Rebalancing

Rebalancing is the process of periodically buying or selling assets in a portfolio to maintain the original desired level of asset allocation. It's a disciplined approach that enforces buying low and selling high.

Why Rebalancing Matters:

• Maintains target risk level
• Forces disciplined investing
• Sells high, buys low automatically
• Prevents portfolio drift

Example:

Asset	Target	After Growth	After Rebalance
Stocks	70%	80%	70%
Bonds	30%	20%	30%

Rebalancing Methods:

1. Calendar-Based:

   • Quarterly, semi-annual, or annual
   • Simple and predictable
   • May miss significant drift

2. Threshold-Based:

   • Trigger at 5% drift from target
   • More responsive
   • More trading activity

3. Hybrid:

   • Check quarterly
   • Rebalance if 5%+ drift
   • Best of both approaches

Tax Considerations:

• Use tax-advantaged accounts first (401k, IRA)
• Consider tax-loss harvesting
• New contributions can reduce selling need
• Long-term vs. short-term capital gains

Rebalancing Costs:

• Transaction fees (minimal with modern brokers)
• Bid-ask spreads
• Tax implications
• Time and attention

Research Findings:

• Annual rebalancing captures most benefits
• More frequent rarely improves returns
• Threshold method slightly outperforms calendar

Automatic Options:

• Target-date funds auto-rebalance
• Robo-advisors handle rebalancing
• Some brokers offer automatic rebalancing