefit your investing’s bottom line. The recent round of tariffs and trade wars have roiled markets, offering the latest example of investing’s inherent volatility. The fact that market drops do happen, and happen with some regularity, means that managing them is not only possible but paramount. "It's not about whether you're right or wrong," the investor George Soros once quipped. "But how much money you make when you're right, and how much you lose when you're wrong." Mitigating losses, in other words, matters just as much as maximizing gains. And this is true for two important reasons: The bigger the loss, the more tempted you may be to sell assets and lock in those losses. The bigger the loss, the less fuel for growth you have when the market does rebound. Point A is psychological, while Point B is mathematical, so let’s take each one separately. In the process, we’ll explain how we build our portfolios to not only weather the storm, but soak up as many rays as possible when the sun shines again. Smoothing out your investing journey Imagine you’re given a choice of rides: one’s a hair-raising roller coaster, the other a bike ride through a series of rolling hills. Sure, thrill seekers may choose the first option, but we think most investors would prefer the latter, especially if the ride in question lasts for decades. So to smooth things out, we diversify. Owning a mix of asset types can help soften the blow on your portfolio when any one particular type underperforms. Our Core portfolio, for example, features a blend of asset types like U.S. stocks and global bonds. The chart below shows how those asset types have performed individually since 2018, compared with the blended approach of a 90% stocks, 10% bonds allocation of Core. As you can see, Core avoids the big losses that individual asset classes experience on the regular. That’s one reason why through all the ups and downs of the past 15 years, it’s delivered ~10% in composite annual-weighted returns after fees since its launch1. 1As of 12/31/2025, and inception date 9/7/2011. Composite annual time-weighted returns: 20.1% over 1 year, 9.3% over 5 years, and 10.1% over 10 years. Composite performance calculated based on the dollar-weighted average of actual client time-weighted returns for the Core portfolio at 90/10 allocation, net of fees, includes dividend reinvestment, and excludes the impact of cash flows. Performance not guaranteed, investing involves risk. Core’s exposure to global bonds and international stocks has also helped its cause, given their outperformance relative to U.S. stocks year-to-date amidst the current market volatility of 2025. A smoother ride can take your money farther Downside protection is all the more important when considering the “math of losses.” We’ll be the first to admit it’s hard math to follow, but it boils down to this: as a portfolio’s losses rack up, the gains required to break even grow exponentially. The chart below illustrates this with losses in blue, and the gains required to be made whole in orange. Notice how their relationship is anything but 1-to-1. This speaks to the previously-mentioned Point B: The bigger your losses, the less fuel for growth you have in the future. Investors call this “volatility drag,” and it’s why we carefully weigh the risk of an investment against its expected returns. By sizing them up together, expressed as the Sharpe ratio, we can help assess whether the reward of any particular asset justifies its risk. This matters because building long-term wealth is a marathon, not a race. It pays to pace yourself. And yet, there will still be bumps in the road Because no amount of downside protection will get rid of market volatility altogether. It’s okay to feel worried during drops. But hopefully, with more information on our portfolio construction and automated tools like tax loss harvesting, you can ride out the storm with a little more peace-of-mind. And if you’re looking for even more reassurance, consider upgrading to Betterment Premium and talking with our team of advisors.

