Part 4 Portfolio management

A robo-advisor’s work doesn’t stop once they’ve designed an optimal portfolio, or even once they’ve purchased the securities they want to hold. They need to monitor the portfolio to ensure that its weights stay on track (close to the target weights) and make trades to correct deviations—a process called rebalancing.

Some robo-advisors go beyond rebalancing by doing tax-loss harvesting. Tax harvesting refers to selling assets that have declined in value to create realized losses in the investor’s portfolio, which can then offset realized gains (from the same portfolio or from elsewhere) and even some ordinary income.

Although simple to describe, both rebalancing and tax-loss harvesting require some care to ensure that the costs of the trades don’t outweigh the benefits. In these final two chapters, we discuss several approaches to rebalancing (including building a backtester to compare different approaches using historical data) and how to implement a tax-loss harvesting strategy using ETFs.