Our advanced technology makes rebalancing easy
- Our algorithm weighs the costs and benefits of rebalancing and determines if transactions are needed to get you closer to your target asset allocation
- We allow some drift so we can capture returns, and calculate whether the benefit of rebalancing outweighs its costs
- New dividends and contributions get invested in the asset classes that are furthest from their ideal allocations
- We rebalance your portfolio as needed based on market movements, this is known as “market-based rebalancing”
Why portfolio rebalancing matters
When you sign up for Automated Investor, we’ll ask you about your tolerance for risk and your desired retirement age. Then we’ll create a model for your portfolio, made up of 12 asset classes. Rebalancing helps you maintain the appropriate portfolio risk for your financial goals. Here’s why:
- Over time, your portfolio will change due to market movements, this is called “drift”
- Rebalancing restores your portfolio to its target asset allocation by selling some of your asset classes that have outperformed in the short-term, and buying more of the asset classes that have underperformed in the short-term
- The goal of rebalancing is to reduce volatility in your portfolio, this helps to manage your risk
- We’ll review your portfolio each trading day and rebalance it as needed
Example: Rebalancing makes a difference
- A $100 portfolio has a target asset allocation of an 65/35 stock/bond split, or $65 in stocks and $35 in bonds. It is balanced.
- If throughout the year, stocks return 35% and bonds return 2%, stocks are now worth $87.75 (65 x 1.35) and make up 71% of your portfolio, while bonds are worth $35.70 (35 x 1.02) and make up 29%.
- This portfolio is no longer in balance with its 65/35 target asset allocation. Because it has more stocks than it should, it's taking on higher risk.
Cost benefit of rebalancing
Here are other considerations:
- No transaction fees: Portfolio rebalancing is included as part of Automated Investor
- Tax-efficient placement: We’ll rebalance in a tax-advantaged account when possible, and factor in capital gains when not (capital gains taxes may be due upon the sale if the asset sold has appreciated in value)
- Time and effort: Automated Investor efficiently rebalances your portfolio, so you don’t have to pay additional management fees for each rebalance