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Are you out of balance?

Advisors typically recommend rebalancing investment portfolios once every twelve months or whenever the allocations stray beyond their targeted percentages.  

Why is rebalancing important:  Since asset classes will perform differently over time, rebalancing restores the portfolio to its original asset allocation and risk profile.   At the same time, rebalancing captures gains and reinvests funds at relatively low prices.

Who executes the changes: If you invest through a target-date fund, robo-advisor, or a target asset allocation fund (like Vanguard’s Life Strategy funds), rebalancing is automatic.   Alternatively, a DIY investor can perform individually or with the help of their advisor.  

What are the steps

1. Review your Investment Policy Statement (IPS), which details the long-term investment strategy.  The IPS will include a target asset allocation on two different metrics: 1) stock versus bond and 2) sub-categories within the stock and bond allocations.  A typical allocation is:

2. Calculate your current positions from your most recent statements (or online aggregator if you are using something like Mint.com).   Either by hand or using a spreadsheet, identify the funds by category for each account, add the category totals together,  and then calculate what percentage each category is to your total portfolio balance.   Start with stock versus bonds and then look to each individual category.   If a category in nominal dollars has strayed from its original target percentage by more than 5%, you should think about rebalancing.

 2. To rebalance simply sell holdings from those categories that exceed their targets while at the same time buying more shares in the funds below target.  Essentially, you are selling high and buying low.  Once complete, you are okay for the next year or so.

 Are there any other considerations? 

1. Ideally, all rebalancing is executed in tax-qualified or tax-free accounts since you may generate capital gains taxes when you buy and sell in an after-tax brokerage account.  

 2. At certain times, when the market declines, you may simultaneous also do tax-loss harvesting in your after-tax account.  If so, please review the “wash sale” rules.

 3. There may be an advantage to holding certain investments in a specific account, i.e., tax-qualified, tax-free, or after-tax. This decision is known as tax location and, unfortunately, is beyond the scope of this summary.

 Consider consulting your investment and tax advisors before executing any rebalancing trades to avoid any unplanned complications or tax consequences

Additional Resources:





Wash Sale: