Before you dismiss rebalancing as some super-healthy, crunchy granola term that’s good for your body but bad for your taste buds, stay with me. This is a juicy investment tidbit.
Rebalancing is recognized as smart practice in investing. It realigns your portfolio back to its original asset allocation. A portfolio is rebalanced by selling “extra” stocks and buying more bonds to recreate your original stock/bond ratio.A portfolio is rebalanced by selling “extra” stocks and buying more bonds to recreate the original stock/bond ratio.
At Betterment, we rebalance your portfolio dynamically, efficiently and automatically as you invest. Every time you receive a dividend or deposit more money, we invest it into the part of the portfolio that needs rebalancing. For the most part, this negates the need to sell stocks or bonds to balance out the portfolio. It’s an extremely tax efficient way to rebalance.
For example, when you signed up for Betterment you may have decided that the right allocation for you is 60% stocks/ 40% bonds. If stocks perform well during a certain period, your portfolio allocation might move to 65% stocks/35% bonds. Inadvertently, your investment is now exposed to more risk (especially if this compounds over time to create an even larger allocation gap). So we take your new deposits or dividends and use them to top up the part of your portfolio that has moved out of balance.
Why is more risk a bad thing? Because when you set your original allocation, you did so with a particular goal in mind. A shift in allocation might make it difficult for you to reach your goal in your desired time frame because suddenly, your investment will be more susceptible to market volatility.
The best part?
Rebalancing prevents you from making the classic behavioral mistake of buying high and selling low. It takes emotion out of the equation because you adjust your portfolio to its original state, regardless of whether the market’s up or down (remember… it’s all about the long term).
The other best part?
We all know how hard it is to align “should do” with “do”, so we’ve automated this in your Betterment account.
Wait, there’s more?
Betterment doesn’t charge for transactions, so automatic rebalancing costs you nothing.
New to Betterment? As the most trusted online financial advisor, Betterment offers a fully diversified investment portfolio of 12 global asset classes, optimized to provide you the best possible returns for both retirement planning and wealth building. Betterment costs 0.15% of assets under management annually for a portfolio of $100,000 or more. Learn more here.
This article was published on November 1, 2011