How automatic rebalancing simplifies portfolio management

automatic portfolio rebalancing

We do not include the universe of companies or financial offers that may be available to you. In a world where nothing is free, rebalancing is one of the most approachable and affordable — most of the cost is your time — ways to get more return for your money without making a gamble that could be detrimental to your future. Rebalancing is the act of correcting any drift to align with your chosen risk profile, and redirecting any overperformance toward assets that haven’t done as well. Advisors can automatically rebalance all accounts, a single subaccount, or a user-defined Account Group.


A stock index rebalancing is typically a non-event, just like with the ETFs mentioned above. The index sells stocks that are overweight and uses the funds to buy stocks that are underweight. Indices are portfolios of stocks regularly rebalanced by the creators of the index. Some investors rebalance once per year, some rebalance quarterly, while others rebalance only when the portfolio deviates from the original portfolio allocation by a certain amount or percentage.

Why is rebalancing important and what are the benefits?

As percentage of portfolio’s net value invested in articles of great value. Rebalancing your portfolio is a great way to be in tune with your finances. It ensures you remain diversified and on track to reach your long-term financial goals. When dealing with multiple accounts, consider consolidating all of them with an online portfolio tracker, or by keeping them at the same financial institution. Even if your accounts are actively managed, having them under one view should make it easier to track.

A fund for investors with a target retirement date of 2040, for example, might have a starting target asset allocation of 90% GAL stocks and 10% bonds. The fund’s managers will rebalance the fund as often as needed to maintain that target allocation. In addition, they will shift the fund’s asset allocation over time, making it more conservative through 2040. These funds typically have low expense ratios; the industry average was 0.52% in 2020, according to Morningstar. Once a year, you should compare your investment portfolio to your ideal asset allocation – the right mix of stocks, bonds, cash, or other investments for your investment goals.

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Imagine another investor, who at age 30 has a portfolio with a more aggressive mix of 70% stocks and 30% bonds. If the equity market takes a dive, the portfolio will suddenly lean more heavily toward bonds, even though the investor is relatively young and has time to recoup the loss. If an investor does nothing, it would leave the portfolio vulnerable to automatic portfolio rebalancing underperformance when the market recovers, hurting long-term goals. Automating the rebalancing puts the process of buying stocks and selling bonds on autopilot, resetting the asset allocations to the original allocation. The funny thing about hiring an advisor to rebalance your portfolio is that they’re probably going to use an automatic asset rebalancing tool .

automatic portfolio rebalancing

Investors can use leverage to trade on more equities while still keeping bonds in the portfolio. The leveraged stock purchases help to increase the returns of the portfolio while holding bonds, which are historically less volatile, automatic portfolio rebalancing to help reduce the overall risk of the portfolio. As the capital in the account changes, the new numbers are plugged into the formula to tell the investor how much they should have in stocks and money market funds.

As the values of assets change, inevitably the original asset mix will change due to the differing returns of the asset classes. Betterment, for example, charges an annual fee of 0.25% of assets under management and there’s no minimum account balance. And because robo-advisors are automated, they may rebalance your portfolio as often as daily, so it’s usually in near-perfect balance. Instead of moving toward the 40% bond and 60% stock asset allocation that might be recommended for someone planning to retire at age 65, you might move toward a 50/50 allocation.

  • Returns will fluctuate, as will their weighting in your portfolio.
  • This is human nature, but it is also the exact opposite of buying low and selling high.
  • A disciplined process for rebalancing your investment portfolio is among the keys to long-term investment success.

Market changes can alter your asset allocation and take you off track, making it harder to meet your investment goals. Basically, in order to bring your asset allocation in alignment with your idea, you’ll need to sell off investments that are overweighted in assets you want to reduce and buy investments in asset classes you want to increase. Automatic rebalancing helps you maintain your preferred asset mix. Rebalancing is the action of updating investments to match your target portfolio. While portfolio rebalancing does not assure a profit or protect against loss, it can help align an individual’s investment mix around their preferred portfolio settings .

But as time passes, certain investments will have higher returns than others, and therefore will begin to take up a more significant percentage of your portfolio. The weighting of a portfolio’s asset classes may change over time. If this happens, investors may see a shift away from what they initially outlined as their target investment mix. While these may generally be small percent changes, they could also signal that the risk profile of a portfolio is changing.

