Automatic Rebalancing – What it is and Why it Matters


Why automatic asset reallocation may help your portfolio.


Provided by
Mike Fassi, CLU, CHFC


If you participate in a 401(k) plan, or if you have a variable annuity, an ETF, or an IRA mutual fund, you may have an option to automatically and periodically have your assets “rebalanced.” In fact, a 2007 survey by Hewitt & Associates found that 42% of large employers offered this option.1 Why might this be important?

An automatic check-up for your portfolio. Here’s why. When you first contributed to that retirement plan, ETF, IRA or variable annuity, there was a specific asset allocation in mind. Your assets were fractionally allocated across different investments – a certain percentage in this class, a certain percentage in that class, and so on. You did this in a way that suited your tolerance for risk.

But over time, those percentages subtly change. Some investments outperform others, and as a result, the asset allocation may stray from the targets you once set.

Automatic rebalancing may remedy this.

A way to keep you on track. How does it work? Well, just as an example, let’s say you have assets initially allocated in a typical 60/40 ratio: 60% in stocks, 40% in non-stock market investments. If stocks do poorly and, say, bonds do well, that 60/40 balance may approach 50/50. You now have a greater percentage of your invested assets than you initially wanted in a certain investment sector.

Now you may be thinking, “If that investment sector is doing well, what’s the problem?” The problem is that you are drifting away from the guideposts you started investing with. If more and more of your assets end up in one investment class, your portfolio becomes less and less diverse and more heavily weighted in one category. So your risk exposure may increase, or conversely, your portfolio assets may not be poised to earn a large enough return to meet your goals.

The age-old idea behind automatic reallocation. Five words really sum it up: “buy low and sell high.” In the rebalancing process, some of the assets within an overachieving investment category are sold off and a bit more of the assets in an underachieving investment category are bought in order to regain the original asset allocation. This is the other important effect of automatic rebalancing.2

Should you opt for automatic rebalancing? If you want a better understanding of the potential benefits of automatic asset reallocation, or if you just have questions about your retirement plan or investments, be sure to talk with a qualified financial advisor today before making any moves. What you learn may help you in the years ahead.


Mike Fassi, CLU, CHFC  is a Representative with Centaurus Financial Inc. and may be reached at Financial Educators Network, (800) 320-3012 or


These are the views of Peter Montoya, Inc., not the named Representative or Broker/Dealer, and should not be construed as investment advice. Neither the named Representative or Broker/Dealer give tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.



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Automatic Rebalancing - What it is and Why it Matters
Automatic Rebalancing - What it is and Why it Matters