Use tax-favored retirement accounts.
Taking gains inside plans such as 401(k)s and individual retirement accounts (IRA) will not generate current taxes. Therefore, Ellen may be able to do some or all of her rebalancing, tax-free, by moving from stocks to bonds within her IRA.
Rebalancing your portfolio on your own, without the help of a robo-advisor or investment advisor, doesn't require you to spend any money.
Usually the best option is to consider your whole portfolio as one and do the rebalancing in tax advantaged accounts so you can leave your taxable account alone. ... Leave the taxable alone and do any rebalancing in your tax advantaged accounts to keep your overall portfolio balanced.
Because rebalancing can involve selling assets, it often results in a tax burden—but only if it's done within a taxable account. Selling these assets within a tax-advantaged account instead won't have any tax impact.
Rebalancing by set asset targets is a good way to approach portfolio rebalancing since markets can change more in some time periods than in others. A standard rule of thumb is to rebalance when an asset allocation changes more than 5%—ie. if a certain subset of stocks changes from 15% of the portfolio to 20%.
Let's look at each step in detail.
At a minimum, you should rebalance your portfolio at least once a year, preferably on about the same date, Carey advises. You could also choose to do so on a more periodic basis, such as quarterly. ... An investor who rebalances quarterly would sell bonds and buy stocks to get back to a 60/40 portfolio mix.
Typically, balanced portfolios are divided between stocks and bonds, either equally or tilted to 60% stocks and 40% bonds. Balanced portfolios may also maintain a small cash or money market component for liquidity purposes.
Remember that over the long term, stocks have a significantly higher expected return than bonds. ... For this reason, rebalancing a portfolio of stocks and bonds is therefore likely to lower your returns, not increase them.
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