Portfolio rebalancing is nothing more than regular maintenance for your investments, like going to the doctor for a checkup or getting your car’s oil changed. Rebalancing means selling some stocks and buying some bonds, or vice versa, so that most of the time, your portfolio’s asset allocation matches the level of returns you’re trying to achieve and the amount of risk you’re comfortable taking. And while rebalancing does involve buying and selling, it is still part of a long-term, passive investing strategy – the type that tends to do the best in the long run. In this article, we’ll talk more about what rebalancing is as well as why, how often, and how to do it.

Why Rebalance Your Portfolio?

Rebalancing your portfolio is the only way to stay on track with your target asset allocation. Asset allocation refers to the percentage of your portfolio that’s held in different investments, such as 80% stocks and 20% bonds. Your target asset allocation is the percentage you want to hold in each investment so that you’re comfortable with how much risk you’re taking and you’re on track to earn the investment returns you need to meet your goals, such as being able to retire by age 65. The more stocks you hold, the more risk you’re taking on and the more volatile your portfolio will be – the more its value will change with swings in the market. But stocks tend to outperform bonds significantly over the long run, which is why so many investors rely more on stocks than on bonds to meet their goals.

When the stock market does well, the percentage of your portfolio’s dollar value that’s represented by stocks will increase as the value of your stock holdings goes up. If you start with an 80% allocation to stocks, for example, it might increase to 85%. Then, your portfolio will be riskier than you intended it to be. The solution? Sell 5% of your stock holdings and buy bonds with the money. That’s an example of rebalancing.

When the market is doing well, you might have a hard time, psychologically speaking, with rebalancing. Who wants to sell investments that are doing well? They might go higher and you might miss out! Consider these three reasons:

  1. They might go lower and then you’ll suffer greater losses than you’re comfortable with.
  2. When you sell an investment that’s been performing well, you’re locking in those gains. They’re real; they don’t just exist on a screen in your brokerage account. And when you buy an investment that’s not performing as well, you’re getting a bargain. Overall, you’re selling high and buying low, which is exactly what all investors hope for.
  3. Rebalancing usually involves selling only 5% to 10% of your portfolio. So even if you are bothered by the idea of selling winners and buying losers (in the short term), at least you’re only doing it with a small amount of your money.

Most of the time, you’ll be selling stocks and rebalancing into bonds. A Vanguard study looked back over the years 1926 to 2009 and found that for an investor who wanted to maintain a balance of 60% stocks and 40% bonds, there were only seven occasions during those years when maintaining the ideal target allocation involved the bond proportion straying at least 5% from the 40% target.

You don’t have to rebalance, of course. The more heavily your portfolio becomes weighted toward stocks, the higher your long-term returns will probably be. But they won’t be that much higher than if you had a more balanced asset allocation, and the additional volatility might cause you to make financially harmful decisions, like selling stocks at a loss. For a completely rational investor (which no one really is), it might make sense to hold 100% stocks. But for anyone who has an emotional reaction to seeing their retirement account balance decline when the stock market suffers, holding some bonds and rebalancing regularly is the best way to stay on track with your plan and achieve the best risk-adjusted returns over time.

One of the times when investors found themselves rebalancing out of bonds and into stocks was during the financial crisis. At the time, it might have seemed scary to buy stocks that were plunging. But those stocks were essentially purchased at a huge discount, and the long bull market that followed the Great Recession rewarded those investors handsomely. Today, those same investors should still be rebalancing. If not, they will have become strongly overweighted in stocks and they’ll suffer more than they need to the next time the market declines. Since markets are cyclical, it’s only a matter of time until a market’s fortunes, whether good or bad, reverse.

How Often Should You Rebalance?

There are three frequencies with which you might choose to rebalance your portfolio:

  1. According to a set timeframe, like once a year at tax time.
  2. Whenever your target asset allocation strays by a certain percentage, such as 5% or 10%.
  3. According to a set timeframe, but only if your target asset allocation has strayed by a certain percentage (a combination of choices 1 and 2).

