In the realm of personal finance, having clear investment goals is paramount. Betterment, a pioneer in automated investing, offers a sophisticated system that allows users to define and pursue various financial objectives. This approach enables investors to align their portfolios with specific life events and aspirations, creating a more personalized and effective investment strategy.
Betterment’s platform is designed to accommodate a wide range of financial goals from short-term needs to long-term aspirations. By setting up these goals, users can receive tailored investment advice that adapts to their unique circumstances and risk tolerance. This methodology ensures that each investment decision is aligned with the user’s
Understanding Betterment’s goal types and time horizons
Betterment categorizes investment goals into several distinct types, each with its own set of characteristics and implications for portfolio allocation. These goal types include Major PurchaseEducationRetirementRetirement IncomeGeneral Investing and Emergency Fund. Each goal type is associated with a specific time horizon which refers to the anticipated period until the funds are needed.
For most goal types, the time horizon plays a crucial role in determining the recommended investment allocation. Betterment’s system projects a range of market outcomes and averages the best-performing risk levels across the 5th-50th percentiles to develop these recommendations. This data-driven approach ensures that the suggested allocations are grounded in robust financial modeling and market analysis.
Emergency funds: a unique consideration
Emergency Funds represent a special case in Betterment’s goal-based approach. Unlike other goal types, Emergency Funds do not have a predefined time horizon, as the timing and amount of unexpected expenses are inherently unpredictable. To address this uncertainty, Betterment maintains a small operational cash allocation in automated investing portfolios, providing a buffer against potential financial setbacks.
For Emergency Funds, Betterment’s recommended investment allocation focuses on balancing growth potential with the need to limit the risk of significant drawdowns. This approach ensures that users have access to funds when needed, while still benefiting from the potential for long-term growth. The platform’s advice for Emergency Funds is designed to help users maintain a financial safety net without sacrificing the opportunity for investment gains.
Glidepaths: adapting your portfolio over time
One of the most innovative aspects of Betterment’s goal-based approach is the concept of a glidepath. A glidepath refers to how the recommended investment allocation for a given goal type adjusts over time, becoming more conservative as the target date approaches. This dynamic adjustment process helps users manage risk more effectively and ensures that their portfolios remain aligned with their evolving financial needs.
The glidepath for each goal type is tailored to the specific characteristics of that goal. For instance, Major Purchase and Education goals follow a more conservative path compared to Retirement or General Investing goals. This difference reflects the expectation that users will fully liquidate their investments at the intended date for Major Purchase and Education goals, while Retirement goals involve periodic distributions over time.
Auto-adjust feature: streamlining portfolio management
To further simplify the investment process, Betterment offers an auto-adjust feature that automatically adjusts the allocation of applicable goal types. This feature uses both reactive and proactive rebalancing to keep the goal’s allocation in line with Betterment’s recommended glidepath. By enabling auto-adjust, users can ensure that their portfolios remain optimized for their specific financial objectives and risk tolerance.
The auto-adjust feature is available for various portfolio types, including the Betterment Core portfolio, SRI portfolios, Innovation Technology portfolio, Value Tilt portfolio, and Goldman Sachs Smart Beta portfolio. This broad compatibility ensures that users can benefit from automated portfolio management regardless of their preferred investment strategy.
Customizing your investment strategy with risk tolerance
While Betterment’s recommended allocations are based on a concept called risk capacity which considers the extent to which a client’s goal can sustain a financial setback, users have the flexibility to deviate from these recommendations. Betterment provides an interactive slider that allows clients to adjust their investment allocations until they find the mix that suits their personal risk tolerance.
The slider offers five categories of risk tolerance: Very ConservativeConservativeModerateAggressive and Very Aggressive. Each category is associated with a specific range of stock allocations, enabling users to fine-tune their portfolios to match their comfort level with market fluctuations. This customization ensures that users can pursue their financial goals with a strategy that aligns with their individual preferences and circumstances.
By offering a comprehensive suite of goal-based investment tools, Betterment empowers users to take control of their financial futures. Whether saving for a major purchase, planning for retirement, or building an emergency fund, Betterment’s platform provides the guidance and flexibility needed to achieve long-term financial success.
