How M1 Finance Automatic Rebalancing Works

Investing is the key to the future and M1 Finance offers a low-cost, no commission alternative to traditional investing. With 55% of Americans owning stocks, portfolio allocation is a central tenant of success.

The most common investing tip is to diversify your portfolio. However, maintaining that diversity in allocation can become a challenge as you invest further amounts into your portfolio. Our M1 Finance review touches upon the groundbreaking pie-based investing approach taken by the platform.

The pie approach makes it simple for you to keep tabs on your allocations. M1 Finance makes it even simpler with its automatic re-balancing feature. Here’s what you need to know about how it works.

What is Automatic Re-balancing?

Anyone who creates an account with M1 Finance has access to the automatic re-balancing feature. It’s the pie approach that makes it easy because each asset in your pie has a percentage allocation.

The built-in re-balancing means that each deposit you make to that pie will be automatically allocated so you’re as close to your target allocation as humanly possible. If one of your assets spikes in value and you make another deposit, M1 investing will make sure most of that deposit helps the other slices of your pie to catch up.

What’s the Best Way to Allocate Your Investment Assets?

Whenever you invest with M1, you need to decide how to allocate your investment assets. Determining the correct allocation depends largely on your goals and what you want to achieve. Age also plays a big role in where your money should be.

M1 is a robo-advisor aimed primarily at people with limited experience in the markets. For that reason, the assets available to invest in are considered low-risk, such as stocks, bonds, and exchange-traded funds (ETFs).

So, what is our recommended allocation?

For a more aggressive strategy, we recommend putting 85-90% of your money into stocks, with the remaining 10% going into ETFs or bonds.

Older people who have less room for error may want to turn this on its head and invest 80-90% of their money in government bonds. While bonds have low returns, they are also one of the safest investments in the industry.

M1 One-Click Re-balancing

Many platforms come with the same automatic re-balancing features to enable you to keep your portfolio in check.

M1 Finance takes it one step further with its one-click re-balancing feature. The feature is available on both desktop and the M1 Finance app. To automatically re-balance a portfolio pie, follow these steps:

• Navigate to the portfolio pie you want to re-balance from your dashboard.
• Click the Rebalance button.
• Let M1 investing automatically execute the necessary trades to re-balance your portfolio.

M1 will initiate all trades at the next trading window, which is 9:30 a.m. EST. If you’re a subscriber to the M1 program, you can use the additional trading window at 3 p.m. EST.

Are There Any Tax Implications with M1 Re-balancing?

Tax implications are a major concern for investors. Short and long-term capital gains taxes can put a serious dent in your portfolio.

Whenever you sell an investment asset, such as a stock, you’ll need to pay taxes on those gains. If you’ve held the asset for less than a year, you’ll qualify for short-term capital gains taxes. Under this tax regime, your gains are taxed in the same way as income from a normal job.

Long-term capital gains taxes are applied on assets that are held for more than a year. Your tax rate depends entirely on your income, but the three brackets are:

• 0%
• 15%
• 20%

With M1, if you’re using a 401(k) or a tax-deferred retirement plan, there are no tax implications of using the re-balancing feature. Tax-deferred retirement plans don’t incur taxes on gains or deductibles on losses.

If your investments aren’t in one of these plans, normal taxes will apply, so it’s important to think about re-balancing before initiating it.

Can I Change My Portfolio with M1 Automatic Re-balancing?

Automatic re-balancing is not an obstacle to making changes to your portfolio. You can make changes to your portfolio at any time even with this feature engaged. It’s also possible to alter the interval of automatic re-balancing with M1 whenever you like.

Understand that the re-balancing feature doesn’t limit your control over your portfolio or put you in a situation where you cannot buy and sell investments whenever you like.

The Bottom Line

Automatic re-balancing is an intelligent feature that can help you to get the most out of investing with M1 Finance. It’s the next step in automated, passive investing. If you’re someone who doesn’t want to spend huge amounts of time managing your portfolio, this is just one of the features that can help you to do it.

At Modest Money, we believe M1 is one of the most advanced investing platforms on the market today. If you’re ready to start investing for free with no account minimums, click on this link.

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