The downside of the first option is that you might waste time and money (in the form of transaction costs) rebalancing needlessly. There’s really no point in rebalancing if your portfolio is a mere 1% out of alignment with your plan.

You’ll need to decide how much “drift” you’re okay with – how far you’re comfortable letting your asset allocation deviate from your target – to determine how often to rebalance. In other words, if your target allocation is 60% stocks, 40% bonds, do you want to rebalance when your portfolio has drifted to 65% stocks, 35% bonds, or are you comfortable waiting until it’s reached 70% stocks, 30% bonds?

As it turns out, you don’t need to worry much about when or how often to rebalance. The same Vanguard study that analyzed a 60/40 portfolio from 1926 through 2009 found that “there is no optimal frequency or threshold when selecting a rebalancing strategy.” Someone who rebalanced monthly would have more than 1,000 rebalancing events, while someone who rebalanced quarterly would have 335 and someone who rebalanced annually would have just 83. Yet the average annualized return and volatility were nearly identical among the three groups. Someone who had a 10% threshold and rebalanced annually (option 3) would have only had 15 rebalancing events over those 83 years. Vanguard recommends checking your portfolio every six months or once a year and rebalancing at a 5% threshold to strike the best balance between risk management and minimizing costs.

Taking it a step further, the Vanguard study actually found that it would be fine to never rebalance your portfolio. On average, someone who started with a 60% allocation to stocks would have ended up with an 84% allocation to stocks. This person would have spent zero time or money rebalancing. Their portfolio’s volatility was about 2.5 percentage points higher than that of an investor who did rebalance. And their average annualized returns were 9.1%, compared with 8.6%, 8.8% and 8.6% for the hypothetical investors who rebalanced monthly, quarterly and annually.

Other times you might want to consider rebalancing annually are when your life situation changes in a way that affects your risk tolerance:

Married a multimillionaire? You can safely shift to more conservative asset allocation. Assuming both you and your spouse manage your existing assets wisely, you may already be set for life.

Become disabled or seriously ill? Again, you might want to rebalance into something more conservative since you want to be able to spend the money you have during the time you have left. You’ll also need money for medical bills sooner rather than later.

Divorcing and not responsible for child support or alimony? With no one to provide for but yourself, you might decide to rebalance into a higher percentage of stocks since your risk-taking won’t affect your family.

Planning to buy a house in the next few years? You’d be wise to rebalance into more bonds and fewer stocks so that you’ll have plenty of cash to pull out – even if there’s a market downturn – when you’re ready to withdraw your down payment.

Now that we’ve covered what rebalancing is and why you should (probably, maybe) do it, let’s talk about how to do it.

Look at Your Overall Portfolio

To get an accurate picture of your investments, you need to look at all your accounts combined, not just individual accounts. If you have both a 401(k) and a Roth IRA, you want to know how they are working together. What does your combined portfolio look like? Obviously, you’ll skip this step if you only have one investment account.

Use one of these three methods to create a combined picture of all your investment accounts.

1. Spreadsheet. On a single sheet, input each of your accounts, each of the investments within those accounts and how much money you have in each investment. Note whether each investment is a stock, bond or cash holding. Calculate the percentage of your total holdings allocated to each category. This isn’t the easiest or fastest method, but it might be fun if you’re a personal finance geek who likes making spreadsheets.

Next, compare the allocation of your holdings in each category to your target allocation. If any of your holdings are target-date funds or balanced funds, which will include both stocks and bonds, consult the website of the company that offers those funds (e.g., Fidelity, Vanguard, Schwab) or a research site such as Morningstar (which is what we used to create the spreadsheet below) to see how they’re allocated.


