Rebalancing Mechanics

Do I need to rebalance?

When the large allocations of your portfolio are greater than 5% from goal allocation, rebalancing is generally considered appropriate. Moderate allocations in you portfolio will have a smaller cut-off to trigger a rebalancing effort (2-3%). The smallest allocations in your portfolio with have the smallest cut-offs to trigger a rebalance (1-2%).  The Loot Lasso Rebalancing Calculator can provide guidance on when your portfolio could use a rebalance. 

What are the challenges associated with rebalancing?

Superficially, rebalancing seems to be a simple and straightforward process. There are pitfalls that must be taken into consideration before determining your strategy.

1.       Know your investment goals and risk tolerance. Without determining the goal of your rebalancing effort, you cannot employ an effective strategy. Learn more here. 

2.       Selling investments in a taxable (typically considered a brokerage account) will result in capital gains taxes on profitable trades (the price you sold the investment for was greater than your purchase price). Capital gains taxes eats away a percentage of your investment return.  The Loot Lasso Rebalancing Calculator is designed to avoid selling in taxable (brokerage) accounts.

3.       Making trades with brokerages can result in trading fees (a fee to buy or sell your investment), so buying or selling a small amount of an investment may not be efficient. 

4.       Holding certain investments in tax advantaged vs. taxable accounts may provide you with improved tax efficiency, so simply utilizing the same allocation in each account may not be the best strategy.  Learn more here.

Following these limitations to the rebalancing process complicates the simple math that would allow balancing each account individually to result in a balanced portfolio.

How do I rebalance my portfolio?

Maintaining a balanced portfolio can be simple or quite complicated depending on your situation and your investment goals.  Many individuals and families find themselves with multiple accounts across several institutions, which makes maintaining a balanced portfolio challenging. Using one or more of the following strategies will help balance your portfolio. 

Rebalancing Strategies:

1.       Use new investments to rebalance your portfolio.  Your portfolio may be balanced enough that additions to your portfolio (your new investments and dividends from prior investments) can cover the allocation gaps.  Utilizing this strategy throughout the year reduces the need for selling assets to maintain balance, which reduces potential tax liabilities.  Use the Loot Lasso Rebalancing Calculator to assist in allocating your new investments.

2.       Only invest in funds that automatically maintain your desired allocation.  Most investment brokerages (Vanguard, E*Trade, Schwab, etc.) have funds that automatically maintain a specific allocation.  These funds tend to have higher expenses because of the semi-active management that occurs.  This strategy can become more complicated when you have specific investment goals that do not align with the available products at these institutions. 

3.       Pick a time or times throughout the year to review your portfolio and your desired allocations to determine if you are on track.  During these check-ins, you can determine if your portfolio needs some rebalancing. The Loot Lasso Rebalancing Calculator is here to help.

4.       Utilize a “Robo advisor” to maintain your investment balances. Robo advisors are automated investment portfolios that are personalized to you. Robo advisors are useful in determining your risk tolerance, maintaining balanced allocations, and providing tax-efficient investment strategies.  Robo advisors are less expensive than a traditional financial advisor but more expensive than more independent approaches.  Learn more here.

5.       Utilize a financial advisor. A financial advisor gets to know you at a personal level and can help you decide an appropriate strategy based on their experiences and assessments of your risk tolerance.  Financial advisors may be able to employ a more diverse set of investment options than are available through a “Robo advisor.”