Automated portfolio rebalancing: Automatic erosion of investment performance? SpringerLink



When you sell an investment that’s been performing well, you’re locking in those gains. They’re real; they don’t just exist on a screen in your brokerage account. And when you buy an investment that’s not performing as well, you’re getting a bargain. Overall, you’re selling high and buying low, which is exactly what all investors hope for. However, if the stock market rallies again throughout the second year, the equity fund would appreciate more and the ignored portfolio may realize a greater appreciation in value than the bond fund. Just as with many hedging strategies, theupside potential may be limited, but by rebalancing, you are nevertheless adhering to your risk-return tolerance level.

  • Most investment companies offer automatic rebalancing as a complimentary feature so investors don’t have to remember to do it themselves.
  • Automatic rebalancing, or auto rebalancing for short, takes this manual process and does it, you guessed it, automatically.
  • Periodically rebalancing back to the targeted allocation helps avoid letting the portfolio drift to a higher risk allocation than intended.

Due to the nature of rebalancing, those assets that have appreciated the most, relative to the others within the portfolio, are sold in favor of increasing the allocation to those assets that have not performed as well on an absolute basis. This naturally creates a tendency to sell gains, therefore increasing your tax liability. Rebalancing your portfolio is the only way to stay on track with your target asset allocation—the percentage of your portfolio that’s held in different investments, such as 80% stocks and 20% bonds.

Adjust Asset Allocation to Prevent Overexposure

With this type of rebalancing, an investor would adjust the portfolio allocation on a schedule but also when an asset’s value crosses a particular threshold. For example, your portfolio of 50% BTC, 25% SOL, and 25% AVAX has a threshold of ± 10%. If the percentage of any asset within the portfolio rises or drops by 10%, it’s time to do rebalancing. With threshold rebalancing, your portfolio’s asset allocation is adjusted when an asset’s value crosses a particular threshold. Being able to let go of “winners” – While it might seem like the most logical, allowing one asset to over allocate in your portfolio over the long term just because it’s on an uptrend is risky business. If the price of that asset starts going down, your losses would be quite significant since your portfolio is highly dependent on the success or failure of that single asset.

When rebalancing your portfolio, it can be done manually or automatically. Many investors choose to enable automatic rebalancing so that it is one less task for them to remember. Below are many of the factors to consider when setting up the automatic rebalancing of your portfolio. There are two primary strategies when it comes to rebalancing your portfolio. The first is based on time and the other focuses on the mix of assets.

Hiring an Investment Advisor

CCM does not guarantee any minimum level of investment performance or the success of any client account, model portfolio, or investment strategy. All investments involve risk and investment recommendations will not always be profitable. Let’s assume you are years old and you have signed up for an automated online management service. You answer some questions about your age, time horizon, and risk tolerance and the “intelligent” service places you in an allocation that is heavily weighted toward stocks, similar to the allocation shown below. One of the automated features of many robo-advisors is automatic portfolio rebalancing. Therefore, it is prudent to see if auto-rebalancing adds value in a bear market.

Setting up automatic rebalancing removes the emotions that could prevent an investor from actively buying or selling their investments. Rebalancing is important for keeping your intended level of risk consistent as markets fluctuate and asset classes drift too far away from their target weighting in your portfolio. When an investor has a small portfolio, it can quickly become expensive to purchase and sell bonds and stocks yearly. If the investor varies from their allotted target by even a tiny percentage, it may not be worth the cost or trouble rebalancing the portfolio. A difference of even one percent can significantly raise the expense. Discover the benefits of automatic portfolio rebalancing with our ultimate guide.

There are also certain situations where a manual override becomes necessary. The can take care of any complex combinations of constraints, transitions, and tax management. An excellent example of a unique situation is when a client calls and wants $1 million transferred the following week. The analytics quality will not make a difference if the data is not useful. This means any automated workflow must have a process for handling issues with the integrity of the data. This generally means the affected accounts must be suspended until the problems with the data are resolved.


Investors tend to earn lower returns than the funds they invest in because of their tendency to sell low and buy high. A financial advisor’s behavioral coaching can overcome this problem. Working with an advisor can help you stay the course, especially in bull or bear markets when your emotions might tempt you to stray from your long-term investment strategy.

If the current level is too high for your risk tolerance, you can return to your original allocation. Your investment strategy is probably designed for the long term, with a diversified mix of various types of investments. The portfolio rebalancing algorithm will change along with the investor. Investors must also decide whether to maintain their portfolio manually or consider automatic portfolio rebalancing. One of the most significant benefits of rebalancing a portfolio is controlling the risk factor, and maintaining the desired risk level may require the investor to take action.

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It allows them to focus on their daily responsibilities without having to track their auto rebalancing portfolio performance for outliers or remember to rebalance on certain days. While these Intelligent Portfolios are monitored daily, in the typical market environment clients should only expect a few rebalancing events every year, whenever an asset class drifts just far enough from its intended target. Personal Capital is a financial platform with a free tier that provides standard wealth management capabilities and a paid tier where users can take advantage of professional advisory services. With all your assets added to Kubera, you get the instant overview you need to understand current allocation — and what tweaks need to be made to rebalance your portfolio. While it may be effective, it’s also unpopular — especially among DIY investors — because it means you have to have a consistent, accurate view of all the assets that make up your portfolio.

auto rebalancing portfolio-date funds, which are mutual funds that hold a basket of investments and have an asset allocation that’s based on your projected retirement date, are an example of a type of fund that is rebalanced automatically. The higher your investment fees, the lower your returns, all else being equal. Other fees to watch out for include loads for buying and selling mutual funds and commissions for buying and selling stocks and exchange-traded funds .

  • She wasn’t comfortable with a level of investment risk that high, so she decided to return her asset allocation to the original percentages.
  • For most investors, the most common reason to rebalance a portfolio is diversification.
  • The dataset of the PHF-Survey includes the absolute amount of money that an interviewed household invested per asset class.
  • That means that it had become a riskier portfolio, with higher expected volatility, just before the global financial crisis hit.

Life and annuity products are issued by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, Columbus, Ohio. The general distributor for variable products is Nationwide Investment Services Corporation , member FINRA, Columbus, Ohio. In boom times, Portfolio Rebalancing helps in booking profits while in bad times, it helps to enter the Equity markets at lower levels. This will happen by redeeming 25% from Equity and reinvesting the proceeds into Debt. When ETH choosing ETC a fee-only fiduciary, check their background using the Financial Industry Regulatory Authority’s BrokerCheckwebsite and the Securities and Exchange Commission’s Investment Adviser Public Disclosure website.