No matter which type of assets you hold in your portfolio, values may rise or fall with market movements. To ensure your portfolio keeps up with these changes and you manage risk accordingly, it’s good practice to adjust how your assets are divided among various investment types.
This process is known as portfolio rebalancing, and it’s a key component of a healthy long-term investment strategy.
Automatic rebalancing, or auto rebalancing for short, takes this manual process and does it, you guessed it, automatically. Before implementing auto rebalancing, as is done in Domain Money Strategies, it’s important to understand what happens behind the scenes, and whether it makes sense for your portfolio.
A “portfolio” may contain investments in different asset classes including stocks, bonds, cryptocurrencies, cash, or cash equivalents. How much of each type of asset you have is known as your portfolio’s allocation. For example, in our Domain Access Strategy, we target an 80% stock and 20% crypto distribution of assets. Over time, as markets move, the allocation of a portfolio may drift to 70% stocks and 30% crypto. At this point it might make sense to rebalance the portfolio to target weights as we have too much crypto and not enough stock. The rebalance transaction would sell crypto and buy stocks to align the portfolio with the 80% stock and 20% crypto target.
In order to help our clients manage the risk associated with their investments and maintain a desired asset allocation, we employ an auto-rebalancing technique in our Strategies.
Perhaps one of the most beneficial aspects of auto rebalancing is sheer convenience. It takes the burden of portfolio rebalancing off your hands.
Other benefits of auto rebalancing include:
Removing emotions from investing: If you believe crypto will drop in value, you may begin to sell out of panic. The opposite can happen if you think crypto will rise in value—overconfidence may tempt a purchase of too much for your risk appetite. Auto rebalancing cuts emotion from the investing equation because it takes care of it for you.
Keeps your portfolio balanced: Technological algorithms adjust your portfolio automatically, so it stays within the percentages you selected — and you don’t even have to think about it.
Auto rebalancing might not be right for every investor or every circumstance. Here are two factors to consider:
Transaction fees: Generally, investment transactions come with fees. Make sure you know the costs when you sign up for a strategy with auto rebalancing. The more transactions there are, the more fees you may pay.
Capital gains taxes: Selling assets for a profit can trigger capital gains taxes. Ensure you have a good understanding of any taxes you’ll be responsible for paying or talk to a tax professional, so there are no surprises at tax time.
At Domain Money we offer Strategies that utilize an auto rebalancing process. One strategy, Domain Access, targets 80% stocks and 20% crypto. Another strategy, Domain Balanced, targets 50% stocks and 50% crypto. As markets move and as client portfolios drift away from the target asset allocation, Domain Money will auto rebalance back to target weights. As discussed, this process allows us to help our clients manage the risk associated with their investments and maintain a desired asset allocation between stocks and crypto.
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