There are several benefits of automatic rebalancing:
1. It forces you to buy low and sell high. By selling assets that have appreciated in value and using the proceeds to buy other assets that have declined in value, automatic rebalancing forces you to practice buying low and selling high which is one of the most important principles of successful investing.
2. It helps keep emotions out of investing decisions. Automatic rebalancing takes the emotion out of investing decisions by forcing you to sell winners and buy losers – even though it may go against your natural instincts.
3. It keeps your portfolio diversified. As your investments grow and change over time,automatic rebalancing helps ensure that your portfolio stays diversified which is another important principle of successful investing.
4. It reduces trading costs. By keeping your portfolio diversified and only making trades when necessary (i.e., when rebalancing), automatic rebalancing can help reduce your trading costs.
5. It can help you stay disciplined. Automatic rebalancing can help keep you disciplined by forcing you to stick to your investment plan.
Of course, there are also some potential drawbacks to automatic rebalancing that you should be aware of:
1. It can be time-consuming. If you rebalance manually, it can take some time to research which assets to buy and sell and then execute the trades.
2. There may not be perfect opportunities. Even if you use a threshold-based rebalancing strategy, there may not always be perfect opportunities to rebalance (for example, if your stocks are down 3% but your target is 5%, you may not want to sell).
3. You may incur taxes or fees. If you hold investments in a taxable account, selling appreciated assets will trigger capital gains taxes. And if you hold investments in a retirement account, there may be fees associated with selling and buying certain assets.
1. It forces you to buy low and sell high. By selling assets that have appreciated in value and using the proceeds to buy other assets that have declined in value, automatic rebalancing forces you to practice buying low and selling high which is one of the most important principles of successful investing.
2. It helps keep emotions out of investing decisions. Automatic rebalancing takes the emotion out of investing decisions by forcing you to sell winners and buy losers – even though it may go against your natural instincts.
3. It keeps your portfolio diversified. As your investments grow and change over time,automatic rebalancing helps ensure that your portfolio stays diversified which is another important principle of successful investing.
4. It reduces trading costs. By keeping your portfolio diversified and only making trades when necessary (i.e., when rebalancing), automatic rebalancing can help reduce your trading costs.
5. It can help you stay disciplined. Automatic rebalancing can help keep you disciplined by forcing you to stick to your investment plan.
Of course, there are also some potential drawbacks to automatic rebalancing that you should be aware of:
1. It can be time-consuming. If you rebalance manually, it can take some time to research which assets to buy and sell and then execute the trades.
2. There may not be perfect opportunities. Even if you use a threshold-based rebalancing strategy, there may not always be perfect opportunities to rebalance (for example, if your stocks are down 3% but your target is 5%, you may not want to sell).
3. You may incur taxes or fees. If you hold investments in a taxable account, selling appreciated assets will trigger capital gains taxes. And if you hold investments in a retirement account, there may be fees associated with selling and buying certain assets.