Dan Egan

Betterment's Recommended Allocation Methodology Oct 25, 2022 10:00:00 AM Betterment helps you meet your goals by providing allocation advice. Our allocation methodology and the assumptions behind it are worth exploring. When you sign up with Betterment, you can set up investment goals you wish to save towards. You can set up countless investment goals. While creating a new investment goal, we will ask you for the anticipated time horizon of that goal, and to select one of the following goal types. Major Purchase Education Retirement Retirement Income General Investing Emergency Fund Betterment also allows users to create cash goals through the Cash Reserve offering, and crypto goals through the Betterment Crypto Investing offering. These goal types are outside the scope of this allocation advice methodology. For all investing goals (except for Emergency Funds) the anticipated time horizon and the goal type you select inform Betterment when you plan to use the money, and how you plan to withdraw the funds (i.e. full immediate liquidation for a major purchase, or partial periodic liquidations for retirement). Emergency Funds, by definition, do not have an anticipated time horizon (when you set up your goal, Betterment will assume a time horizon for Emergency Funds to help inform saving and deposit advice, but you can edit this, and it does not impact our recommended investment allocation). This is because we cannot predict when an unexpected emergency expense will arise, or how much it will cost. For all goals (except for Emergency Funds) Betterment will recommend an investment allocation based on the time horizon and goal type you select. Betterment develops the recommended investment allocation by projecting a range of market outcomes and averaging the best-performing risk level across the 5th-50th percentiles. For Emergency Funds, Betterment’s recommended investment allocation is formed by determining the safest allocation that seeks to match or just beat inflation. Below are the ranges of recommended investment allocations for each goal type. Goal Type Most Aggressive Recommended Allocation Most Conservative Recommended Allocation Major Purchase 90% stocks (33+ years) 0% stocks (time horizon reached) Education 90% stocks (33+ years) 0% stocks (time horizon reached) Retirement 90% stocks (20+ years until retirement age) 56% stocks (retirement age reached) Retirement Income 56% stocks (24+ years remaining life expectancy) 30% stocks (9 years or less remaining life expectancy) General Investing 90% stocks (20+ years) 56% stocks (time horizon reached) Emergency Fund Safest allocation that seeks to match or just beat inflation Safest allocation that seeks to match or just beat inflation As you can see from the table above, in general, the longer a goal’s time horizon, the more aggressive Betterment’s recommended allocation. And the shorter a goal’s time horizon, the more conservative Betterment’s recommended allocation. This results in what we call a “glidepath” which is how our recommended allocation for a given goal type adjusts over time. Below are the full glidepaths when applicable to the goal types Betterment offers. Major Purchase/Education Goals Retirement/Retirement Income Goals Figure above shows a hypothetical example of a client who lives until they’re 90 years old. It does not represent actual client performance and is not indicative of future results. Actual results may vary based on a variety of factors, including but not limited to client changes inside the account and market fluctuation. General Investing Goals Betterment offers an “auto-adjust” feature that will automatically adjust your goal’s allocation to control risk for applicable goal types, becoming more conservative as you near the end of your goals’ investing timeline. We make incremental changes to your risk level, creating a smooth glidepath. Since Betterment adjusts the recommended allocation and portfolio weights of the glidepath based on your specific goals and time horizons, you’ll notice that “Major Purchase” goals take a more conservative path compared to a Retirement or General Investing glidepath. It takes a near zero risk for very short time horizons because we expect you to fully liquidate your investment at the intended date. With Retirement goals, we expect you to take distributions over time so we will recommend remaining at a higher risk allocation even as you reach the target date. Auto-adjust is available in investing goals with an associated time horizon (excluding Emergency Fund goals and the BlackRock Target Income portfolio) for the Betterment Core portfolio, SRI portfolios, Innovation Technology portfolio, Value Tilt portfolio, and Goldman Sachs Smart Beta portfolio. If you would like Betterment to automatically adjust your investments according to these glidepaths, you have the option to enable Betterment’s auto-adjust feature when you accept Betterment’s recommended allocation. This feature uses cash flow rebalancing and sell/buy rebalancing