One of the most hotly debated topics among advisors and investors today is how often to rebalance a portfolio. I’m not here to argue that annual rebalancing is better than monthly, or monthly better than daily. But any time you do rebalance, there are three factors worth keeping in mind, because they’re all things you can control.
Factor #1: The overall cost of rebalancing
The first factor is the overall cost of rebalancing. Some investments still charge an upfront commission (a percentage of the overall investment), and others carry smaller ticket charges of $5, $10, or $15 each time you buy or sell. It’s worth knowing what your options are. Today there are plenty of no-cost or very low-cost investments that let you rebalance without stacking up charges every step of the way.
Factor #2: The tax impact
The second factor is taxes. Any time you perform a rebalance, it’s good to know how much gain is going to be triggered, whether it’s short-term or long-term, and ultimately how much in taxes you might owe next April. Knowing how much gain is on the table may also open the door to some tax loss harvesting to offset those gains.
Factor #3: Portfolio concentration
The third factor is portfolio concentration, and this one matters most for people who don’t rebalance often. Even if you set your initial investment strategy and don’t touch it for a while, the allocation is likely to skew over time. It’s important to check in periodically: are there any individual positions that now make up a substantial share of your portfolio, and do you need to rebalance so you haven’t taken on more long-term risk than you intended?
Overall, it’s worth reviewing your rebalancing approach from time to time, and keeping taxes and overall cost in mind when you do.