Account



Ticker



Fund name



Stocks



Bonds



Cash



Total



401(k)



VTSMX



Vanguard Total Stock Market Index Fund



$9,900





$100



$10,000



 



VBMFX



Vanguard Total Bond Market Index Fund





$9,800



$200



$10,000



Roth IRA



IVV



iShares Core S&P 500 Index ETF



$6,000







$6,000



 



GOVT



iShares U.S. Treasury Bond ETF





$1,960



$40



$2,000



Total



 



 



$15,900



$11,760



$340



$28,000



 



 



 



 



 



 



 



Current Allocation



 



 



56.7%



42.0%



0.3%



100%



Target Allocation



 



 



60.0%


 



40.0%



0.0%



100%



Difference



 



 



-3.7%



2%



0.3%



 


 Thanks to MoneyUnder30.com for the basic format of this spreadsheet.

Advanced tip: You can break down the stock and bond categories further for a more detailed picture. What percentage of your stocks, for example, are a small cap or large cap? What percentage are domestic or international? What percentage of your bonds are corporate and what percentage is a government issued security?

You’ll notice when you look up your funds’ asset allocations that funds supposedly 100% dedicated to a specific asset class often have a tiny percentage of their holdings, perhaps 0.5% to 2.0%, in cash. Don’t sweat this small detail when rebalancing your portfolio.

Also, in the example above, you’ll note that our investor hasn’t strayed far from their target asset allocation. They might decide not to bother rebalancing until the difference is 5% or even 10%.

2. Brokerage software. Some brokerage firms allow their customers to view all their investments in one place, not just the investments they hold with that brokerage. Examples include the Merrill Edge Asset Allocator and Fidelity’s Full View. You’ll need to provide your login information for each account whose details you want to view. If you’re using Fidelity’s Full View, for example, and you have a self-employed 401(k) with Fidelity and a Roth IRA with Vanguard, you’ll need to give Fidelity your Vanguard login details so you can see your two accounts’ combined asset allocation.

3. Apps. Apps such as Personal Capital’s Investment Checkup, SigFig’s Portfolio Tracker, FutureAdvisor and Wealthica (for Canadian investors) can sync with your existing accounts to provide a regularly updated and complete picture of your investments. You can use these apps for free; their providers are hoping you’ll sign up for one of the company’s paid services, such as portfolio management. Again, you’ll have to provide these sites with the login details of your brokerage accounts to see your combined asset allocation.

If you think finding a way to examine your overall portfolio is too much work or if you don’t want to share your login details across sites, here’s another strategy: Strive to maintain your target asset allocation in each of your accounts. Make sure your 401(k) is allocated 60% to stocks and 40% to bonds, and do the same for your IRA. Then rebalance within each account as needed.

Analyze Your Portfolio

Once you have a complete view of your portfolio holdings, examine these four things:

1. Overall asset allocation. What percentage of your investments are in stocks, bonds, and cash? How does this allocation compare to your target allocation?

Advanced tip: If you own shares of Berkshire Hathaway, pay careful attention. While it’s technically a stock, it has large cash and bond holdings. You might have to do some manual asset allocation calculations if the software you’re using isn’t smart enough to recognize this.

2. Overall risk. If you find that you have 70% stocks and 30% bonds, is that too risky for you? If you find that you have 20% cash, 30% bonds and 50% stocks, are you not taking enough risk to meet your investment goals?

3. Overall fees. Ideally, you want your investment fees to be as close to zero as possible, and thanks to increased innovation and competition in the investment marketplace, you might be able to achieve this goal. Fidelity’s Total Market Index Fund (FSTMX), for example, has an annual expense ratio of 0.09% for its investor-class shares, which require a $2,500 minimum investment in the fund. The higher your investment fees, the lower your returns, all else being equal. Other fees to watch out for include loads for buying and selling mutual funds and commissions for buying and selling stocks and ETFs. For long-term buy-and-hold investors, loads and commissions may cost less over time than annual expense ratios.