Some brokerage firms allow their customers to view all their investments in one place, not just the investments they hold with that brokerage. Examples include the Merrill Edge Asset Allocator and Fidelity’s Full View. Rebalancing usually involves selling only 5% to 10% of your portfolio. So if you are bothered by the idea of selling winners and buying losers , at least you’re only doing it with a small amount of your money. Amanda Jackson has expertise in personal finance, investing, and social services. She is a library professional, transcriptionist, editor, and fact-checker.

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Portfolio management involves selecting and overseeing a group of investments that meet a client’s long-term financial objectives and risk tolerance. The first time you rebalance your portfolio might be the hardest because everything is new. While it isn’t designed to increase your long-term returns directly, it is designed to increase your risk-adjusted returns. Of course, there are also downsides to hiring an advisor, including the fact that many of them have investment minimums.

  • Nothing in this informational site is an offer, solicitation of an offer, or advice to buy or sell any security and you are encouraged to consult your personal investment, legal, or tax advisors.
  • Hypothetically, the automatic rebalancing would reallocate the extra 2% of your portfolio in the real estate mutual fund into the equity fund to bring your portfolio back to its original target allocation.
  • Also, certain mutual funds might have early redemption fees, or even load fees.
  • Diversification, asset allocation, and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.
  • Instead assets that continue to go up are previously sold due to their past returns.

A good investment portfolio is diversified among types of investments called asset classes. These include the largest classes of stocks, bonds, cash, real estate, and alternatives like precious metals. Once the asset allocation percentages are set for a portfolio, this model allows the portfolio to fluctuate until the percentages deviate by a specified amount. For example, let’s say an investor chooses to put 30% into stock, 30% into bonds, 30% into commodities, and 10% into money market funds, with a +/-5% deviation tolerance. Taken together, the results reveal that households whose portfolio largely consists of stocks, bonds and real estate funds could have increased their portfolio performance through rebalancing on the one hand.

How often should portfolios be rebalanced?

Not sure when to rebalance your portfolio? We recommend checking your asset allocation every 6 months and making adjustments if it's shifted 5 percentage points or more from its target.

In the above example, this investor has 10% too much in bonds, 5% too much in other and is 15% under in stocks. Even if you’re a passive, buy-and-hold investor, you should rebalance your portfolio at least once a year. We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401 to your employees. Human Interest offers a low-cost 401 with automated administration, built-in investment education, and integration with leading payroll providers. Michael Edesess, chief investment strategist at Compendium Finance, suggests that rebalancing is no better or worse a strategy than buy-and-hold….

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Usually, about once a year is sufficient; however, if some assets in your portfolio haven’t experienced a large appreciation within the year, longer periods may also be appropriate. Portfolio rebalancing is nothing more than regular maintenance for your investments, like going to the doctor for a checkup or getting your car’s oil changed. Rebalancing means selling some stocks and buying some bonds, or vice versa, so that most of the time your portfolio’s asset allocation matches the level of returns you’re trying to achieve and the amount of risk you’re comfortable taking. Markets inevitably move up and down, which can throw an investor’s preferred mix of stocks, bonds and other assets out of alignment with a portfolio design. Doing nothing to correct this can undermine an investor’s long-term strategy and goals.

automatic portfolio rebalancing

If you choose to sell them at this high point, you can get more cash for them than you originally invested — which gives you more resources to pour into those assets with less-than-ideal performance. When drift occurs, it can throw off your diversification efforts and increase your exposure to specific asset classes — therefore increasing the risk of loss if that asset class plummets in value. In this day and age when portfolio diversification is an invaluable investment strategy, portfolio rebalancing has become a complicated procedure. For example, a 50/50 allocation split between a stock mutual fund and a bond fund might now be allocated at a level of 60% or even 70% toward stocks if left alone over the past few years. This would expose you to more potential downside risk than the intended 50/50 allocation. Investment and insurance products and services including annuities are available through U.S.

By using this website, you accept and agree to Titan’s Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities or investment products. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Account holdings and other information provided are for illustrative purposes only and are not to be considered investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.

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