The pitfalls of comparing portfolio returns

The pitfalls of comparing portfolio returns Jan 28, 2026 8:00:00 AM How to take stock of your stocks (and bonds)—here, there, everywhere. Investing can feel like a leap of faith. You pick a portfolio. You deposit money. Then, you wait. Trouble is, it takes a while for compound growth to do its thing. Using the Rule of 72 and historical stock returns, it takes roughly a decade for every dollar invested to double. That’s a lot of time for second-guessing. You may peek at your portfolio returns and wonder, “Could I be doing better?” Don’t worry; it’s normal to question whether we’re making the right choices with our money. But comparing different portfolios can be tricky. Variables abound. There’s the composition of the portfolios themselves, but also their fees and tax treatments. So whether you’re sizing us up with rival money managers, or with the stock indexes you see most often in the news, we’re here to help you level set. The ABCs of apples-to-apples comparisons Let’s start with a statistic we’re quite proud of: Since its launch, our Core portfolio’s average annual return has been ~10% after fees*. Those are the returns of real Betterment customers, minus fees, and taking the timing of deposits and withdrawals out of the equation. This helps focus more on the performance of the portfolio itself. *As of 12/31/2025, and inception date 9/7/2011. Composite annual time-weighted returns: 20.1% over 1 year, 9.3% over 5 years, and 10.1% over 10 years. Composite performance calculated based on the dollar-weighted average of actual client time-weighted returns for the Core portfolio at 90/10 allocation, net of fees, includes dividend reinvestment, and excludes the impact of cash flows. Performance not guaranteed, investing involves risk. So, is 10% good? Well, it depends on the comparison. Stock indexes like the S&P 500 and Dow Jones dominate the news, but they’re hardly comprehensive. For one, they exclude bonds, a lower-yield staple of many portfolios. There’s a reason why regardless of the portfolio, we recommend holding at least some bonds. They help temper market volatility and preserve precious capital. Secondly, popular indexes also largely ignore international markets. The S&P, for example, typically represents less than half the value of all investable stocks in the world. Our globally-diversified portfolios, meanwhile, spread things out in service of a smoother investing journey. We're built for the long run, and history has shown that American and International assets take turns outperforming each other every 10-15 years. So the modest amount of international exposure in many of our portfolios means this: you're in a better position to profit when the pendulum swings the other way. Now, taking all of this to heart isn't easy. Not when the S&P returns 20% in a given year. At moments like these, it’s perfectly normal to feel FOMO when looking at the returns of your globally-hedged investing. To keep the faith, it helps to keep the right benchmark(s) in mind. Not all diversification is created equal We’re not alone in offering globally-diversified portfolios. But two portfolios, even with similar stock-to-bond ratios, can take very different paths to the same end goal. Tax optimization, market timing, and fund fees can all impact your investing’s bottom line as well. Some investors compare providers by investing a little with each, waiting a few months, then comparing the balances. This sort of trialing, however, may not tell you much. When it comes to our portfolios, you can find better comparisons in two particular ETFs that seek to track a wide swath of the market: ACWI for stocks and AGG for bonds. See how your Betterment portfolio stacks up against them in the Performance section for any goal or account. Simply scroll down to “Portfolio returns,” click “Add comparison,” and pick from the available allocations of stocks and bonds. We show your “Total return” by default at Betterment, otherwise known as the portfolio’s total growth for a given time period. You can also see this expressed as an “Annualized” return, or the yearly growth rate you often see advertised with other investments. Putting your performance in perspective Comparison may be the thief of joy, but it’s okay, prudent even, to evaluate your investing returns on occasion. Once or twice a year is plenty. The key is to steer clear of common pitfalls along the way. Like comparing your globally-diversified apple to someone else’s all-U.S. orange. Or cherry-picking a small sample size instead of a longer, more-reliable track record. It’s easier said than done. That’s why we bake more relevant comparisons right into the Betterment app. It’s also why we produce content like this. Because if there’s a silver lining to the slow snowballing of compound growth, it’s that you have plenty of time to brush up on the basics.

Are stocks stuck in AI’s orbit?

