Maximizing Investment Returns: Increasing Risk For Betterment

Betterment is a robo-advisor that offers two service options: Betterment Digital provides automated portfolio management at $10 to start an account; Betterment Premium provides unlimited phone access to certified financial planners for a $100,000 account minimum. Betterment supports multiple investment portfolios, including a factor-based portfolio strategy from Goldman Sachs, bond-only portfolios from BlackRock, or the option to build your own. It also offers a variety of socially responsible portfolios, including Broad Impact, Climate Impact, and Social Impact.

When it comes to increasing your investment risk on Betterment, it's important to understand that investing always involves some level of risk. However, you should have control over how much risk you take on. Betterment provides tools and features to help manage your risk and keep you on track toward your financial goals. The key to managing your risk is through asset allocation, which involves diversifying your investments across various financial assets like stocks, bonds, cash, and crypto. By diversifying your investments, you can protect yourself from extreme losses when the markets perform poorly while still allowing for potential windfalls when the market does well.

To increase your investment risk on Betterment, you can consider the following options:

- Choose a more aggressive portfolio allocation: Betterment offers a range of portfolio options, including more aggressive strategies that aim for higher returns but come with higher risk.

- Adjust your individual asset class weights: If you have a Flexible portfolio, you can adjust the weights of your asset classes to increase your exposure to riskier investments.

- Increase your stock allocation: Stocks generally carry more risk than bonds or cash, so increasing your allocation towards stocks can raise your overall investment risk.

- Explore riskier investment themes: Betterment offers portfolios focused on innovative technology and high-growth potential companies, which may involve a higher level of risk.

Remember that while increasing your investment risk may provide the potential for higher returns, it also exposes you to greater potential losses. It's important to carefully consider your financial goals, risk tolerance, and investment horizon before making any changes to your portfolio.

Diversification of investments

Diversification is the process of spreading your investments across different asset classes, such as stocks, bonds, cash or cash equivalents, real estate, commodities, and more. By doing so, you reduce the risk of major losses and protect your portfolio from extreme downturns in the market. If one investment fails or underperforms, your other investments can mitigate the negative impact on your overall portfolio performance.

For example, an investor could hold a mix of large-cap equities, bonds, international stock funds, and cash reserves. If one of those asset categories experiences a downturn, the other assets can help offset the loss.

It's important to diversify both among and within asset classes. For instance, when investing in stocks, you can increase diversification by owning stocks in companies of different sizes (small, medium, and large), from different sectors (technology, consumer, healthcare), and in different geographical locations (domestic and international). Similarly, when investing in bonds, you can choose bonds from different issuers (federal government, state and local governments, corporations) and with different terms and credit ratings.

Diversification is also achieved through the use of exchange-traded funds (ETFs) and mutual funds, which are pooled investments that typically include a large variety of underlying assets, helping to spread out your risk.

The level of diversification in your portfolio depends on your risk tolerance and investment horizon. For example, if you're saving for a down payment on a house, you might invest more heavily in cash or cash equivalents, while if retirement is decades away, you might invest more heavily in stocks.

While diversification can help manage risk, it doesn't eliminate it entirely. It's important to remember that investing always involves some level of risk, and there is no guarantee that diversification will ensure profitable returns. However, by diversifying your investments, you can create a balance of risk and return that aligns with your financial goals and risk tolerance.

Choosing a portfolio strategy

Setting Clear Financial Goals

Firstly, it's crucial to define your financial goals. These goals can vary from saving for retirement, college, or a house to planning for a vacation or an emergency fund. Each goal will have its own timeline, priority, and savings requirements, which will impact the investment strategy you choose.

Determining Your Risk Tolerance

Your risk tolerance, or how much risk you're comfortable taking on, is a key factor in choosing a portfolio strategy. As a general rule, if your goals are decades away, you can afford to take on more risk. As you get closer to achieving your goals, you may want to adopt a more conservative approach to preserve your gains.

Diversification

Diversification is a critical aspect of managing risk. By spreading your investments across various financial assets, such as stocks, bonds, and other asset classes, you reduce the impact of any single investment failing. This is often referred to as "not putting all your eggs in one basket."

Time Horizon

The time horizon, or the amount of time you plan to invest for, is another crucial factor. If you have a long-term horizon, you may opt for a more aggressive strategy with higher potential returns and higher volatility. Conversely, if your goal is short-term, a conservative portfolio with lower expected returns and less volatility may be more suitable.

Customization Options

Betterment offers a range of portfolio options, including pre-built portfolios curated by experts, as well as customizable portfolios for experienced investors who want more control. Here are some of the options available:

• Core Portfolio: This portfolio utilizes exchange-traded funds (ETFs) from 12 asset classes, providing diversification and different levels of risk tolerance to match your goals.
• Socially Responsible Investing Options: These portfolios focus on environmental, social, and corporate governance (ESG) criteria, investing in companies with lower carbon emissions, funding green projects, and supporting minority empowerment and gender diversity.
• Goldman Sachs Smart Beta: This portfolio targets companies with the potential to outperform the broader market over the long term. It offers diversification and relatively low costs but carries higher exposure to risk.
• Innovative Technology: This portfolio focuses on high-growth potential companies in sectors like clean energy, semiconductors, robots, virtual reality, blockchain, and nanotechnology. It offers increased exposure to risk.
• BlackRock Target Income: This is a 100% bond portfolio designed to protect against stock market volatility and provide different income yields.
• Flexible Portfolio: This option allows experienced investors to adjust individual asset class weights based on their preferences, giving them more control over their investments.

