In the realm of investment, constructing a portfolio that aligns with individual goals can be daunting. Betterment, a pioneer in automated investment services, has developed a systematic methodology for building portfolios aimed at enhancing client financial outcomes. This article delves into the intricate process underlying Betterment’s portfolio construction, emphasizing the importance of global diversification, asset allocation, and optimization.
The foundation of Betterment’s investment philosophy is the Core portfolio, which serves as the starting point for various tailored portfolios.
Each portfolio is uniquely adjusted based on specific investment goals, whether it involves focusing on value stocks, innovative technologies, or adhering to socially responsible investing principles.
Table of Contents:
Global diversification and asset allocation
At the core of Betterment’s strategy is the concept of global diversification. An effective asset allocation strategy resides on the efficient frontier, representing portfolios that aim to achieve the highest expected return for a given level of risk. The objective is to maximize returns while minimizing potential volatility, understood as the variability of investment returns.
This approach is heavily influenced by Modern Portfolio Theory, introduced by economist Harry Markowitz. According to this theory, no asset should be evaluated in isolation; instead, its risk and return must be viewed in the context of the overall portfolio. Thus, the aim is to maximize expected returns while effectively managing risk levels.
Asset class selection
Betterment begins its asset allocation by considering a comprehensive range of investment options, visualized as a vast global market portfolio. The selection process predominantly involves exchange-traded funds (ETFs), which represent various asset classes in the theoretical market portfolio. The following asset categories form the backbone of Betterment’s portfolio construction:
- Stocks:including U.S. stocks, international developed market stocks, and emerging market stocks.
- Bonds:comprising U.S. treasury bonds, inflation-protected bonds, investment-grade bonds, municipal bonds, and international bonds.
Stocks, particularly from developed markets, are integral to Betterment’s strategy as they have historically outperformed bonds, especially on a risk-adjusted basis. While investing in stocks carries inherent volatility—as seen during events like the 2008 financial crisis or the pandemic—long-term projections suggest they remain vital for achieving positive investment returns.
The importance of bond exposure
In addition to equities, bonds play a crucial role in Betterment’s portfolio construction. They traditionally demonstrate a low correlation with stocks, providing a mechanism to mitigate overall portfolio risk. By incorporating a diverse range of bond assets, Betterment enhances the diversification of client portfolios.
However, Betterment consciously excludes certain asset classes, such as commodities and real estate investment trusts (REITs), from its portfolios. The reasoning lies in the minimal contributions these assets make to overall risk-adjusted returns. Instead, Betterment offers real estate exposure through stock sectors rather than as a separate asset class.
Benchmark awareness in portfolio management
In 2026, Betterment transitioned to a benchmark-aware approach, allowing for a more structured evaluation of portfolio performance. This shift involved introducing a custom benchmark that reflects the global stock and bond markets. This benchmark serves as a reference point for asset allocation and investment performance, helping to align expectations between portfolio managers and clients.
The custom benchmark comprises a mixture of indices, including the MSCI All Country World Stock IMI Index and the Bloomberg U.S. Universal Bond Index. This framework provides a clearer view of how client portfolios should behave concerning broader market movements while still optimizing for varying risk tolerances.
Optimizing portfolios for client needs
The foundation of Betterment’s investment philosophy is the Core portfolio, which serves as the starting point for various tailored portfolios. Each portfolio is uniquely adjusted based on specific investment goals, whether it involves focusing on value stocks, innovative technologies, or adhering to socially responsible investing principles.0
The foundation of Betterment’s investment philosophy is the Core portfolio, which serves as the starting point for various tailored portfolios. Each portfolio is uniquely adjusted based on specific investment goals, whether it involves focusing on value stocks, innovative technologies, or adhering to socially responsible investing principles.1
The foundation of Betterment’s investment philosophy is the Core portfolio, which serves as the starting point for various tailored portfolios. Each portfolio is uniquely adjusted based on specific investment goals, whether it involves focusing on value stocks, innovative technologies, or adhering to socially responsible investing principles.2