Are stocks stuck in AI’s orbit? Dec 29, 2025 11:20:25 AM Big Tech buoyed the market in 2025—We look at whether the trend will continue, and why the key to wealth remains unchanged. Stocks rallied in 2025, much of it on the back of Big Tech companies racing to develop transformative AI. But all of those businesses’ investments in AI infrastructure—fueled more by expectations than present-day profits—have turned up the volume on talks of an AI bubble emerging. Artificial intelligence could very well revolutionize our economy, but potentially not before the market loses patience with this early round of investing and valuations come back down to earth. So what’s an everyday investor to do? Before we suggest a few simple ways to better position yourself for the future, it can help to understand how big this AI boom may be historically-speaking, the bets behind it, and why timing its peak is so hard. The simple metric hinting at too much AI hype One of the most fundamental ways to size up whether an asset or market is overvalued in the present moment is its price-to-earnings (P/E) ratio. How much are people paying for it, in other words, relative to its current profits? If this ratio gets high enough, investors start to ask themselves whether such a steep cost is worth it for a piece of those earnings. Sometimes they seek out better deals—a big reason why international stocks outperformed in 2025—and sometimes they simply keep paying the premium. But that investing crucially becomes more and more pinned on the hopes of hypothetically larger profits down the road, not the earnings generated today. So just how big are those AI hopes right now, and how relatively expensive is it for a share of the U.S. stock market’s earnings? We’re not at dot-com bubble levels, but we’re getting close. Investors are incredibly bullish on the promise of AI, influenced in no small part by the hundreds of billions being invested by the AI companies themselves. It’s an arms race to secure the processing power they believe will be needed to power the promised AI revolution. Chips ahoy – How one tech giant’s expense is another’s earnings Training and delivering AI to market isn’t cheap. It requires sophisticated computing provided by power-hungry data centers. Many of the biggest tech companies, also known as “hyperscalers,” also provide this cloud computing infrastructure—and their spending on it is set to skyrocket in the coming years. These capital expenditures support market-wide earnings growth in a couple ways. Most directly, they drive the profits of the companies selling the computer chips that power AI. It’s no coincidence that Nvidia, the biggest chip company and benefactor of this spending, is currently the most valuable company in the S&P 500. The second way they support earnings growth is a little more indirect. And that’s because these big purchases are treated as investments, with the expense being spread out over time instead of immediately subtracted from the earnings of the companies doing the buying. This leads to the key question behind the AI bubble debate: Can all these chips and data centers deliver revenue in the next few years before the full bill comes due and eats into Big Tech’s earnings? Many analysts argue no, there’s no way the trillions of investments can pay off that quickly. Others, however, believe demand for computing power will remain strong, and point out all this spending is still small relative to our economy’s overall size. Whichever path we head down, however, no one knows exactly how fast we’ll get there. And therein lies the danger of trying to time a market peak. You could just as easily exit too early. Why timing bubbles can get you into trouble, and what to do instead If all of this is making you a little uneasy, you’re not alone. The thought of an upcoming market correction can be scary. But reeling in your investments to avoid future losses can be costly. You could just as easily miss out on the growth that’s made stocks one of the most reliable builders of wealth for centuries. Look back at the dot-com bubble itself. The “irrational exuberance” line that came to define it was coined a full three years before the market peaked. The S&P 500 more than doubled in that time. This is why the key to building wealth is keeping a long-term mindset. It’s easier said than done, so here are three concrete steps you can take today to better position yourself and your investing for the future: Diversify globally. Big Tech is by far the biggest slice of the U.S. stock market. Our globally-diversified portfolios help mitigate this risk by dedicating roughly a third of their allocation to international markets, the same markets that surged ahead in 2025 and outperformed for a decade after the dot-com bubble. Invest with a safety net. Having a healthy emergency fund makes it less likely you’ll need to touch your investments. It can also help you sleep more soundly at night. Accept your own appetite for risk. Our automated investing can suggest a target allocation of stocks and bonds, gliding that risk level down as your goal nears. But there’s no shame in craving a little less volatility. You can turn off this auto-adjust feature and manually bump up your allocation of bonds by a few percentage points. This will lower your expected returns, but sometimes it’s all you need to scratch the itch for action. Most importantly, remind yourself that however AI’s fortunes unfold in the years ahead, wealth is built over decades, not dictated by the daily headlines.

