Author Topic: What is the best method for rebalancing a portfolio?  (Read 2710 times)

BlueHouse

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What is the best method for rebalancing a portfolio?
« on: December 08, 2014, 03:01:42 PM »
What's your preferred method?
Sell and buy once, twice, or more per year?
Reallocate future purchases to favor the "underserved" sector of your portfolio?
Is there a different strategy if you have two big windfalls (shareholder distributions) per year vs. equivalent monthly amounts? 
If you max out all tax-deferred accounts and you also invest in taxable accounts, does your balancing act change due tax implications of foreign and dividend-paying funds?

Please share your strategies. I'm finally in a position (thanks to this site) where I feel as if I have some control over my investments.  I just turned 47 and this will be my first time EVER to use a plan to rebalance.  Previously, I moved things around out of fear and panic without clear insight into how much the churn cost me. 

Thanks!

arebelspy

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Re: What is the best method for rebalancing a portfolio?
« Reply #1 on: December 08, 2014, 03:08:50 PM »
It depends on where you're at.

I favor rebalancing via contributions when your stache is low and you're in the accumulation phase.

Later when that isn't enough setting rebalancing bands.

A time-limited one is fine too, but I prefer the above.
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Tyler

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Re: What is the best method for rebalancing a portfolio?
« Reply #2 on: December 08, 2014, 07:36:29 PM »
Same as arebelspy.

1) Set your target asset allocation and rebalancing bands. Write your plan down and stick to it.
2) When you make new money, buy the lagging asset(s) to keep things as balanced as possible.  Depending on the transaction fees, you may want to pool up enough cash to buy in larger chunks.
3) Once or twice a year, check the percentages.  If you hit a rebalancing band, sell some of the high asset(s) to buy more of the low asset(s) to get back to the original target.

Generally speaking, your goal is to rebalance as little as possible to avoid capital gains taxes and transaction fees while staying true to your original allocation. 

BlueHouse

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Re: What is the best method for rebalancing a portfolio?
« Reply #3 on: December 09, 2014, 06:19:14 AM »
Thanks spy and Tyler.  I've spent a good part of the last year slowly consolidating accounts and getting the asset allocation to match my desired percentages.
I have two main accounts. One taxable and one tax deferred. At this time they are almost equal in value. I also have them balanced so that all my bonds are in my tax deferred account and the taxable account has only domestic and international index funds.
In February/March I will get about 30k that can only go into the tax deferred account. In September/October I will get about $50k that can only go into the taxable account.
In February, nothing else changes, my goal allocation of the $30k would be to split it in half to keep my allocations in range of my plan. But that means buying duplicate VTSAX in my tax deferred 401k. Then in September I'll have $50-70k to deposit in taxable account, at which time I'd have to open up a bond fund in my taxable account.  This would give me duplicate accounts in both accounts.
Is this desirable?   
Is there any benefit in going heavy on bonds for 6 months until the fall distribution, at which time I can use the taxable account to balance out the entire portfolio? 
I hope it's Clear what I'm asking. I'm not too good at this stuff yet.

JetBlast

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Re: What is the best method for rebalancing a portfolio?
« Reply #4 on: December 09, 2014, 06:59:16 AM »
Assuming there are no commissions in the tax deferred account, why not do the 50/50 split, and then exchange the VTSAX from that buy for bonds when you get the money for the taxable?  Since it is tax deferred account you don't need to worry about capital gains taxes, which is the main motivation for rebalancing by adjusting contributions.

arebelspy

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Re: What is the best method for rebalancing a portfolio?
« Reply #5 on: December 09, 2014, 08:02:03 AM »
You'll have to weigh tax consequences versus consequences of being out of balance for ~6 months.  I'd probably optimize the former at the expense of the latter based on what stage you're at (based on the dollar amounts).  But that's what you need to look at, basically.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

BlueHouse

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Re: What is the best method for rebalancing a portfolio?
« Reply #6 on: December 09, 2014, 12:27:48 PM »
Great advice.  Thanks - that's what I'll do.