Author Topic: Do you account for cost basis when you rebalance?  (Read 4234 times)

sheepstache

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Do you account for cost basis when you rebalance?
« on: January 05, 2013, 11:42:28 PM »

This may be a stupid question with an obvious answer.  The point of rebalancing is to sell assets that have gone up to purchase assets that have gone down or stayed the same.  So like if you started the year at 75/25 stocks/bonds and then after a year you're at 80/20, you should sell some stocks to buy bonds.  (There's the other purpose that this keeps your risk level where you decided you were comfortable, but that's irrelevant to my question.)  But does that assume you were contributing 75/25 all along?  What if you only started buying stocks in some company/fund more recently and therefore those prices are already "up" (or you bought them because you assumed they were down and so you aren't ready to sell yet).  Do you figure out a cost basis for each holding to see which is highest or just sell the earliest thing you bought or what?  And what if you weren't buying in 75/25 proportion?  What if you noticed stocks were going up so you started weighting monthly contributions more towards bonds?

What do people here do?

dragoncar

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Re: Do you account for cost basis when you rebalance?
« Reply #1 on: January 06, 2013, 02:51:31 PM »
Short answer is no, don't overthink it.  On the day you rebalance, you want your target asset allocation to be correct (e.g., 75/25).

Personally, when I make contributions, I do it so that my ending asset allocation is correct (if possible).  In other words, I'll tend to buy more of a lagging asset and less of a leading asset.  If you are making frequent contributions, this is similar to constant rebalancing.

However, there are arguments for other approaches, which I won't explain in detal.  For example, if you want to capture momentum.

Catbert

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Re: Do you account for cost basis when you rebalance?
« Reply #2 on: January 06, 2013, 03:21:35 PM »
My approach is similar to dragoncar's.  I determine my allocation at a particular point in time (now) and ignore when they were bought and for how much.  I try not to sell since that generates capital gains taxes.  For me minor variations (75/25 or 80/20 isn't all that different especially if you're dealing with relatively small amounts of money) don't trigger a need to make any changes.  When it gets far enough out of whack I use to just re-allocate future contributions. 

Now that I'm retired and not contributing much I buy/sell within my IRAs to avoid a tax problem.  Or harvest tax losses to off-set capital gains.  I also make charitable contributions with appreciated stock/mutual funds which avoids capital gains tax and can help get allocations back on track.   

sheepstache

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Re: Do you account for cost basis when you rebalance?
« Reply #3 on: January 16, 2013, 10:24:59 AM »
Okay thanks, ladies :)  Sometimes I do the purchase-more-of-the-lagging-asset thing but sometimes the lagging one is in IRA-land when I'm at my limit or like other times I want to go heavy on one fund just to get to admiral shares faster (I am not a master investing strategist).  Honestly, it's pretty much all equities and I just want to get in the habit of checking twice a year and making sure there's the right mix of US vs. non-US vs. REITS.

tooqk4u22

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Re: Do you account for cost basis when you rebalance?
« Reply #4 on: January 16, 2013, 10:38:03 AM »
Not in my retirement accounts but in my non-retirement accounts I do look at it as I don't want to incur any unnecessary taxes and in that case I will either offset a winner with a loser or I will direct more of my periodic contributions in such a way to achieve the balancing. 

Mr Mark

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Re: Do you account for cost basis when you rebalance?
« Reply #5 on: January 16, 2013, 01:50:58 PM »
No. Annual rebalancing to allocation, but I would also buy the lagging allocations during the year to minimise rebalance. Plus I get a lump sum bonus every year that enables easy catch up via purchase.

If you are in accumulation mode, you shouldn't be selling anything. Rebalance through buying, but agree with dragoncar- don't sweat it too much.

Vanguard has a whole load of  "balanced funds" that keep a fixed bounded bond/stock ratio automatically for you. E.g. VWELX is 65/35, VBIAX 60/40, VFFVX 90/10, ....

By adding a pure sp500 index to say, VBIAX , you can then set whatever you want wrt a basic stock bond allocation automatically by just owning 2 funds, and let vanguard do the work for just 0.1% in fees.

kris1

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Re: Do you account for cost basis when you rebalance?
« Reply #6 on: March 01, 2013, 12:38:25 AM »
I agree with @Mr Mark! This is exactly what I do. I use NetBasis which allows me to make my annual rebalance to allocation. The cost basis calculator does its job very well & keeps a fixed bounded bond/stock ratio automatically for you as you define.