A big bill, ballooning debt, and a weakening U.S. dollar

A big bill, ballooning debt, and a weakening U.S. dollar Aug 20, 2025 5:00:00 AM The “Big Beautiful Bill” could take our national debt to unseen levels. Will international markets reap the rewards? In early July, Congress passed the One Big Beautiful Bill Act (OBBBA), and while its full impact won’t be felt for some time, two key aspects of it seem at odds. The first is that it permanently extends certain provisions of the 2017 Tax Cuts and Jobs Act, including lower individual tax rates and higher standard deductions. The similar corporate and individual income boosting nature of the OBBBA has likely played some part in the rally in stocks since April. Yet as much as markets eat this type of legislation up, it comes with a strong risk of heartburn. That’s because the second major takeaway from the bill is that it’s forecasted to add around $4 trillion to the national debt over the next 10 years. The chart below shows the national debt as a share of U.S. GDP, and the dashed orange line shows the estimated trajectory after the passage of the OBBBA. It’s projected to grow to levels unlike anything we’ve seen before, including World War II. So what does all this mean for markets? Burgeoning debt means a larger supply of Treasury bonds that the Federal government uses to borrow. This may in turn cause interest rates to rise in the long term as bond investors with creeping doubts about our country’s fiscal situation demand a lower price and a higher yield for its debt. There are also estimates that the bill may be a drag on economic growth as bigger deficits and government borrowing start to crowd out private investment. We may not fully know the outcomes of tariffs and the OBBBA for some time, but one place we’re seeing policy changes already is in demand for the U.S. dollar. Since January, we've seen a significant weakening in the dollar relative to other major currencies as the trade war and fiscal outlook have shaken confidence in U.S. markets. The dollar is down almost 10% over the last six months, the largest decline in such a span in over 30 years. A weaker dollar has the effect of making imports in the U.S. more expensive for consumers, but it also makes international investments worth more, as the values of companies overseas have gone up in dollar terms just by virtue of their local currencies strengthening relative to the dollar. This currency dynamic has contributed to the strong returns of our globally-diversified portfolios in 2025. The first half of the year offers a case study in the benefits of being globally-diversified, which smooths out volatility as various parts of the world take turns outperforming each other. It may not make the news headlines any less scary, but it can benefit your investing’s bottom line. Cash Reserve offered by Betterment LLC and requires a Betterment Securities brokerage account. Betterment is not a bank. FDIC insurance provided by Program Banks, subject to certain conditions. Learn more.

