What Are The Benefits And Drawbacks Of Automatic Rebalancing?

[Yusra]

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.

 

[Knowlopedia]

When it comes to investing, there is no one-size-fits-all solution. Some investors prefer to stay hands-off and let their investments ride, while others are more comfortable actively managing their portfolios. For those who fall into the latter category, automatic rebalancing can be a helpful tool.

Automatic rebalancing is the process of periodically resetting your portfolio back to its original asset allocation. This can be done on a set schedule (e.g. monthly, quarterly, etc.) or in response to changes in the market.

There are a few potential benefits to using automatic rebalancing. First, it can help you stay disciplined in your investing. By resetting your portfolio on a regular basis, you are less likely to let emotions or market volatility dictate your investment decisions. Second, automatic rebalancing can help you take advantage of market opportunities. For example, if your portfolio starts to become overweight in one asset class, automatic rebalancing can help you sell high and buy low.

There are also a few potential drawbacks to automatic rebalancing. First, it can trigger taxes if you are holding investments in a taxable account. Second, it can require more frequent trading, which can incur additional costs. Finally, it is important to remember that automatic rebalancing is not a substitute for active portfolio management. If you are not paying attention to your investments, automatic rebalancing will not magically make them perform better.

Overall, automatic rebalancing can be a helpful tool for active investors. However, it is not without its drawbacks. Be sure to weigh the pros and cons before deciding if it is right for you.