Automatic Rebalancing - A Lifecycle Fund Bonus

Today there was an article I came across on CNNMoney.com that caught my interest about the benefits and perils of rebalancing your portfolio. The article specifically mentions the Charles Schwab Lifecycle Funds that I talked about in my last post about one fund investing. It seems that I forgot to mention the important benefit of automatic, professionally directed rebalancing that is an inherent part of Lifecycle funds.

The idea of rebalancing is to keep the asset allocation close to its target. The benefits of this strategy are three fold, 1) it keeps your level of risk in sync with your tolerances, 2) it forces you to sell asset classes that have had a run-up in price and buy assets classes that are selling at a discount, and 3) your portfolio is on autopilot as it is regularly rebalanced automatically in line with a professionally determined asset allocation that is appropriate for the time horizon of the fund. In my case as I approach my retirement around 2040 the asset mix is gradually adjusted to be more conservative. The disadvantages of rebalancing are the potential capital gains taxes and transaction fees that you will incur. Both of these negatives can be completely avoided by using an tax sheltered account such as a 401(k) or IRA and investing in a fund like the Schwab 2040 (SWERX).

If you aspire to wealth like I do then starting a Roth IRA and investing in a Lifecycle Fund is a great way to start your on a path to wealth.

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