Inside the investing kitchen, part 1

Inside the investing kitchen, part 1 Jun 24, 2025 11:30:00 AM The recipe for a better portfolio, and the science behind a safer nest egg. Jamie Lee isn’t a Top Chef, but he knows his way around the kitchen. He dabbles in sous vide with the help of a sous chef (his 6-year-old daughter). He loves smoking salmon low and slow on a pair of pellet grills. And in some ways, his day job on the Betterment Investing team resembles the culinary world as well. He and his teammates work in a test kitchen of sorts, defining and refining the recipes for our low-cost, high-performing, and globally-diversified portfolios. They size up ingredients, pair flavors, and thoughtfully assemble the courses of each “meal.” All in service of customers with varying appetites for risk. It's highly-technical work, but we wouldn't be Betterment if we didn't make our methodologies as accessible as possible. So whether you're kicking the tires on our services, or you're already a customer and simply curious about the mechanics of your money machine, come along for a three-part, behind-the-scenes look at how we cook up a better portfolio. Here in part 1, we'll explore how we allocate your investing at a high level. In part 2, we'll zoom in to our process for selecting specific funds. And in part 3, we'll show you how we handle thousands of trades each day to keep our customers’ portfolios in tip-top shape. The science behind a safer nest egg Betterment customers rely on Jamie and team to do the heavy lifting of portfolio construction. They distill handfuls of asset classes, a hundred-plus risk levels, and thousands of funds into a simple yet eclectic menu of investment options. And underpinning much of this process is something called Modern Portfolio Theory, a framework developed by the late American economist Harry Markowitz. The theory revolutionized how investors think about risk, and led to Markowitz winning the Nobel Prize in 1990. Diversification lies at the heart of Modern Portfolio Theory. The more of it your investing has, the theory goes, the less risk you're exposed to. But that barely scratches the surface. One of the meatiest parts of building a portfolio (and by extension, diversifying your investing) is how much weight to give each asset class, also known as asset allocation. Broadly speaking, you have stocks and bonds. But you can slice up the pie in several other ways. There’s large cap companies or less established ones. Government debt or the corporate variety. And even more relevant as of late: American markets or international. Jamie came of age in South Korea during the late 90s. Back here in the States, the dot-com bubble was still years away from popping. But in South Korea and Asia more broadly, a financial crisis was well underway. And it changed the trajectory of Jamie’s career. His interest in and application of math shifted from computer science to the study of markets, and ultimately led to a PhD in statistics. Jamie Lee (right) helps optimize the weights of asset classes in Betterment portfolios. For Jamie, the interplay of markets at a global level is fascinating. So it’s only fitting that when optimizing asset allocations for customers, Jamie and team start with the hypothetical "global market portfolio," an imaginary snapshot of all the investable assets in the world. The current value of U.S. stocks, for example, represents about two-thirds the value of all stocks, so it's weighted accordingly in the global market portfolio. These weights are the jumping off point for a key part of the portfolio construction process: projecting future returns. Reverse engineering expected returns “Past performance does not guarantee future results.” We include this type of language in all of our communications at Betterment, but for quantitative researchers, or “quants,” like Jamie, it’s more than a boilerplate. It’s why our forecasts for the expected returns of various asset classes largely aren't based on historical performance. They're forward-looking. "Past data is simply too unreliable," says Jamie. "Look at the biggest companies of the 90s; that list is completely different from today.” So to build our forecasts, commonly referred to in the investing world as Capital Market Assumptions, we pretend for a moment that the global market portfolio is the optimal one. Since we know roughly how each of those asset classes performs relative to one another, we can reverse engineer their expected returns. This robust math is represented by a deceivingly short equation—μ = λ Σ ωmarket—which you can read more about in our full portfolio construction methodology. From there, we simulate thousands of paths for the market, factoring in both our forecasts and those of large asset managers like BlackRock to find the optimal allocation for each path. Then we average those weights to land on a single recommendation. This “Monte Carlo" style of simulations is commonly used in environments filled with variables. Environments like, say, capital markets. The outputs are the asset allocation percentages (refreshed each year) that you see in the holdings portion of your portfolio details At this point in the journey, however, our Investing team's work is hardly finished. They still need to seek out some of the most cost-effective, and just plain effective, funds that give you the intended exposure to each relevant asset class. For this, we need to head out of the test kitchen and into the market. So don’t forget your tote bag.

