How and when do you rebalance?

[Villanelle]

BLUF: What's your plan for rebalancing, and what thresholds do you use to trigger action on your part?  Do you typically sell to rebalance, or just adjust future investments? 

I've got our ideal portfolio pretty locked down and track it with a very detailed and fairly obsessive spreadsheet.  It breaks downs stock and bonds to the % we want, and then within stocks tracks domestic (further broken into small and large cap) and international (broken into emerging and developing, though I admittedly pay little attention to that and thus far it has mostly just worked out), and bonds are broken down to TIPS and nominal bonds. 

I generally check it quarterly to make sure things aren't going too far off the rails, and then annually do a rebalance which coincides with husband adjusting his TSP contributions for the year by changing the amount based on annual limits and changing the funds to which the money goes, which effectively rebalances us going forward. 

This year, a couple categories have moved further out of balance than usual.  Small cap got pretty high.  I've changed his TSP contributions to remove nearly all small cap for 2018 and adjusted our ROTH contributions as well, which I project will put us back to within 0.5% (of total invested) of where we want to be by the end of 2018, but that is of course if the market and all our funds stay exactly where they are right now. 

I'm trying to decide if I should actually sell some of the small caps, or just let things rebalance over time, and it got me wondering what everyone else does.  What are your thresholds for rebalancing?  Do you do that with selling, or simply adjusting future contributions (or do you have a specific threshold for each)?  How often do you check?  In general, what is your system?

(Currently, we actively invest in 5 TSP funds and 3 Vanguard funds, but we have money in a few other funds as well, like a TIPS fund, where I occasionally throw some money if things get too far off in those categories.)

[Frankies Girl]

I have a excel spreadsheet (downloaded from Squawkfox) I use.

I hold a very simple asset allocation. I have 1 total stock market index, 1 total bond fund index and an REIT index (and a fraction of a percentage in a legacy growth fund that I hold for pure nostalgia and pay no attention to in terms of buying/selling). I don't care to deal with small/medium/large/emerging or value or international or growth categories. That sounds like way too much work and I prefer couch potato/lazy versions that don't require much if any monitoring.

I used to check about every 6 months or so, but it's getting to the point where it is once a year.

I plug the total amounts held of each fund into the excel along with the percentages I'd like to be holding and as long as it's all under 5% or less out of balance, I do nothing. This is all based off of my IPS I created when I first started taking over my investments and learned about indexing and the Boglehead way. If I ever have a question about what I should do, I refer back to the IPS.

I hold my bond allocation in my inherited IRA, and if I needed to rebalance I'd sell the high fund in the same IRA (it's a pretty large account) and buy the low fund within that iIRA.

ETA: I'm FIREd with no earned income, so there is no more building up investments other than through taxable accounts.

[Mr Mark]

I generally do it after my big annual bonuses land in the bank acount and buy to rebalance. Also fund any IRA contributions asap. I only have 3 assets now* - small cap value, VTBSX bond and VTSAX stock. As I'm adding during the year I also rebalance if possible while adding to the stache.

Selling to rebalance could have tax implications and best avoided. A few points off while waiting to 'catch up' your ideal % shouldn't make any significant delta to returns.

*well, I have some play money in my IRA that I use to speculate on individual stocks, but that's not part of the main stache. And I have some Wellington Admiral that I'm just letting ride. I use the small cap @10% and then VTSAX and VTBSX to adjust overall bond % to my stated asset allocation target. Pretty easy.

[Retire-Canada]

I rebalance with new funds every time I add money monthly + quarterly dividends. If things got really out of balance [~+/-10% of planned allocation]  I would sell existing funds to rebalance since I am not adding much these days as I used to.

[pigpen]

I've been meaning to ask a similar question myself for quite a while. I've always thought that at least part of the effect of rebalancing is in the selling of an asset class that's gone up. Put simply, you're selling high and buying low. I haven't read it in a while, but this is how I remember it from William Bernstein's book, The Intelligent Asset Allocator.

[Christof]

I'm still working, so basically every month I buy the asset group that is furthest out of balance. Once a year I sell some losses for tax optimization (harder to do in Germany) and use the proceedings to buy whatever asset group is underrepresented according to my great investment plan. After FIRE I plan to rebalance annually.

[frugalnacho]

For regular automatic investments I try to set them up to buy roughly in proportion to my desired AA (for example I hold domestic in my 401k, so I tend to regularly invest in international in the IRAs).  For period investments of large amounts (>$2k) in IRA or taxable accounts  I check my AA and buy the underfunded asset.  I only use VTSAX and VTIAX (or approximates as close as possible) so it's fairly easy.

Each year on my birthday I check all account balances and will trade within the 401k or tIRA (so I don't have to worry about tax implications) to get exact desired AA.

[Mr Mark]

Each year on my birthday I check all account balances and will trade within the 401k or tIRA (so I don't have to worry about tax implications) to get exact desired AA.

good advice.

Earlier (when I was doing a more complex AA than I do now - thanks JLCollins]  I used a % of Vanguard's Wellington [65 Equity/35 bonds] or Wellesley fund [40/60] to make my stache 'autobalance'. IE If you want 10% bonds, if you allocate 16.7% to Wellesley & rest to equities then Vanguard will help ensure you stay more balanced over shorter periods.

[ZiziPB]

I generally rebalance once a year in March/April when I have a significant amount of money to play with from RSUs and a bonus.  I only track 3 categories: domestic stock (total stock fund), international stock (total international stock fund) and fixed income (this includes things like bond funds, I Bonds, CDs, etc.).  This year, with the stock market going up so much, things got a bit out of whack later in the year and I ended up selling some total market fund and bought more total bond fund in one of the IRAs to get more in line with my desired ratios.  But I'm generally not obsessive about it and use the Fidelity portfolio analysis tool from time to time to see if I'm roughly where I want to be.  If things don't look the way they should, I pull out a calculator and do a more detailed calculation on a piece of paper.  Did I mention that I'm hopeless with Excel and spreadsheets? :-)

[GGNoob]

I rebalance with new contributions and dividends. My 457 is invested at TD Ameritrade, so every month when I transfer my new contribution over I have to buy ETFs, so that's an easy time to buy more of whatever has done the worst over the past month. If I add any money to my taxable brokerage or IRA, I rebalance with that as well.

All of my funds are tracked via Google Sheets so I have a real-time view of my current allocation and drift. If my portfolio ever gets to a 5% drift, I will actually sell ETFs to rebalance (hasn't happened yet since I can rebalance with contributions). My spreadsheet shows current allocation, target allocation, and the number of dollars I would need to buy/sell of that asset to get back to a perfect allocation. It also tells me how much of each ETF I would need to buy/sell to reach that amount. Basically, when my contribution hits my account, I enter it as cash and since my target allocation for cash is 0%, it tells me to sell my cash and how much of each asset I need to buy.

[GuitarStv]

If I happen to have some extra cash for investing then I'll rebalance a bit with it.  I do a formal rebalance once a year or when things get about 10% off target, whichever comes first.

[RedmondStash]

Honestly, I rebalance way too often. I'm just a couple of weeks into FIRE, and still tinkering with figuring out a comfortable AA in retirement; it's easier to be bold when you've got employment income. We still don't know what our post-retirement finances are going to look like, especially with increasing healthcare costs.

I hope to get to a point where I track financial info weekly and rebalance maybe 1-2x per year. There's conventional wisdom that you should only rebalance if you're more than 5% off your AA, but I'm not sure I could wait that long. With time may come more patience.

[talltexan]

I rebalance on my birthday, then 3, 6, 9 months afterwards.