Betterment is dedicated to developing investment portfolios that enhance financial growth while aligning with personal aspirations. This article explores Betterment’s structured methodology for constructing portfolios, which is based on empirical evidence and a rigorous decision-making process.
The foundation of Betterment’s approach is the Core portfolio, which serves as a baseline for all globally diversified investment strategies. Adjustments are made to address the unique objectives of various portfolios, including tailored allocations toward value-centric or innovative stocks, as well as adherence to Socially Responsible Investing (SRI) principles.
For a more detailed understanding of specific third-party portfolios offered, such as the Goldman Sachs Smart Beta portfolio, please refer to their respective disclosures.
Table of Contents:
The evidence
Investment managers face two primary responsibilities when constructing a portfolio: selecting asset classes and optimizing the portfolio. The methodology for these components is examined in detail in the following sections. Although the selection of funds is crucial, it is addressed separately to emphasize the distinct processes involved.
To achieve effective asset allocation, the goal is to position the portfolio along the efficient frontier, which represents a collection of portfolios aimed at maximizing returns for any given level of risk. Long-term strategies typically prioritize maximizing returns relative to volatility, a metric used to measure the fluctuation of those returns. Betterment’s asset allocation strategy is informed by the Modern Portfolio Theory introduced by economist Harry Markowitz.
Modern Portfolio Theory and its implications
A core principle of Modern Portfolio Theory is that each asset within a portfolio should not be evaluated in isolation. Instead, its potential risks and returns must be considered as they contribute to the overall portfolio performance. This theory aims to optimize expected returns while minimizing risk or, conversely, to limit expected risk while achieving certain returns.
Alternative portfolio construction methods may pursue different objectives, such as maximizing income or minimizing losses. Beginning with a broad spectrum of investable assets, Betterment conceptualizes the global market portfolio. To effectively represent the exposures of various asset classes, Betterment evaluates available exchange-traded funds (ETFs) that symbolize each class within the theoretical market portfolio.
Composition of Betterment’s portfolios
Betterment’s asset class selection includes a mix of stocks and bonds. U.S. and developed international market stocks form a core component of the portfolios. Historically, while stocks can be volatile, they also provide a degree of protection against inflation. Despite significant downturns, such as the financial crisis of 2008 and the ongoing impacts of the pandemic, long-term data and expected returns indicate that developed market stocks typically outperform bonds on a risk-adjusted basis.
Diversity through emerging markets
In the pursuit of a globally diversified portfolio, Betterment also includes stocks from emerging markets. Although these stocks exhibit greater volatility compared to developed market stocks, their inclusion is essential for enhancing global diversification. It is important to note that frontier markets are excluded due to their minimal contribution to global capital and the challenges associated with investing in them.
Bond exposure is another vital component of the portfolio, as bonds historically exhibit a low correlation with stocks, thereby reducing overall portfolio risk. To enhance diversification and address varying risk-reward dynamics, Betterment incorporates several bond asset classes.
Refining portfolio management techniques
Prior to the transition to a benchmark-aware approach, portfolios were managed without direct reference to global stock and bond indices. This new strategy allows Betterment to calibrate exposures according to a custom benchmark that reflects diversification preferences across global stocks and bonds. This benchmark serves as a reference point for asset allocation decisions and performance assessment.
The foundation of Betterment’s approach is the Core portfolio, which serves as a baseline for all globally diversified investment strategies. Adjustments are made to address the unique objectives of various portfolios, including tailored allocations toward value-centric or innovative stocks, as well as adherence to Socially Responsible Investing (SRI) principles. For a more detailed understanding of specific third-party portfolios offered, such as the Goldman Sachs Smart Beta portfolio, please refer to their respective disclosures.0
The foundation of Betterment’s approach is the Core portfolio, which serves as a baseline for all globally diversified investment strategies. Adjustments are made to address the unique objectives of various portfolios, including tailored allocations toward value-centric or innovative stocks, as well as adherence to Socially Responsible Investing (SRI) principles. For a more detailed understanding of specific third-party portfolios offered, such as the Goldman Sachs Smart Beta portfolio, please refer to their respective disclosures.1
The foundation of Betterment’s approach is the Core portfolio, which serves as a baseline for all globally diversified investment strategies. Adjustments are made to address the unique objectives of various portfolios, including tailored allocations toward value-centric or innovative stocks, as well as adherence to Socially Responsible Investing (SRI) principles. For a more detailed understanding of specific third-party portfolios offered, such as the Goldman Sachs Smart Beta portfolio, please refer to their respective disclosures.2
The foundation of Betterment’s approach is the Core portfolio, which serves as a baseline for all globally diversified investment strategies. Adjustments are made to address the unique objectives of various portfolios, including tailored allocations toward value-centric or innovative stocks, as well as adherence to Socially Responsible Investing (SRI) principles. For a more detailed understanding of specific third-party portfolios offered, such as the Goldman Sachs Smart Beta portfolio, please refer to their respective disclosures.3
Ensuring robust portfolio performance
The foundation of Betterment’s approach is the Core portfolio, which serves as a baseline for all globally diversified investment strategies. Adjustments are made to address the unique objectives of various portfolios, including tailored allocations toward value-centric or innovative stocks, as well as adherence to Socially Responsible Investing (SRI) principles. For a more detailed understanding of specific third-party portfolios offered, such as the Goldman Sachs Smart Beta portfolio, please refer to their respective disclosures.4
The foundation of Betterment’s approach is the Core portfolio, which serves as a baseline for all globally diversified investment strategies. Adjustments are made to address the unique objectives of various portfolios, including tailored allocations toward value-centric or innovative stocks, as well as adherence to Socially Responsible Investing (SRI) principles. For a more detailed understanding of specific third-party portfolios offered, such as the Goldman Sachs Smart Beta portfolio, please refer to their respective disclosures.5
The foundation of Betterment’s approach is the Core portfolio, which serves as a baseline for all globally diversified investment strategies. Adjustments are made to address the unique objectives of various portfolios, including tailored allocations toward value-centric or innovative stocks, as well as adherence to Socially Responsible Investing (SRI) principles. For a more detailed understanding of specific third-party portfolios offered, such as the Goldman Sachs Smart Beta portfolio, please refer to their respective disclosures.6
