By not selling any investments, you don't face any tax consequences. This strategy is called cash flow rebalancing. You can use this strategy on your own to save money, too, but it's only helpful within taxable accounts, not within retirement accounts such as IRAs and 401(k)s.
7 Rebalancing Strategies That Are Tax-Efficient, Too!
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%.
To rebalance, you simply make the appropriate trades to return your mutual funds back to their target allocations. For example, returning to our 5 fund portfolio example, you would buy and sell shares of the appropriate funds to get back to the original 20% allocation for each fund.
Rebalancing during a bear market can feel painful, but it pays off in the long run. ... If a 60% allocation to equities is appropriate given that investor's goals and risk tolerance, then rebalancing back to that equity allocation target when the portfolio is this out of whack should be beneficial over the long term.
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.
Rebalancing is inherently an inefficient tax process. Investors are always selling assets that moved above the desired allocation, which generally means taking gains. Such gains can be taxable and may add to an individual's reluctance to rebalance.
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