Tips for Optimising Your Roboadvisor Portfolio

Tips for Optimising Your Roboadvisor Portfolio

Roboadvisors offer a convenient and cost-effective way to invest, but simply setting up an account isn't enough to guarantee success. To maximise your returns and achieve your financial goals, it's crucial to actively manage and optimise your roboadvisor portfolio. This article provides actionable tips and strategies to help you do just that.

1. Regularly Review and Rebalance Your Portfolio

Rebalancing is the process of restoring your portfolio to its original asset allocation. Over time, different asset classes will perform differently, causing your portfolio to drift away from its target allocation. For example, if your portfolio is initially 60% stocks and 40% bonds, a strong stock market performance might push the allocation to 70% stocks and 30% bonds. This increases your portfolio's risk level.

Why is Rebalancing Important?

Maintains Your Risk Profile: Rebalancing ensures that your portfolio's risk level remains consistent with your risk tolerance. By selling assets that have performed well and buying those that have underperformed, you're essentially selling high and buying low.
Potential for Higher Returns: Studies have shown that rebalancing can lead to higher returns over the long term, although this is not guaranteed. It forces you to take profits from winning assets and reinvest in undervalued ones.
Disciplined Investing: Rebalancing helps you stay disciplined and avoid emotional decision-making. It prevents you from chasing after the latest hot stocks or selling during market downturns.

How Often Should You Rebalance?

Most roboadvisors offer automatic rebalancing, typically quarterly or annually. However, you should also review your portfolio more frequently, especially after significant market events. Consider rebalancing if your asset allocation has drifted more than 5% from your target.

Common Mistake: Ignoring your portfolio and assuming the roboadvisor will handle everything. While automatic rebalancing is helpful, it's essential to understand the underlying principles and monitor your portfolio's performance.

2. Take Advantage of Tax-Loss Harvesting

Tax-loss harvesting is a strategy that involves selling investments that have lost value to offset capital gains taxes. This can help reduce your overall tax burden and improve your after-tax returns. Many roboadvisors offer this feature automatically.

How Tax-Loss Harvesting Works

Reduces Tax Liability: Capital losses can be used to offset capital gains, reducing the amount of taxes you owe.
Increases After-Tax Returns: By minimising taxes, you can keep more of your investment gains.
Automated Process: Many roboadvisors automate tax-loss harvesting, making it easy to implement.

Example: Suppose you have a stock that you bought for $1,000 and it's now worth $800. You can sell the stock and realise a $200 capital loss. You can then use this loss to offset $200 of capital gains from other investments. To avoid the wash-sale rule, you could buy a similar stock in the same sector or an exchange-traded fund (ETF) that tracks the same index.

Important Note: Tax-loss harvesting is most effective in taxable accounts. It's generally not applicable in tax-advantaged accounts like superannuation funds.

3. Set Clear Financial Goals and Time Horizons

Your investment strategy should be aligned with your financial goals and time horizons. Are you saving for retirement, a down payment on a house, or your children's education? The longer your time horizon, the more risk you can generally afford to take. Conversely, if you have a short time horizon, you should consider a more conservative investment approach.

Defining Your Goals

Retirement: Determine your desired retirement income and the number of years until retirement. This will help you estimate how much you need to save and the appropriate asset allocation.
Home Purchase: Calculate the amount you need for a down payment and the timeframe for buying a house. A shorter timeframe may require a more conservative approach.
Education: Estimate the future cost of education and the number of years until your children will attend university. Consider opening a dedicated education savings account.

Aligning Your Portfolio with Your Goals

Once you've defined your goals, you can adjust your portfolio's asset allocation to match your risk tolerance and time horizon. If you have a long time horizon, you can allocate a larger portion of your portfolio to stocks, which have historically provided higher returns over the long term. If you have a short time horizon, you should consider a more conservative allocation with a higher percentage of bonds and cash.

Roboadvisor can help you determine the appropriate asset allocation based on your goals and risk profile. You can also learn more about Roboadvisor and our services to see how we can assist you in achieving your financial objectives.

4. Adjust Your Risk Tolerance as Needed

Your risk tolerance is your ability and willingness to accept potential losses in exchange for higher returns. It's important to periodically reassess your risk tolerance, as it can change over time due to factors such as age, income, and life events.

Factors Affecting Risk Tolerance

Age: Younger investors typically have a higher risk tolerance because they have more time to recover from potential losses.
Income: Investors with higher incomes may be more comfortable taking on risk because they have a larger financial cushion.
Life Events: Major life events such as marriage, having children, or changing jobs can affect your risk tolerance.

How to Assess Your Risk Tolerance

Questionnaires: Many roboadvisors provide risk assessment questionnaires to help you determine your risk tolerance.
Self-Reflection: Consider your comfort level with market volatility and potential losses. How would you react to a significant market downturn?
Professional Advice: Consult with a financial advisor to get personalised advice on your risk tolerance and investment strategy.

Scenario: Imagine you initially set up your roboadvisor account when you were single and had a high-risk tolerance. Now, you're married with a young child and a mortgage. Your risk tolerance may have decreased, and you might want to adjust your portfolio to a more conservative allocation.

5. Consider Additional Investments

While roboadvisors offer a diversified portfolio, you may want to consider adding other investments to further enhance your returns or diversify your holdings. This could include direct investments in stocks, bonds, or real estate.

Diversification Strategies

Individual Stocks: Investing in individual stocks can potentially provide higher returns, but it also comes with higher risk. Conduct thorough research before investing in individual stocks.
Bonds: Bonds can provide a stable source of income and help reduce your portfolio's overall volatility.
Real Estate: Real estate can be a good long-term investment, but it's less liquid than stocks and bonds. Consider the costs of property management and maintenance.

Integrating Additional Investments with Your Roboadvisor

It's important to ensure that your additional investments are aligned with your overall financial goals and risk tolerance. Consider how these investments will impact your portfolio's asset allocation and diversification. Regularly review your entire portfolio to ensure it remains balanced and aligned with your objectives.

6. Stay Informed About Market Trends

While roboadvisors automate many aspects of investing, it's still important to stay informed about market trends and economic conditions. This will help you understand the factors that are driving your portfolio's performance and make informed decisions about your investment strategy.

Resources for Staying Informed

Financial News Websites: Stay up-to-date on market news and economic trends by reading reputable financial news websites.
Investment Research Reports: Many brokerage firms and investment research companies provide reports on market outlook and investment recommendations.

• Roboadvisor Updates: Your roboadvisor may provide regular updates on market conditions and portfolio performance.

Disclaimer: While staying informed is important, avoid making impulsive decisions based on short-term market fluctuations. Stick to your long-term investment strategy and focus on your financial goals. Remember to consult the frequently asked questions for more information.

By following these tips, you can optimise your roboadvisor portfolio and increase your chances of achieving your financial goals. Remember that investing involves risk, and there's no guarantee of returns. However, with a disciplined approach and a well-managed portfolio, you can maximise your potential for success.