Inside the investing kitchen, part 2

Inside the investing kitchen, part 2 Jun 24, 2025 11:25:00 AM See how we source the higher-quality, lower-cost funds that fill up your portfolio. A lot goes into the making of a single Betterment portfolio. So much that we're spreading out this showcase of our Investing team's work over three parts. In part 1, we explore how we allocate customers’ investing at a high level, and in part 3, we show how we handle thousands of trades each day to keep their portfolios humming. And here in part 2, we zoom into a topic that may be a little more relatable for the everyday investor: picking the actual investments themselves. If asset allocation is like refining a recipe, then today's topic of fund selection is all about the sourcing of higher-quality, lower-cost ingredients. And for that, we turn our eye toward a market of another kind. Josh Shrair specializes in shopping capital markets here at Betterment, picking the funds that fill up your portfolio's respective allocations. His line of work looked a little different decades ago, back when his step dad was working as a trader on Wall Street. Back then, this level of attention to portfolio construction and fund selection was typically in service of only the ultra wealthy. But now, Josh and team navigate a rapidly-expanding universe of investments on behalf of everyday investors. Why shopping for funds isn't always so simple On one hand, the recent explosion of investment options has been great for investors. Increased competition drives down costs and opens up access to newer, more niche markets. But more choice also leads to more complexity. Take Exchange Traded Funds (ETFs), our preferred building block for portfolios thanks to their transparency, tax efficiency, and lower costs. They bundle up hundreds, and sometimes thousands, of individual stocks and bonds. But even ETFs are multiplying fast. In 2024 alone, 723 new ones launched, bringing the total to nearly 4,000. To illustrate this abundance, let's say your asset allocation calls for a heaping serving of “Large Cap” stocks, meaning companies valued at $10 billion or more. Nearly 500 ETFs populate this particular corner of the ETF universe. We can narrow that group down to 30 based on the specific exposure we’re looking for, like say U.S. Large Cap companies, or the S&P 500, a list or “index” of 500 of the biggest American companies. But the due diligence is hardly done. Some ETFs that track the S&P 500 follow it faithfully, while others put their own spin on it, which can open investors up to unintended exposure. Josh Shrair (second from left) helps navigate a rapidly-expanding universe of ETFs on behalf of Betterment customers. Just as crucially, their costs are all over the place, and higher fees can erode your returns in the long run. That's why the SPDR fund is currently our Core portfolio’s primary way of achieving U.S. Large Cap stock exposure. It offers both a low cost to hold (0.02%) and a low cost to trade (0.03% at the time of writing), making for a low overall cost of ownership. "Shopping for investments is a little like buying a car," Josh says. "The total cost is way more than the sticker price." How we calculate cost of ownership Part of our role as a fiduciary, someone who's legally obligated to act in their clients' best interests, is conducting a deep and unbiased evaluation of the ETFs used in our portfolios. The process Josh and team use is entirely "open architecture," meaning we’re not obligated to use funds from any particular provider. Instead, we strive to select the most optimal ones in terms of cost and exposure. It helps that Betterment itself doesn't make, manage, and sell funds, which means we avoid the inherent conflict of interest some advisors face when they also act as a fund manager. These firms can be tempted to steer customers toward their own funds, even when a better alternative exists. So we take pride in the due diligence behind our fund selection, and that begins with our "cost of ownership" scoring methodology. It factors in the two types of costs mentioned earlier: the cost to "hold" or own a fund, also known as its expense ratio, and the cost to trade it. As you'll see in part 3 of this series, a portfolio is hardly static. Deposits come in. Withdrawals go out. Rebalancing takes place on the regular. All of this requires daily trading, so the cost of those transactions matters to your investing's bottom line. The cost-to-trade is also known as the "bid-ask spread," or the markup that traders expect when selling a share. It's how they make money, and similar to wholesalers and retailers like Costco, the bigger the fund, the smaller the margins a trader can live with. Seeking out these value buys is how we're able to deliver globally-diversified portfolios at a fraction of the cost of alternatives on the market today. And we’re never done shopping. Our preferred funds are updated multiple times throughout the year. Primed for the purchase There's a lot more to our fund selection methodology, especially for funds that aren’t tied to a specific index, but are instead made from scratch. Some fund managers like Goldman Sachs, where Josh worked earlier in his career, also blend both approaches into a “smart beta” strategy. We offer one such portfolio alongside our Betterment-built collections. But for the sake of this series, let's pretend for a moment that our tote bags are full, and we're ready to check out. It’s time to meet the team behind every transaction at Betterment.