4. Returns. Are your portfolio’s returns meeting your goals? If they aren’t, that’s not necessarily a problem: What you really care about are the long-term average annual returns, and your portfolio might have had a negative return over the last two years because of a recession. That’s why you want to look at how your portfolio’s investments are performing compared to similar investments. Is your stock market fund tracking the index it’s supposed to track? You can look this up on Morningstar, which has determined appropriate benchmarks for different funds and has created color-coded graphs to show you how your fund has performed against its benchmark. Another possibility is that your portfolio’s asset allocation can’t possibly meet your goals. If your goal is to earn an 8% average annual return and your portfolio consists of 80% bonds and 20% stocks, there’s almost no chance you’re going to meet your goal unless you flip your asset allocation to 80% stocks and 20% bonds.

Advanced tip: If at this stage, you find that you have an unwieldy number of accounts – perhaps you have several 401(k) plans with several former employers – consider consolidating them. You can roll over old 401(k) balances to an IRA (traditional or Roth, depending on which kind of 401(k) you have or whether you're willing to pay taxes to switch to a Roth). The IRA switch will give you maximum control over your fees and investments. Or, if you like your current employer’s 401(k) and your current employer allows it, you can roll your old 401(k) balances into your current 401(k). Note that 401(k) balances have more protection against creditors.

Learn What’s New

Investment innovation might mean that what you currently hold isn’t the best option for meeting your goals. As an example, you might have an index mutual fund that charges an expense ratio of 0.5% when you could be holding a nearly identical index ETF with an expense ratio of 0.05%. Does this sound too good to be true? How could you get a nearly identical investment for so much less? Unlike some mutual funds, ETFs rarely charge sales loads or 12b-1 (marketing) fees. Also unlike some mutual funds, ETFs are usually passively managed (they follow a given index by investing in all the stocks in that index), not actively managed by human fund managers picking winners and losers. Passive management is not only less expensive but tends to yield better returns – partly due to the lower fees.

Another possibility is that you might want to move your assets to a robo-advisor to lower your fees and eliminate the task of managing your own investments. We talk more about robo-advisors a bit later in this article.

What Should You Sell vs. Buy?

Next, it’s time to figure out which investments to unload from your portfolio. Primarily, you want to sell overweighted assets. If stocks have been outperforming bonds, then your desired asset allocation will have gotten out of whack in favor of stocks. You might be holding 75% stocks and 25% bonds when your goal is to hold 70% stocks and 30% bonds. In that case, you’ll need to sell 5% of your stock holdings.

Which stocks, including stock mutual funds and stock ETFs, should you sell? Start with these:

– stock funds with fees that are too high

– stock funds you don’t understand

– stocks of companies whose business model you don’t understand

– stocks and funds that are too risky or not risky enough for your tolerance

– stocks and funds that haven’t performed as well as their benchmarks or as well as you expected them too

– individual stocks that are overvalued or underperforming their peers or that no longer have a positive outlook

If it is bonds you’re looking to sell, consider these criteria:

– bonds whose credit rating has dropped (these bonds are now riskier than they were when you purchased them)

– bonds that are underperforming their benchmarks

– bonds with returns that aren’t keeping pace with inflation

– bond funds with fees that are higher than they need to be (that is, you could get a nearly identical bond fund for less)

If none of these traits apply to your holdings, sell the investment with the lowest trading fee, such as shares of a no-transaction-fee mutual fund or ETF.

Before you can purchase new investments, you’ll have to wait for your sales to settle. Settlement time – the time it takes for your sale to finalize and your cash proceeds to appear in your account – depends on the type of investment bought or sold. For stocks and ETFs, settlement time can be T+2 in industry jargon, where T is the date you place the trade and 2 is two business days. Mutual funds settle a bit faster, in one to two business days. Keep in mind that if you place a trade after the market closes, it won’t be executed until the following business day.

While your sales are settling, decide what you want to buy. The easiest thing is to buy more of what you already have that you’re underweight in. Reexamine that investment and ask yourself, “Would I buy it today?” If not, seek out a new investment that aligns with your goals. 

Portfolio Rebalancing by Age/Goals

Portfolio rebalancing in and of itself isn’t really a function of how old you are or what you’re trying to achieve with your portfolio. Asset allocation is. But since choosing an asset allocation is the precursor to portfolio rebalancing, let’s talk about how you might allocate your portfolio at different key times in your life.