Tax Strategies

Betterment also offers automated and optimized tax strategies to help minimize the tax impact on your returns. These strategies include tax-loss harvesting, tax-coordinated portfolios, and a tax impact preview tool to make informed decisions.

Remember, choosing an investment portfolio is a personal decision, and Betterment provides tools and recommendations to help you select a strategy that aligns with your financial goals and risk tolerance.

Determining your personal risk level

When determining your personal risk level, it's important to remember that investing always involves some level of risk. However, you should always be in control of how much risk you take on.

Your personal risk level will depend on a few factors, including your financial goals, investment horizon, and risk tolerance.

Financial Goals

The first step is to identify your financial goals. Are you saving for retirement, buying a house, or investing for the long term? Each goal will have its own timeline and level of risk associated with it. For example, if you're saving for a down payment on a house, you may want to take on less risk, as you don't want to lose your money right before you plan to buy. On the other hand, if you're investing for retirement and won't need the money for decades, you may be comfortable taking on more risk.

Investment Horizon

Your investment horizon refers to the amount of time you have to achieve your financial goals. If you're investing for the long term, you may be able to take on more risk, as you have time to recover from any potential losses. Conversely, if you have a shorter investment horizon, you may want to be more conservative to avoid short-term losses.

Risk Tolerance

Risk tolerance refers to how comfortable you are with taking on risk. Some people are comfortable with high-risk investments, while others prefer a more conservative approach. It's important to assess your own risk tolerance to ensure your investment strategy aligns with your comfort level. Ask yourself how you would react to market volatility and losses in your investment portfolio. If the idea of a market downturn makes you panic, you may have a lower risk tolerance. On the other hand, if you take an optimistic approach and view investing as a long-term game, you may have a higher risk tolerance.

Other Factors to Consider

While the above factors are key in determining your personal risk level, there are also other considerations:

• Liquidity: How quickly you may need to access your money can impact your risk level. If you may need the funds in the short term, you may want to choose more liquid and less risky investments.
• Investment Knowledge: The more knowledge and experience you have, the more comfortable you may be with taking on risk.
• Risk Aversion: This is a measure of how comfortable you are with risk. Do you prefer investments with lower risk and moderate profits, or are you willing to take on more risk for the chance of higher gains?
• Economic Outlook: The economic climate can impact your risk level. A positive economic outlook may allow you to take on more risk, while a poor economic outlook may make you more risk-averse.
• Savings and Income: Your savings and income can influence the types of investments you make. Someone with substantial savings but low income may invest differently from someone with a high income and minimal savings.
• Tax Considerations: While tax breaks shouldn't be your main focus, it's important to be aware of tax implications when investing.

By considering these factors, you can determine your personal risk level and create an investment strategy that aligns with your goals and comfort level.

Tax-loss harvesting

However, it's important to note that tax-loss harvesting may not be suitable for all investors. For example, if an investor's future tax bracket is expected to be higher than their current bracket, utilising this strategy could actually increase their overall tax burden. Additionally, tax-loss harvesting is not applicable to tax-advantaged accounts such as IRAs and 401(k)s.

Betterment offers Tax Loss Harvesting+ (TLH+), an automated algorithm that regularly scans for tax-loss harvesting opportunities. TLH+ is designed to minimise the tax impact and avoid extra trading costs associated with harvesting losses. It also helps navigate wash sales, ensuring that harvested losses are not undermined by IRA deposits or subsequent purchases of identical securities.

While tax-loss harvesting can be a powerful tool, it should be approached with caution. It is important for investors to carefully consider their personal circumstances and seek appropriate advice before implementing this strategy.

Long-term investment strategies

Setting Clear Financial Goals

Betterment's platform is designed around helping investors achieve their financial goals. These goals could include saving for retirement, buying a house, or funding a college education. By setting clear goals, Betterment can help create a personalised plan with appropriate risk levels and investment portfolios.

Determining Your Investment Horizon

Your investment horizon is a key factor in determining your risk level and investment strategy. It refers to the timeline until you need to withdraw your money. If your goals are decades away, you can afford to take on more risk, whereas shorter-term goals may require a more conservative approach.

Diversification and Asset Allocation

Diversification is a critical strategy to manage risk. By spreading your investments across various asset classes, such as stocks, bonds, and ETFs, you reduce the potential loss if one investment performs poorly. Betterment's automated tools can help determine the right asset allocation based on your goals and risk tolerance.

Long-Term Investment Portfolios

Betterment offers a range of well-diversified, low-cost, and curated portfolios built for long-term investing. These include stock and bond portfolios, ESG-focused portfolios, and technology-focused portfolios.

Tax-Efficiency Strategies

Betterment employs tax-efficient strategies, such as tax-loss harvesting and tax-coordinated portfolios, to help minimise the tax impact on your investments. This ensures that more of your money goes towards growing your wealth.

Automatic Rebalancing

Betterment's technology automatically monitors and adjusts your portfolio to maintain the desired asset allocation. This helps ensure your portfolio stays aligned with your risk tolerance and investment strategy over time.

Flexible and Customisable Options

For more experienced investors, Betterment offers flexible portfolios that allow you to adjust individual asset class weights based on your preferences. This gives you more control over your investments while still benefiting from Betterment's tools and features.

In summary, Betterment provides a comprehensive set of tools and features to support long-term investment strategies. By setting clear goals, determining your investment horizon, utilising diversification, and taking advantage of Betterment's automated tools and portfolio options, you can effectively manage your investments for the long term.

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