Three burning questions for the market in 2025

Three burning questions for the market in 2025 Jan 7, 2025 10:09:29 AM Are U.S. stocks overvalued? Will AI pan out? Do markets care who’s in the White House? Investors are starting to feel a healthy dose of cognitive dissonance—that grating feeling when two beliefs you hold don't quite line up. On one hand, the U.S. market is soaring on the back of AI optimism and potential tax cuts. And on the other, companies’ stock prices, relative to their actual earnings, are starting to loosely resemble the run-up to the Dotcom bubble of the late 90s. So which belief will win out in 2025: boom or bust? Let's parse this conflicted outlook by examining three questions in particular: Are U.S. stocks overvalued? Will AI pan out? Do markets care who’s in the White House? Are U.S. stocks overvalued? Around this time last year, we said the booming market at the time might keep going if the Fed lowered interest rates in response to cooling inflation. Interest rates did tick down, and boy, did markets take notice. Through the end of November 2024, a 90% stock Betterment Core portfolio returned roughly 17.6% year-to-date. Such a run, however, begs speculation of yet another reversal, a swing of the pendulum toward less frothy valuations and a drawback in portfolio returns. The S&P 500 currently costs about 25 times more than what those companies are expected to bring in over the next 12 months. For comparison, this average “price-to-earnings” ratio over the last 35 years has been 18x. Taking the perspective of a long-term investor, however, these ratios matter less than you may think. So long as you stay invested for more than a few years, chances are the market as a whole may “grow” into its valuation. Remember 2021 when a group of tech-centric, risky stocks were darlings of the pandemic and shot to the moon? Analysts rightly called foul—those kinds of valuations shouldn’t be sustainable. But within a few years the market was setting fresh all-time highs. An investor who had sold or stayed on the sidelines would've missed out on all that growth. So if you’re tempted to sell “high” right now, remember this: On average, investing at all-time highs hasn’t resulted in lower future returns compared to investing on any given trading day. On the contrary, buying when the market has never been higher leads to slightly higher average returns in the long run. You can never be sure exactly when a growth cycle will end. Will AI pan out? A big driver of this bull market has been optimism surrounding artificial intelligence and the big tech companies powering it, like Amazon, Google, and the computer chip-maker Nvidia. They’ve rallied big-time over the last 12 months, and as a result, they make up an increasingly large share of the U.S. and global stock market. A debate, however, surrounds their outperformance and the hoopla around AI in general. Some analysts argue that a good amount of AI investment won’t ultimately prove fruitful, while others foresee significant boosts to productivity and profits. There’s that grating feeling again—the potential of revolutionary upside sitting right next to worries that it’s mostly hype. In the face of uncertainty, all one can do to lower their risk is hedge their bets and diversify. Our portfolios’ stock allocations take this to heart, offering significant exposure to Big Tech, while also investing in European, Japanese, and emerging markets. It’s these less expensive equities that provide a potential buffer in the event AI’s ambitions fall short. Do markets care who’s in the White House? Right now, markets aren’t sure exactly what to make of President-elect Trump’s proposed economic agenda. Promises of corporate tax cuts, while fueling the recent surge in stocks, could in practice increase inflation. Same goes for tariffs and mass deportation. And rising inflation could in turn pause or reverse the recent trend in interest rate cuts. But until more details emerge, or the policies themselves are actually put into practice, we won’t know their full effect. Instead of sitting back and anxiously waiting, we suggest taking a look at the chart below. It shows that markets tend to rise over time regardless of which party holds the presidency. Maintaining a consistent, diversified investment approach is the best way to navigate political and economic cycles. That, and maybe cooling it a bit on your news consumption. So what now? As always, it’s impossible to know exactly how long each growth cycle will last, so consider erring on the side of staying invested. If you find yourself sitting on too much cash, now might be the time to put it to work in the market. You can invest it as a lump sum, which research shows may offer higher potential returns. Or you can sprinkle it into a portfolio over time. Most importantly, however the market performs in 2025, we suggest zooming out and reminding yourself you’re in it for the long haul.