Age 25

You’ve probably read that young investors should place a high percentage of their money in stocks since they have a long time horizon and since stocks tend to perform the best in the long run. But your ideal asset allocation depends not just on your age but also on your risk tolerance. If a 10% drop in the stock market would cause you to panic and start selling stocks, you have a lower risk tolerance than someone who would see that same market drop as a buying opportunity. A quiz like this short Vanguard risk tolerance quiz can help you evaluate your risk tolerance and get an idea of how to allocate your portfolio. A simplistic formula like 100 minus your age to get the percentage of your portfolio to allocate to stocks (75% for a 25-year-old) might be a useful starting point, but you’ll need to tweak that percentage to suit your investing personality. You can invest 100% in stocks if you have a very high-risk tolerance and long time horizon, for example.

That Vanguard study we were talking about earlier found that with a hypothetical portfolio invested from 1926 through 2009, average annualized returns after inflation would be as low as 2.4% for someone invested 100% in bonds and as high as 6.7% for someone invested 100% in stocks. But the difference between investing 100% in stocks versus 80% in stocks, 20% in bonds was just half a percentage point, with the latter earning real average annualized returns of 6.2%. And someone invested 70% in stocks and 30% in bonds would have earned 5.9%, while a 60/40 investor would have earned 5.5%.

What we can take away from these findings is that the most important thing is to invest in something tried and true; maybe don’t invest 100% or even 20% of your portfolio in bitcoin, which is still considered highly speculative. Since most people are more upset when they lose money in the stock market than they are happy when they make money in the stock market, a strategy that makes you comfortable with the amount of risk you’re taking and helps you stay the course during market corrections is the best strategy for you. So even if you’re 25 years old and you keep hearing that you should be invested 80% in stocks, if you’re only comfortable with 50% in stocks and want to keep the other 50% in bonds, that’s fine.

Age 45

At this point in your life, you might have received an inheritance from a parent or grandparent and be wondering what to do with the money and how the windfall should affect your investment strategy. (Or you might not receive an inheritance ever, or not until you’re in your 60s, 70s or 80s.) Another scenario many people face around age 45 is needing money to send a child to college – tens of thousands of dollars, or maybe even hundreds of thousands if you have multiple children or a private school-bound child who didn’t receive any financial aid.

If you inherit assets, such as stocks, you have to decide how they fit into your overall portfolio and rebalance accordingly. Having more money might mean you’d prefer a more conservative allocation since you don’t need to take on as much risk to achieve the growth you need. Inheriting lots of stocks might throw your target allocation way out of whack; you might need to sell off a lot of them and buy bonds. Or you might have inherited lots of bonds and want to own more stocks. You’ll also want to think about whether the particular assets you’ve inherited are things you would buy if you were picking out investments with your own money. And if you inherit cash, well, you can just use the money to purchase the stocks and bonds you want to create your ideal asset allocation.

As far as paying for college, let’s say you have a 529 plan, a tax-advantaged account that helps families save money for education expenses. When your child is 10 or more years away from college, you can use an aggressive asset allocation with a high percentage of stocks. As your child gets closer to college age, you need to rebalance in a way that makes your asset allocation more conservative. Use account contributions to buy bonds instead of stocks. The account’s value needs to become less volatile and more stable over time so you’ll be able to withdraw money for your child’s education when you need it without having to sell investments at a loss. Some 529 plans even have age-based options that act like target-date retirement funds but with the shorter time horizon associated with raising kids and sending them to college.

Also at age 45, if you’ve been highly successful and watched your spending carefully, you might be on track to retire early. If that’s the case, you might need to start rebalancing toward a more conservative asset allocation. Then again, you might not want to – it depends on your philosophy about stock ownership during retirement, which again has to do with your risk tolerance. When you’re zero to 10 years away from retirement, your portfolio is considered to be in the transition stage. Most experts say you should be moving toward an asset allocation that’s weighted more heavily toward bonds than toward stocks – but not too heavily, because you still need continued growth so you won’t outlive your portfolio. Instead of moving toward the 40% bond, 60% stock asset allocation that might be recommended for someone planning to retire at age 65, you might move toward a 50/50 allocation. When rebalancing, you’ll be selling stocks and buying bonds.

