Keeping your portfolio in balance is essential no matter how diversified your investment portfolio is. Having a balanced portfolio enables you to adjust your allocation to meet your goals. If you prefer to be more of a hands-off investor, then automatic rebalancing is a great feature to have since it takes care of the process for you.

This article will explain what automatic rebalancing is, how it functions, its benefits, and setting up suggestions. By using this strategy to your personal portfolio, you’ll enjoy greater diversification and accomplish your ambitions more effectively.

What is automatic rebalancing?

Smart rebalancing is the process by which your portfolio is adjusted when it becomes misaligned with the current market. Because the stock markets fluctuate, this can lead to a misalignment in your portfolio allocation.

Let’s say you have a portfolio that is 50/50 stocks and bonds and the market crashes. Suddenly, your portfolio will favor conservative bonds over stocks, and you will not have the results you expected at the time of your retirement because bonds are more conservative. If you left it like that, you would not receive the returns you anticipated at the end of your time frame.

With a rebalancing feature, you can easily give your portfolio back to the proper allocation by exchanging the securities your portfolio is lacking and selling more of the securities your portfolio contains too much of. Your portfolio’s asset allocation will be immediately realigned based on your individual preferences.

Robo-advisors often offer an automatic rebalancing feature so that you can sleep more soundly at night.

How does automatic rebalancing work?

Automatic rebalancing occurs automatically. If your portfolio’s allocation is deviated from your goal, your brokerage’s algorithm or Robo-advisor will step in and fix it. Most brokerages and Robo-advisors give you options; you can select ongoing rebalancing or rebalancing in incremental intervals, such as monthly, quarterly, or annually.

They will sell off any assets you have too much of and then use the profits from the sale to purchase assets you are lacking. This will make your holdings balance again according to your desired allocations.

Benefits of using the auto rebalance feature

Investors enjoy many benefits thanks to automatic rebalancing. These include the details below.

Removes emotional aspect of investing

Emotional decisions are not to be trusted, as they often have disastrous results. There could be times when investing all of your money proves to be a poor move, and you may be tempted to sell your holdings. Sometimes it isn’t the answer, though.

A buy-and-hold strategy usually works best for your budget, but this can be challenging when dealing with such large changes. Rather than becoming upset, you can feel at ease knowing that the Robo-advisor will reallocate your portfolio as needed and without emotions affecting decisions.

Mitigates risk

If you leave your portfolio unmanaged, you are at the mercy of the market. In other words, the market controls your allocation, which might not be what you want.

The portfolio that is never rebalanced may take a slightly aggressive portfolio and make it very aggressive. Alternatively, it could lack aggressiveness completely, depending on how the markets performed and based on your specific goals. Staying atop the allocation ensures your portfolio’s risk isn’t influenced by how you set it up.

Reallocates assets based on your goals

Setting up your portfolio was often done in step with specific guidelines and timelines in mind. The distribution must always fit all guidelines and conditions, but markets can change unpredictably.

If you don’t reallocate your portfolio, there’s no guarantee you’ll reach your timeline goals. This could cause you to invest irreplaceable time and resources in an attempt to recover what you lost, or it may cause you to make unwise investment decisions in an attempt to make up for your losses.

Balances your portfolio

When you manage your portfolio, you have the income you wanted. Letting the market dictate your income may leave you off balance. What if you prefer a different suggestion? Perhaps it is too risky or too conservative for your objectives and timeline.

Provides dollar-cost averaging

If you have automatic recalibration turned on, you will purchase items at the current price no matter how much current cost those purchases require. You won’t need to wait for the best price but instead invest in various time periods to maximize your investment portfolio. This dollar cost-averaging format gives you access to good prices and sometimes poor deals, but they average out by the end.

Offers investment flexibility

Automatically rebalanced portfolios are also flexible. Your allocations may change between rebalancing events without being tied down to any particular strategy. You can make trades and purchases between rebalancing events as well.

You can buy and sell assets as desired. If you are unhappy with the terms of your agreement, your portfolio can be adjusted slightly, but you may still make the changes you desire.

Automatic Rebalancing Work
Automatic Rebalancing Work

Is great for a hands-off approach

Managing your own asset allocation can be time-consuming and difficult. Diving into the emotional side of investing, you might make ill-advised decisions when analyzing your own asset allocation and unexpectedly sell an investment or act impulsively.

Autonomous rebalancing provides a convenient hands-free solution so you can be confident your portfolio is being taken care of properly, but you don’t have to perform it yourself.

Example of how automatic rebalancing works

To better illustrate the procedure, here is a demonstration of how an auto rebalancing process would work.

John created a retirement investment portfolio that consisted of 35% stocks, 25% bonds, and 40% other investments. After a couple of months, the market had some turbulence, and John’s portfolio ended up at 50% stocks, 10% bonds, and 40% other investments.

This was more dangerous for John than he wanted. He could have put his goals at risk by placing too much emphasis on automated rebalancing. However, the automatic rebalancing system sold the surplus stock and invested the proceeds in bonds. The portfolio returned to the original allocation he was comfortable with thanks to the rebalancing. You can really see how valuable it is to have a car rebalancing feature when you have one!

Key tips for automatic rebalancing

Are you ready to try it? Here are the guidelines to remember if you want to auto rebalance your portfolio.

1. Look for brokerages and Robo-advisors that offer automatic rebalancing

Not every broker or advisor offers automatic rebalancing. You will have the most success using Robo-advisors, such as Betterment, Wealthfront, and SoFi. They all offer automatic rebalancing.

Traditional brokerages like Vanguard, Fidelity, Charles Schwab, and others also offer automatic rebalancing if you invest in some of their funds.

2. Leverage auto rebalancing in retirement accounts where there are tax implications for doing so

If you reallocate a retirement portfolio (the most common), you won’t pay taxes on the sale or depreciation of investment funds, but you also can’t write off any losses if you sell investments at a loss.

This feature makes vehicle rebalancing highly tax-efficient. You can automatically diversify and allocate your portfolio based on your age and financial objectives, regardless of location. An example is with a target-date retirement fund.

3. Use automatic rebalancing to take advantage of market downturns by buying assets at a lower price

You can save money by refinancing in the event the market goes down and your allocation is cut. This enables you to get a lot more for your money. By way of example, you could trade some bond funds for stock funds.

You don’t have to do the calculations, so you receive the benefits without doing the work. An auto rebalancing feature will move all of your earnings around for you.

4. Remember to choose your auto rebalance parameters when you set up your account

Most Robo-advisors let you set the level of automatic rebalancing. For example, if you don’t care if the portfolio shifts slightly, you can set the point at which you want the portfolio rebalanced.

Some Robo-advisors can even let you pick the frequency. Some do it automatically, while others allow you to choose monthly, bi-monthly, semi-annually, or annually.

Make investing easier with automatic rebalancing!

Enabled rebalancing relieves you of the burden of owning and operating a protocol. All you need to do is routinely contribute, and your platform does all the work. It may sound like a sensible approach, but you can rest assured that your portfolio will always be on track and that you will make emotionally intelligent investment decisions.


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