An investor’s guide to diversification

An investor’s guide to diversification Nov 1, 2024 8:00:00 AM Diversification is an investing strategy that helps reduce risk by allocating investments across various financial assets. Here’s everything you need to know. In 1 minute When you invest too heavily in a single asset, type of asset, or market, your portfolio is more exposed to the risks that come with it. That’s why investors diversify. Diversification means spreading your investments across multiple assets, asset classes, or markets. This aims to do two things: Limit your exposure to specific risks Make your performance more consistent As the market fluctuates, a diverse portfolio generally remains stable. Extreme losses from one asset have less impact—because that asset doesn’t represent your entire portfolio. Maintaining a diversified portfolio forces you to see each asset in relation to the others. Is this asset increasing your exposure to a particular risk? Are you leaning too heavily on one company, industry, asset class, or market? In 5 minutes In this guide, we’ll: Define diversification Explain the benefits of diversification Discuss the potential disadvantages of diversification What is diversification? Financial assets gain or lose value based on different factors. Stocks depend on companies’ performance. Bonds depend on the borrower’s (companies, governments, etc.) ability to pay back loans. Commodities depend on public goods. Real estate depends on property. Entire industries can rise or fall based on government activity. What’s good or bad for one asset may have no effect on another. If you only invest in stocks, your portfolio’s value completely depends on the performance of the companies you invest in. With bonds, changing interest rates or loan defaults could hurt you. And commodities are directly tied to supply and demand. Diversification works to spread your investments across a variety of assets and asset classes, so no single weakness becomes your fatal flaw. The more unrelated your assets, the more diverse your portfolio. So you might invest in some stocks. Some bonds. Some fund commodities. And then if one company has a bad quarterly report, gets negative press, or even goes bankrupt, it won’t tank your entire portfolio. You can make your portfolio more diverse by investing in different assets of the same type—like buying stocks from separate companies. Better yet: companies in separate industries. You can even invest internationally, since foreign markets can potentially be less affected by local downturns. What are the benefits of diversification? There are two main reasons to diversify your portfolio: It can help reduce risk It can provide more consistent performance Here’s how it works. Lower risk Each type of financial asset comes with its own risks. The more you invest in a particular asset, the more vulnerable you are to its risks. Put everything into bonds, for example? Better hope interest rates hold. Distributing your assets distributes your risk. With a diversified portfolio, there are more factors that can negatively affect your performance, but they affect a smaller percentage of your portfolio, so your overall risk is much lower. If 100% of your investments are in a single company and it goes under, your portfolio tanks. But if only 10% of your investments are in that company? The same problem just got a whole lot smaller. Consistent performance The more assets you invest in, the less impact each one has on your portfolio. If your assets are unrelated, their gains and losses depend on different factors, so their performance is unrelated, too. When one loses value, that loss is mitigated by the other assets. And since they’re unrelated, some of your other assets may even increase in value at the same time. Watch the value of a single stock or commodity over time, and you’ll see its value fluctuate significantly. But watch two unrelated stocks or commodities—or one of each—and their collective value fluctuates less. They can offset each other. Diversification can make your portfolio performance less volatile. The gains and losses are smaller, and more predictable. Potential disadvantages of diversification While the benefits are clear, diversification can have a couple drawbacks: It creates a ceiling on potential short-term gains Diverse portfolios may require more maintenance Limits short-term gains Diversification usually means saying goodbye to extremes. Reducing your risk also reduces your potential for extreme short-term gains. Investing heavily in a single asset can mean you’ll see bigger gains over a short period. For some, this is the thrill of investing. With the right research, the right stock, and the right timing, you can strike it rich. But that’s not how it usually goes. Diversification is about playing the long game. You’re trading the all-or-nothing outcomes you can get with a single asset for steady, moderate returns. May require more maintenance As you buy and sell financial assets, diversification requires you (or a broker) to consider how each change affects your portfolio’s diversity. If you sell all of one asset and re-invest in another you already have, you increase the overall risk of your portfolio. Maintaining a diversified portfolio adds another layer to the decision-making process. You have to think about each piece in relation to the whole. A robo advisor or broker can do this for you, but if you’re managing your own portfolio, diversification may take a little more work.

Diversification

Featured articles

All Diversification articles

Looking for a specific topic?