Age 65

Age 65 represents the early years of retirement (or just before it) for most people who can afford to retire. (Full Social Security retirement age for people retiring right now is 66; Medicare starts at 65.)  It can mean starting to withdraw retirement account assets for income. Rebalancing your portfolio at this age could mean selling stocks to gradually move your portfolio toward a heavier bond weighting as you get older. The only catch is that you won’t want to sell stocks at a loss; which investments you’ll sell for income will depend on what you can sell for a profit. Being diversified within each major asset class (for example, holding both large-cap and small-cap stock funds, both international and domestic stock funds, and both government and corporate bonds) gives you a better chance of always having assets to sell at a profit.

You should also have a retirement drawdown strategy in place – perhaps you’re going to withdraw 4% of your portfolio balance in year one and adjust that dollar amount by the inflation rate in each following year. Portfolio rebalancing will require a different approach because you’re now accounting for regular withdrawals, whereas before retirement, you were accounting only (or mostly) for contributions. You might also be making withdrawals from multiple accounts, which might mean rebalancing multiple accounts. Once you reach age 70½ you will have to start taking required minimum distributions (RMDs) from 401(k)s and traditional IRAs to avoid tax penalties.

When you take RMDs, you can rebalance your portfolio by selling an overweight asset class. Keep in mind that you’ll be paying taxes on withdrawals of earnings and pre-tax contributions unless it’s a Roth account. People with significant assets outside of retirement accounts can rebalance in a low-cost, tax-efficient way by gifting appreciated investments to charity or gifting low-basis shares (stock shares with huge capital gains on their original value) to friends or family.

Now that you understand how the rebalancing process works, the next question is whether to do it yourself, use a robo-advisor, or use a real, live investment advisor to help you. Consider the pros and cons of each in terms of skill, time and cost.

DIY Portfolio Rebalancing

Rebalancing your portfolio on your own, without the help of a robo-advisor or investment advisor, doesn’t require you to spend any money. What it does cost you is time; how much time depends on the complexity of your investments and your grasp of how to rebalance. If you have one IRA with one stock ETF and one bond ETF, rebalancing will be quick and easy. The more accounts and the more funds you have, the more complicated the task becomes.

The most common rebalancing advice is to sell the investments you’re overweight in – which will almost always be stocks, since they grow faster than bonds, as we mentioned earlier – and use that money to buy the investments you’re underweight in, which will almost always be the bond. But a simpler method that may have lower transaction costs is to use any new contributions to your account to purchase the investments you need more of.

If you receive a year-end bonus, a tax refund or a large gift, use that money. If you make a lump sum contribution to your IRA, divvy that money up between stocks and bonds in a way that rebalances your portfolio. You might not end up perfectly reallocating your investments back to your target ratio, but you might get close enough that it’s worth not incurring any transaction costs from selling. That being said, many brokerage firms offer no-transaction-fee mutual funds and ETFs, in which case it won’t cost you anything to buy and sell exactly what you need.

The biggest risks to DIY portfolio balancing are not doing it at all and, if you’re working with a taxable account, incurring taxes – especially short-term capital gains taxes, which have a higher rate than long-term capital gains taxes. Any time you pay investment taxes, you’re hurting your net returns.

To sum up, here’s an example of how this whole process plays out.

TOTAL STARTING PORTFOLIO VALUE: $10,000

Allocation before rebalancing:

Stock mutual fund value: $7,500 (75% of your portfolio)

Bond mutual fund value: $2,500 (25% of your portfolio)

To rebalance:

Sell: $500 of the stock mutual fund

Buy: $500 of the bond mutual fund

Allocation after rebalancing:

Stock mutual fund value: $7,000 (70% of your portfolio)

Bond mutual fund value: $3,000 (30% of your portfolio)

TOTAL ENDING PORTFOLIO VALUE: $10,000

One thing might complicate this process: The bond mutual fund you want to purchase additional shares of might have a minimum investment that’s higher than $500. If that happens, you could purchase shares of a nearly identical bond ETF that doesn’t have any investment minimum.

