Finance News

M1 Finance – Automatic Rebalancing and Calibration

By Jeremy Biberdorf

Posted on August 20, 2021

M1 Finance – Automatic Rebalancing and Calibration

Offering a low cost, no commission, and streamlined alternative to more traditional investing platforms, M1 Finance is very much part of the new wave of stock investment software. M1 Finance compares favorably to the likes of Robinhood, Betterment, and Wealthfront, all of which help novice investors better access the fruits of the market. If there is one word to sum up the climate of stock investing nowadays it’s democracy: for good and bad, “app-ification” has brought the New York Stock Exchange (NYSE) and the Nasdaq home to the average Joe.

While M1 Finance does sport very low costs and fees, a $0 minimum investment, and a plethora of account types, the service’s real claim to fame is its “pie-based approach”. In fact, by our estimation M1 Finance takes the process of simplification a step further than other services by way of their pie charts.

And this is exactly why Brian Barnes, director and CEO, created M1: to give those who are unsure about investing an easy, no-frills way to get started. Pie charts work exactly as the name suggests. Your portfolio will resemble a pie or a series of pies which are made up of individual slices, and each of these slices can be stocks, bonds, or electronically traded funds (ETFs). In effect, M1 Finance allows a kind of total visualization of your finances.

In addition, creating an account with M1 Finance grants users access to its automatic rebalancing feature. Coupled with its pie-based approach, this makes it incredibly easy to see just what is happening when M1 rebalances your portfolio. When you make a deposit, you’ll see your pie slices adjust accordingly. Adjustments hinge on your very own, personalized target allocation.

Does this all sound like Greek to you? As a novice investor, it may. Thus, let’s take a closer look at the benefits of automatic rebalancing, and how M1 Finance goes about doing it. Along the way, you’ll learn why M1 is one of the better robo-advisors on the market for beginners.

M1 Finance – Allocation Made Easy

According to Modest Money’s Bob Haegele, portfolio allocation is one of the central tenets to sustained success in the stock markets. Experts always harp on “diversification”, and not without good reason: diversity means that you are less susceptible to unforeseen risks and price movements.

M1 Finance’s automatic rebalancing feature helps users stay diverse.

Automatic Rebalancing: each asset in your “pie” has an allocation percentage, and with M1 it’s easy to keep track of just how much of your is where. By setting up a target allocation, which depends on factors such as age, personal risk tolerance, and income bracket, each deposit you make will be rebalanced for the best possible effect; or, in other words, to match your target allocation as closely as possible.

Allocation Strategies: what’s the best way to allocate your investments? There is no one size fits all. Obviously, everyone has different investing goals, and these should be considered when choosing assets. For those developing a low-risk profile, we suggest a balanced mix of stocks, bonds, and ETFs. For the more aggressively minded, put at least 80% of your money into pure stocks. In addition, government bonds are a great option for older generations, given their low but steady returns.
One-Click Rebalancing: while most modern investing platforms come with some sort of rebalancing feature, M1 Finance’s approach is simple and effective: one-click rebalancing. By clicking the “rebalance” button, M1’s intelligent software will automatically execute the necessary trades to rebalance your portfolio. This takes much of the guess-work out of investing, and helps fine tune your portfolio for success.

Tax Implications – Are There Any?

Taxes. Nobody likes that word, and investors even less so. A major concern for investors of all stripes, taxes can occur whenever you experience short or long-term capital gains. In short, Uncle Sam can put a dent in your portfolio, sometimes when you least expect it.

Basically, whenever you sell an asset you are liable to pay taxes on any capital gain. If you’ve held an asset or assets for less than a year, you’ll qualify for short-term capital gains taxes, which amount to that of normal income taxes.

Unless you are using a 401(k) or tax-deferred retirement plan with your M1 Finance portfolios, you can expect to pay taxes while using the rebalancing feature. It still may pay off in the long run, but this is something to consider before spamming the “rebalance” button.

The Bottom Line – Rebalancing and Recalibration

What may well be the next step forward in automated investing, M1 Finance’s rebalancing feature helps users get the most out of their investments. It’s great for those looking for a hands-off approach, as it functions as a portfolio curator.

Just keep capital gain taxes in mind as you execute this function. Otherwise, combined with M1’s infamous pies, the automatic rebalancing feature has the power to save you both time and cash.