to help keep your goal’s allocation inline with our recommended allocation. Adjusting for Risk Tolerance The above investment allocation recommendations and glidepaths are based on what we call “risk capacity” or the extent to which a client’s goal can sustain a financial setback based on its anticipated time horizon and liquidation strategy. Clients have the option to agree with this recommendation or to deviate from it. Betterment uses an interactive slider that allows clients to toggle between different investment allocations (how much is allocated to stocks versus bonds) until they find the allocation that has the expected range of growth outcomes they are willing to experience for that goal given their tolerance for risk. Betterment’s slider contains 5 categories of risk tolerance: Very Conservative: This risk setting is associated with an allocation that is more than 7 percentage points below our recommended allocation to stocks. That’s ok, as long as you’re aware that you may sacrifice potential returns in order to limit your possibility of experiencing losses. You may need to save more in order to reach your goals. This setting is appropriate for those who have a lower tolerance for risk. Conservative: This risk setting is associated with an allocation that is between 4-7 percentage points below our recommended allocation to stocks. That’s ok, as long as you’re aware that you may sacrifice potential returns in order to limit your possibility of experiencing losses. You may need to save more inorder to reach your goals. This setting is appropriate for those who have a lower tolerance for risk. Moderate: This risk setting is associated with an allocation that is within 3 percentage points of our recommended allocation to stocks. Aggressive: This risk setting is associated with an allocation that is between 4-7 percentage points above our recommended allocation to stocks. This gives the benefit of potentially higher returns in the long-term but exposes you to higher potential losses in the short-term. This setting is appropriate for those who have a higher tolerance for risk. Very Aggressive: This risk setting is associated with an allocation that is more than 7 percentage points above our recommended allocation to stocks. This gives the benefit of potentially higher returns in the long-term but exposes you to higher potential losses in the short-term. This setting is appropriate for those who have a higher tolerance for risk.

Making Sense of Crypto Volatility Oct 12, 2022 7:59:00 AM Crypto is a volatile asset class. But there are things you can do to prepare for likely losses that accompany potential gains. We’ll jump straight to the point: Crypto is definitely a volatile asset class, meaning it can have large positive and negative returns. But there are things you can do to prepare for likely losses that accompany potential gains. Your secret power: Being ready for volatility There is no sugar-coating volatility in crypto, but understanding it can help set you up for long-term success. As an investor, having a plan for how you will respond to volatility ahead of time (and sticking to it) can be your secret power. When the market falls and everyone else is panic selling, you’ll know what to do. Let’s cover the basics of volatility in crypto: Volatility refers to how much crypto prices change over time. Generally, the larger the price changes, the more risky an investment tends to be, and the greater chances of both gains and losses. Crypto has been very volatile in its short life, with prices climbing and falling regularly. For example, since 2021, the price of Bitcoin has bounced around with peaks near $70,000 and lows under $20,000—this is volatility in action. 3 steps to help coast through crypto volatility You don’t have to let volatility take you for a ride. Here are three tools that you can use to manage through volatility to help keep your investments on track over the long term: Diversify your investments. If your overall investment portfolio is diversified, crypto doesn’t have to feel as daunting if it’s only a small percent of your net worth. That’s also why we recommend only 5% or less of your investable assets in crypto. Use dollar cost averaging. One method is to use dollar cost averaging to reduce risk and build up your investment over time. Using dollar cost averaging, you would deposit a consistent amount into your crypto portfolio each month. At Betterment, you can set up a scheduled deposit into your crypto portfolio to automate dollar cost averaging. This results in buying more units when prices are low and less when they’re high. You can use this approach with stocks and bonds as well. Be intentional about monitoring your portfolio. It can feel good to log in and see gains, sure. But logging in during a down period will probably just make you feel stressed. And we don’t make good decisions when we’re stressed—like panic selling for a loss. Take a break from frequently checking your performance when markets are down.

