Four Ways To Rebalance Your Portfolio
June 7, 2009 – 11:43 am
In order to maintain your desired asset allocation you will need to rebalance your portfolio on occasion. There is quite a bit of debate regarding the frequency of rebalancing. Some recommend reviewing your portfolio quarterly on the short end of of the spectrum and every two years on the far end of the spectrum. The middle ground of this range is the most common recommendation: rebalance every year.
Regardless of your preferred frequency for rebalancing you’ll also need to determine how to rebalance. Here are three potential choices:
- Rebalance by selling securities that have appreciated and use the proceeds to purchase those that have not grown as quickly. This method is only recommended for holdings within qualified retirement accounts. The tax-deferred or tax-free treatment of IRA’s and 401k’s allow you to buy and sell without tax consequences. Therefore you can rebalance without creating a tax drag on your total returns.
- Use new funds to rebalance. This choice is a good one if you have investments in taxable accounts. It becomes more difficult to use as your investment base grows, because eventually the growth of your investments will be much larger than your annual investment amount. While the opportunity exists, however, this option is usually a good one worth considering.
- Turn off automatic reinvestment of dividends and interest, and use your portfolio’s cash flow to rebalance. This option can be used by itself or in combination with the method above, and is a good way to maintain your desired asset allocation without have to sell appreciated assets with tax consequences.
- Give money away from your portfolio. I know, this may seem like an odd idea initially. If you give regularly to your church or other organizations this may be an option for you. Assuming you need to rebalance your after-tax investment accounts, rather than selling some securities and buying others you could choose to give from your appreciated assets. Then use the money from your income (that would have been given away) to purchase the investments needed to rebalance. You’ll need to work with your church or charity to figure out how to make a donation of securities in order to do this in a tax-free manner.
Image Credit: geishaboy500
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