Also, if you have to pay any commissions to buy or sell, your total ending portfolio value will dip below $10,000.

Automatic Portfolio Rebalancing

The easiest way to rebalance your DIY portfolio is to choose funds whose managers do the rebalancing for you. Target-date funds, which are mutual funds that hold a basket of investments and have an asset allocation that’s based on your projected (target) retirement date, are an example of a type of fund that is rebalanced automatically. You don’t have to do anything.

A fund for investors with a target retirement date of 2040, for example, might have a starting target asset allocation of 90% stocks and 10% bonds. The fund’s managers will rebalance the fund as often as needed to maintain that target allocation. In addition, they will shift the fund’s asset allocation over time, making it more conservative too and through 2040. These funds typically have low expense ratios; the industry average was 0.43% as of December 31, 2015.

What about balanced mutual funds? Also called hybrid funds or asset allocation funds, these are similar to target-date funds in that they hold both stocks and bonds and aim to maintain a specific allocation, such as 60% stocks and 40% bonds. However, that allocation doesn’t change over time; balanced funds are for investors of any age. Balanced funds, like target-date funds, are rebalanced automatically. Balanced funds had an industry-average expense ratio of 0.74% in 2016.

Robo-Advisor Rebalancing

First, a caveat: Most robo-advisors don’t manage employer-sponsored retirement accounts. An exception is Blooom. Robo-advisors do, however, manage IRAs and taxable accounts.

Working with a robo-advisor requires virtually no time or skill on your part: The robo-advisor does all the work automatically. All you have to do is open an account, put money in it and choose your target asset allocation, or answer the software’s questions to help it set a target asset allocation for you.

Costs are low, too. Robo-advisors such as Betterment, Wealthfront, and SigFig use strategies to make rebalancing less expensive by avoiding or minimizing short- and long-term capital gains taxes. A common strategy is to avoid selling any investments when rebalancing your portfolio. Instead, when you deposit cash or receive a dividend, the robo-advisor uses that money to purchase more of the investment you’re underweight in.

If, for example, your portfolio has drifted from 60% stocks, 40% bonds to 65% stocks, 35% bonds, the next time you add money to your account, the robo-advisor will use your deposit to buy more bonds. By not selling any investments, you don’t face any tax consequences. This strategy is called cash flow rebalancing.

You can use this strategy on your own to save money, too, but it’s only helpful within taxable accounts, not within retirement accounts such as IRAs and 401(k)s. There are no tax consequences when you buy or sell investments within a retirement account.

Another strategy robo-advisors use to keep transaction costs low is to sell whichever asset class you’re overweight at any time you decide to withdraw money from your portfolio.

Further, when your robo-advisor rebalances your portfolio, you won’t incur the commissions, transactions or trading fees that you might encounter when rebalancing on your own or through an investment advisor. Robo-advisors don’t charge these fees. Instead, they charge an annual fee based on the dollar amount of assets they manage for you. Betterment, for example, charges an annual fee of 0.25% of assets under management and there’s no minimum account balance. And because robo-advisors are automated, they may rebalance your portfolio as often as daily, so it’s usually in near-perfect balance.

Hiring an Investment Advisor

If you hire someone to manage your investments, portfolio rebalancing is one of the tasks they’ll do for you, along with creating an investment plan based on your goals and risk tolerance and recommending investments to help you meet those goals.

It’s certainly possible to manage your investments and rebalance your portfolio yourself. But some people don’t have the time, aren’t confident in their ability to learn what they need to know and perform the right tasks, or just don’t want to deal with it. Other people know how to manage their own investments but find themselves making emotional decisions that hurt their returns. If you fall into one of these categories, hiring an investment advisor could pay off.