How To Avoid Common Investor Mistakes Aug 30, 2022 7:00:00 AM People often make financial decisions based on impulses and market shifts—here’s another way to do it. Investing mistakes are often rooted in our natural reactions. Let’s face it: We don’t always react the right way to information. And when enough investors have poor reactions, it can affect the entire market. Behavioral finance is a field of study that looks at how psychology affects financial decisions. It helps us understand why investors make common mistakes, so it’s easier to avoid them. But don’t worry—it doesn’t have to be complicated. Some of the most important lessons from this field are surprisingly simple. Try to invest with a goal in mind Investing can be one of the smartest financial decisions you can make. But a lot of investors start without knowing what they’re working toward—and that’s, well, less smart. When you don’t know why you’re building a financial portfolio, it’s a lot harder to know how to structure your investments. Instead, start with why. What do you want to be able to spend money on in the future? When are you going to use that money? These aren’t just stocks and bonds. Your investment is a future downpayment on a house. Your dream car. Retirement. College. Real things and experiences you want to be able to afford. Having a goal can help take the guesswork out of investing. You can calculate exactly how much you need to invest based on the range of potential outcomes. It’s also easier to decide where to put your investments. Retiring in 40 years? You might consider taking on more risk and allocating more in stocks. Hitting your goal next year? Play it safe. When you know how much you need to invest, break it into monthly chunks and automate your deposits. With recurring deposits, you're basically “paying yourself first” before worrying about other expenses. That way, you won’t talk yourself into skipping a month. (Which turns into two months, then three, and—oops, it’s been a year.) Focus on the long-term When you invest, you’ll likely have short-term losses here and there. It’s inevitable. And most times, it can be a mistake to make adjustments when your portfolio loses value. You can’t predict tomorrow’s performance based on yesterday’s. Even during the last ten years of steady growth, investors had to endure short-term losses at some point every year. Given enough time, the market trends upwards. And investments that perform poorly one day can easily make up for it the next. But that’s not what people tend to think about when they see their portfolio lose 15% of its value. They can panic. They make sweeping changes, reinvesting in funds and stocks that had short-term gains. And those big emotional decisions can do more harm than good. Investing is about long-term gains. Short-term losses are simply part of the process, so don’t panic every time there’s a loss. Watch out for “lifestyle creep” You don’t have to live frugally to be a successful investor. It helps, but the bigger issue is making sure that as your income increases, you stay in control of your lifestyle and spending. Most people see small pay increases over the course of their lives. 3% here. 8% there. When your regular spending increases with your income, it’s known as “lifestyle creep.” It can easily get in the way of saving enough to achieve your goals. If you have a lower income, it makes sense that more of your money goes toward basic necessities. But lifestyle creep happens when you gradually spend more on things you don’t need. Entertainment. Hobbies. Take out. Every time you increase your regular spending, your lifestyle costs more to maintain. You’ll likely need to save more for retirement. Your emergency fund may need to grow, too. Lifestyle creep is an even bigger problem if you started investing with the expectation that you’d invest more later. Some people feel intimidated by their goals, so they plan to increase the amount they invest when they start making more money. That’s fine—as long as you actually do it. Temporary increases in spending are OK. But as you make more money, don’t let a more extravagant lifestyle sabotage your goals. Five ways Betterment helps improve your investing behavior We help you see the big picture Our non-traditional portfolio presentation helps discourage investors from focusing on daily market movements. We show the constituents of your portfolio as the parts of a whole, but never the return of each individual component. This helps reduce the temptation to constantly adjust your allocation and make your portfolio less diverse. We encourage optimized deposit settings Setting up recurring deposits for the day after you get paid can set you up for success in a number of ways. First, it removes the constant temptation to pocket the cash instead. Second, it gives your paycheck just enough time to settle without letting that cash idle for long. And third, it can help rebalance your portfolio more tax-efficiently. We keep the focus on the future Our design helps you focus on decisions that matter—the ones about the future. Our minds assign a disproportionate significance to daily volatility, but it rarely impacts our long-term outlook. So instead of emphasizing daily market movements, we simply keep you updated on whether you’re on-track to reach your goals. We give you the information you need Conventional wisdom says advisors should proactively contact their customers when the market drops. This can create undue anxiety, and it can even prompt negative behaviors, such as making large unnecessary withdrawals. Instead, we carefully target our emails and in-app notifications, using active engagement as a filter. We show you the potential tax impact of transactions We display the estimated tax impact of an allocation change or withdrawal before you finalize the transaction. This estimate is not only useful information in its own right, but it’s also intended to help drive better investing behavior by reducing the number of unnecessary changes.