Automated portfolio rebalancing is a relatively new technique that can help you stay on track with your financial goals. As an investor, you know that markets can change at a moment’s notice. But if you aren’t constantly monitoring your portfolio, things can get out of hand quickly. Not only can this cause you to miss out on investment opportunities, but it also makes you more vulnerable to risk.

That’s why more and more investors are choosing to automate how they manage their portfolios. In this article, we’ll explain how it works and what you need to do to make smarter investment choices for your future.

What is Automated Portfolio Rebalancing?

In simple terms, automated portfolio rebalancing is a strategy that automatically adjusts your asset allocation without the need for manual oversight. It relies on software or computer algorithms to ensure that your portfolio stays in line with your specific goals. So if the market shifts, this automated system can detect the change while also doing work to reallocate your assets.

Despite what you may think, automation is rule-based and therefore does not use artificial intelligence. For more information on AI-driven software, learn about the impact of AI on personal finance management.

For example, let’s say you invest money with a 60% allocation in stocks and a 40% allocation in bonds. If stocks happen to be doing particularly well, then your portfolio value grows.

However, this also shifts the allocation of your portfolio. In this scenario, an increase in stock value means your portfolio allocation is now 75% stocks and only 35% bonds. This change in allocation percentage can throw things off balance, which can open you up to greater risks.

To combat this, you’ll need to rebalance your portfolio. While this can be done manually, it’s far more efficient and time-saving to have the process automated, which is exactly where automated portfolio rebalancing comes in.

Benefits of Automated Portfolio Rebalancing

Now that you know the basics of automated portfolio rebalancing, let’s take a look at why it’s worth using.

It’s Consistent

Automated portfolio rebalancing relies on a consistent set of rules. Unlike human investors, these algorithms and models don’t make hasty decisions based on emotions. Therefore, you won’t have to worry about reacting out of stress or fear. Your portfolio will stay consistent, even in times of turmoil.

Looking for other programs to help you reach your financial goals? Rocket Money can analyze your personal accounts and provide a strategy to help you save more (while avoiding overdraft fees).

It’s Time Efficient

Constantly monitoring your portfolio and investments can eat up a lot of your personal time. But automating your rebalancing process does all the heavy lifting for you. It only needs the initial setup and then it runs quietly in the background without any effort from your end.

It Reduces Risk

One of the biggest benefits of automating your portfolio rebalancing is a reduction in risk. As mentioned earlier, it’s easy for things to drift away from your intended allocations. That can expose you to risk, which can have negative consequences on your investments.

It’s Scalable

Automated portfolio balancing can be used by anyone—whether you have one portfolio or five. The rules and preferences you set for the software will apply to everything across the board. If you take on different assets, the system will automate them using the same strategy, which is no added work for you.

Different Types of Automated Portfolio Rebalancing

Getting started with automated portfolio balancing is easier than you think. However, there are several different options depending on how involved you want to be in the process. Let’s go over the different tools and services available for streamlining your portfolio asset allocation.

Robo-Advisor

If you’re new to automated portfolio management (or investing in stocks in general), using a robo-advisor software program can be the simplest solution. By answering just a few simple questions (like goals and risk tolerance), your robo-advisor will manage your investment portfolio for you.

Robo-advisors generally have little to no human oversight. They’re purely based on algorithms that follow your defined set of rules. This is the best option if you want to be completely hands-off with your investments.

Digital Financial Advisor

If you’d prefer some human guidance, you can alternatively work with a digital-focused financial advisor. It can be beneficial to get advice from a traditional advisor who can set up the automated process for you. We recommend this solution if you want the convenience of automation with the ability to consult with a real advisor now and then.

Portfolio Management Software with Automation
Instead of leaving all the work to a software program, some investors prefer to have some control over their portfolio. In these situations, it’s worth looking for portfolio management software with automation features.

This way, you control the asset allocation and rebalancing tools. However, all the necessary changes will be applied automatically without any manual adjustment on your end.

Types of Financial Assets

It can be helpful to know the types of financial assets that can be included in your automation strategy. These include:

• Stocks

• Bonds

• ETFs (Exchange-Traded Funds)

• Mutual Funds

• Money Market Funds

• Treasuries

• REITs (Real Estate Investment Trusts)

If you want to rebalance digital assets like cryptocurrency, you may need to use a third-party tool or integrated API. Many traditional automation platforms or advisors don’t support crypto rebalancing due to its complexity and high volatility. When it comes to automated portfolio balancing, therefore, you may need to use a third-party tool.

Automated portfolio balancing is a useful strategy for both individuals and online businesses when it comes to seamless, digital management of finances. Automated portfolio balancing is a low-effort way to help you stay aligned with your financial goals. And, if you’re looking for other ways to enhance your portfolio, here’s an in-depth guide on derivative trading. These types of advanced strategies can take your portfolio (and long-term savings) to the next level.