Betterment constructs globally diversified strategic asset allocation portfolios appropriate for an investor's goals and time horizon. Each portfolio is selected as the result of a systematic portfolio optimization process that simultaneously balances forecasts for long-run expected returns for each asset class against both historical and forward-looking downside behavior for the portfolio as a whole.
In forecasting expected returns, we utilize the Black-Litterman Global Portfolio Optimization model to appropriately marry market expectations extracted from historical performance and current price levels with Betterment's views on long-run asset class behavior and correlations. Our advice is based on expected returns as well as downside risk and uncertainty as measured by historical episodes of underperformance and simulated stress tests of the asset performance. The result is a portfolio that provides an optimal blend of asset class exposures across different economic regions, investment styles and security types to deliver the best possible risk-adjusted returns for every level of risk.
The long-term performance of a portfolio can be negatively impacted by interest rates and inflation. Our fully diversified global portfolio helps smooth out the impact of these factors since different areas of the world experience them at different times and with varying severity. Our portfolio also avoids a common behavioral error of investors called home-bias, or the tendency to own companies from the country you live in.
To see the Betterment portfolio's efficient frontier compared to less robust alternatives, read more about our portfolio optimization.