When you pay someone to manage your investing, it’s good to know exactly what you’re paying for. In one sense, you’re paying for how your shares are bought, sold, and held. Our sophisticated spins on strategies like asset location, for example, can help minimize your taxes and maximize your returns.
Then there’s the collections of investments themselves, and making sure these portfolios keep up with market conditions. We do this in part by regularly adjusting our portfolios’ asset allocations, or the specific weights of asset classes (i.e., stocks and bonds) and subasset classes (large cap stocks, long-term bonds, etc.). Let’s quickly walk through our approach to portfolio management, or feel free to skip ahead to preview the upcoming changes.
How we evaluate and manage our portfolios
It all starts with sizing up asset classes. We run a rigorous, data-driven process to form long-term expectations for both the returns and the risk levels of various classes.
From there, we simulate thousands of paths for the market, and average the optimal asset allocations to build more robust portfolio weights. This “Monte Carlo” technique is ideal when random variables are everywhere, such as capital markets.
Lastly, it’s important to reiterate that while things like interest rate shifts and federal fiscal policy can drive short-term market volatility, we manage our portfolios based on long-term outlooks. We keep an eye on the short-term, but we don’t chase trends.
This year’s updates, in a nutshell
For starters, we’re updating a handful of portfolios, ones we build and manage ourselves. We offer a few others managed by partners like Goldman Sachs and BlackRock—you can check out those allocations in the Betterment app or on our website.
This year’s updates, which are much smaller in scope and scale than last year’s, will encompass these portfolios:
- Core
- Value Tilt
- All three Socially Responsible Investing portfolios
- Innovative Technology
- Select Betterment Premium-exclusive portfolios
Here’s what’s changing.
More U.S. exposure
While we don’t advise going all-in on American markets, the forecasted risk-adjusted return for the U.S. remains strong in the long run (think: decades) relative to international markets. So similar to last year’s portfolio updates, we’re dialing down the international exposure for most portfolios. Those portfolios will see:
- Small increases in U.S. stock and bond allocations
- Small decreases in international emerging market stocks and bonds
- Small decreases in international developed market bonds
More short-term corporate bonds
The biggest change this year will be felt by portfolios with larger bond allocations. We expect U.S. short-term, high-quality corporate bonds to offer higher yields without undue increases in long-term risk, so we’re increasing the exposure to them while decreasing the weight of short-term U.S. Treasuries. The yields on these types of treasury bonds, which mature in a year or less, tend to fall right along with interest rates, and a lower interest rate environment is still expected in the long run.
New innovation ETF
Separately, we’re diversifying the Innovative Technology portfolio by adding a new actively-managed fund. This new ETF builds on themes like AI and biotech while adding more exposure to large-cap stocks and the Information Technology sector (hardware, software, etc.) as a whole.
Sit back and enjoy the switch
The great thing about technology like ours is that it makes implementing updated portfolios simple. Our automated rebalancing will tax-efficiently transition customers’ portfolios to the new target weights over time. It’s yet another example of how we make it easy to be invested.
