Highlights:

• The simple way to prevent your portfolio from drifting
• Why ‘set and forget’ investing can lead to an unbalanced portfolio
• A smarter way to invest automatically

DRIPs - or dividend reinvestment plans - are often seen as an easy, hands-off way to grow your investments.

And it’s true: they let you automatically reinvest the dividends you earn into more shares of the same security.

But while DRIPs offer simplicity, they can quietly throw your portfolio out of balance.

Here’s how that happens, and how to get the benefits of DRIPs without throwing your portfolio out of whack.

First, what is a DRIP?

A Dividend Reinvestment Plan (DRIP) is a feature offered by many brokerages and ETFs that lets you automatically reinvest the dividends you receive into additional shares of the same stock, ETF, or fund.

For example, if you hold shares in ZGQ, any cash dividends it generates will automatically be reinvested right back into ZGQ.

These trades are also commission-free, though many brokerages are now offering $0 trades already.

Reinvesting your dividends is a great way to benefit from compound growth! But if you rely on DRIPs, there’s a catch.

DRIPs can cause your portfolio to drift

The problem with DRIPs is that they keep buying more of the same security over and over again, regardless of what your portfolio actually needs to stay balanced.

Here’s an example:

Say your target portfolio is 40% ZSP, 30% ZEA, and 30% ZCN.

It's balanced and globally diversified - perfect for long-term investing.

Now imagine the U.S. market has an exceptional year. Tech stocks boom, and ZSP soars 25%.

It may even pay out higher dividends than before, or at least keep them steady. With a DRIP, those dividends are automatically used to buy even more ZSP.

So not only is your U.S. holding growing from market gains, but you’re also adding to it through reinvested dividends - increasing your U.S. exposure beyond your original target.

And another:

Now let’s say your target portfolio is 40% ZSP, 30% ZEA, and 30% ZDV.

➜ ZDV pays dividends monthly, and at a higher yield than the other two.

➜ ZSP and ZEA pay dividends quarterly, and with lower yields.

If you have DRIPs turned on for all three, you’ve got more money to invest in ZDV because the dividends are higher - and it’s happening more often.

This means each month you’re slowly increasing your percentage of ZDV, throwing your portfolio off balance.

Now you need to rebalance

At one point, you’ll likely need to rebalance to get it back in line with your target portfolio.

But this can come with challenges:

• You have to calculate what to sell

• If the market has dipped, you might have to sell at a loss

• Selling could trigger capital gains taxes in a non-registered account

• Emotionally, it feels wrong to sell a "winner" and buy what’s lagging

In other words, fixing the drift can be costly, time-consuming, or aggravating.

What to do instead

Instead of using a DRIP, you can use Passiv to keep your portfolio on target.

It reinvests your dividends in line with your investment plan so your account stays balanced.

How Passiv keeps your portfolio balanced

Passiv connects to your brokerage account and keeps things balanced based on your target portfolio.

It notifies you of any dividends, and shows exactly where to invest cash to bring your portfolio back in line.

And if you have Passiv Elite, you can invest it all in 1 click!

Passiv is a smarter way to reinvest your dividends so you stick to your plan, instead of just buying more of whatever paid you.

Click here to get Passiv’s “Forever Free” plan!

Start using Passiv!