You want to hire a fee-only fiduciary. This type of professional has no conflicts of interest that prevent them from acting outside your best interests. They are paid for the time they spend helping you, not for the specific investments they sell you or the number of trades they make on your behalf. For any fee-only fiduciary you’re choosing, check their background using the Financial Industry Regulatory Authority’s (FINRA) BrokerCheck website and the Securities and Exchange Commission’s Investment Adviser Public Disclosure website. Depending on the type of advisor, you may be able to check their background at one, both or neither of these websites. If they do show up in one of these databases, you can see their work history, exams passed, credentials earned and any disciplinary actions or customer complaints against them. You can also sometimes check an advisor’s credentials with the credentialing organization. You can verify, for example, an individual’s certified financial planner certification and background at the CFP Board’s website.

The biggest drawback to using an investment advisor to rebalance your portfolio is the cost of hiring one. The industry average cost is about 1.0% of assets managed per year. If your portfolio totals $50,000, you’ll pay your advisor $500 per year. In addition, you’ll pay any commissions and fees associated with the investments in your portfolio. Paying any fees, including an investment advisor’s fees, will reduce your overall returns.

Some advisory services try to beat the industry average. Vanguard finds that on a $250,000 investment with an average annual return of 6% over 20 years, using the company’s Personal Advisor Services (which only cost 0.3% of assets under management per year) could give you $96,798 more compared with paying the industry average 1.02% fee. Here, you're making more than average while spending less than average on fees.

An advisor’s fee can pay for itself, and then some. Investors tend to earn lower returns than the funds they invest in because of their tendency to buy low and sell high. A financial advisor’s behavioral coaching can overcome this problem. Working with an advisor can help you stay the course, especially in bull or bear markets when your emotions might tempt you to stray from your long-term investment strategy. A study Vanguard published in September 2016 found that through financial planning, discipline and guidance – not through trying to outperform the market – advisors can increase their clients’ average annual returns by 3%.

Another reason to hire an investment advisor is if it’s going to mean the difference between actually having an investment plan or doing nothing. The latter is toxic to your long-term financial health.

You don’t have to hire someone on an ongoing basis; you can hire someone to help you on a per project or hourly basis. Not all advisors work this way, but many offer the option. And you can hire someone anywhere in the country whom you can consult online, by Skype or by phone.

Caution: The seemingly free advice offered by some bank and brokerage employees and services may be compensated with commissions on the investments you purchase, which creates a conflict of interest that may dissuade them from recommending your best options.

Another downside is that many advisors have investment minimums. Vanguard Personal Advisor Services has a fairly low minimum, at $50,000. You might not have enough assets for certain advisors to take you on as a client. Some services require that you have at least half a million to invest.

The funny thing about hiring an advisor to rebalance your portfolio is that they’re probably going to use an automatic asset rebalancing tool (in other words, software). This software accounts for the investor’s risk tolerance, tax goals (such as tax loss harvesting and avoiding capital gains and wash sales) in the case of a taxable portfolio, and asset location (whether to hold certain investments in a nontaxable account such as a 401(k) or in a taxable brokerage account).

It’s expensive, sophisticated software that you wouldn’t buy on your own, yes. But robo-advisors also use the software. Why not, then, just hire a robo-advisor?

A Vanguard study published in May 2013 found that for 58,168 self-directed Vanguard IRA investors over the five years ended December 31, 2012, investors who made trades for any reason other than rebalancing – such as reacting to market shake-ups – fared worse than those who stayed the course. If robo-advising won’t prevent you from buying high and selling low, then paying an individual investment advisor to make sure you stay disciplined with your investing strategy can pay off.

The Bottom Line

The first time you rebalance your portfolio might be the hardest because everything is new. It’s a good skill to learn and a good habit to get into, though. While it isn’t designed to increase your long-term returns directly, it is designed to increase your risk-adjusted returns. For most people, taking a little less risk through rebalancing is a good thing because it keeps them from panicking when the market sours and helps them stick with their long-term investment plan. And that means the discipline of rebalancing can increase your long-term returns.