Signed up to an investment service and got the ideal asset allocation? Think you can simply remain invested and forget about it? Think twice: every investment portfolio should regularly be reviewed and rebalanced. But don’t stress: robo-advisors can automatically rebalance your portfolio for you. One of the top robo-advisors is offered by Vanguard, let’s take a look at how Vanguard automatic rebalancing works.
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Investment portfolios need to be regularly reviewed and often rebalanced to take account of changes in the market, investment growth and personal goals. Only by regularly rebalancing the way your money is invested can you ensure that you consistently achieve your risk and return objectives.
Rebalancing is typically required because one of your investments, or a group of investments, outperformed the remainder. This can change the asset weighting of your portfolio. In response you sell some of these better-performing assets and buy the underperforming asset. As a result your portfolio is rebalanced to match your investment strategy.
Ordinarily, rebalancing requires manual intervention: your human investment advisor would periodically review your portfolio and rebalance it. Not so with robo-advisors, a robo-advisor can automatically adjust your portfolio when it is out of balance. This is called automatic rebalancing.
Vanguard has many different investment products, the ability to change the asset allocation for a Vanguard investment will depend on exactly which product you invested in. If you invested in a single Vanguard mutual fund you won’t be able to change the asset allocation as this is up to the fund manager.
Vanguard Personal Advisor Services, on the other hand, offers you the ability to change your asset allocation. In fact, Vanguard Personal Advisor Services features automatic rebalancing in addition to a human advisor that intervenes when necessary.
For other Vanguard products, you can manually adjust your asset allocation. One way to do this is to sell the asset you are overweight in and using the proceeds to buy the asset you are underweight in. E.g. if you have more stocks in your asset mix than you’d like (thanks to solid stock price growth, say) you can sell some stocks and buy bonds instead.
Another option is to change how your new funds are invested. If you are investing a regular monthly amount simply adjust the asset that is purchased with new funds – from stocks to bonds, for example.
If you have invested in a Vanguard mutual fund you can take advantage of the Vanguard automatic exchange service to rebalance your portfolio. The service allows you to automatically and regularly move funds from one fund to another on a monthly, quarterly or annual basis.
However, you cannot perform an automatic exchange more than once a month and you must exchange at least $250, with a minimum $1,000 balance in the source portfolio and an overall minimum Vanguard investment balance of $10,000 or over.
Your portfolio balance will naturally vary as some assets perform well, and others perform poorly. You don’t need to jump to action just because your portfolio is out by a few percentage points, but if your asset allocation varies from its targets by 5% or more you should consider adjusting your portfolio. There are plenty of techniques to do so, here are some we can recommend:
Automatic rebalancing. Ideal for people who do not have the time to actively manage their investments, automatic rebalancing ensures you continue to meet your investment goals on an ongoing basis without any manual intervention. As we’ve explained, robo-advisors typically offer automatic rebalancing as part of the robo-advice service.
Calendar-based rebalancing. A simple approach, calendar-based rebalancing means that you regularly review your portfolio at set intervals, say quarterly. If your asset allocation is out of balance you simply make the necessary adjustments. You then leave your asset allocation as is and review it again at the next interval.
Tolerance-based rebalancing. More intensive than simply consulting a calendar, with this method you set tolerance levels that trigger a rebalance. Say you want 50% invested in stocks, a tolerance method would trigger a rebalance once your stock allocation exceeds 55% – assuming your tolerance level is 5%. Your tolerance level could be as little as 2% or as much as 10%.
There are more advanced strategies for balancing portfolios. You may, for example, decide that solid growth in one asset has made you richer and that you can, therefore, tolerate the higher risk associated with the new portfolio balance – but up to a point. Either way, regularly evaluating the way your investments are allocated is key to ongoing investment success.