Affluent Savvy
Affluent Savvy
Photo: Polina Tankilevitch
This refers to a change in the asset class that is a relative 25% of that asset class. If your asset allocation calls for a 10% allocation to gold, for instance, then you would rebalance when it hit 12.5% (sell) or 7.5% (buy). Likewise, a 5% position to emerging market stocks would be rebalanced at 3.75% and 6.25%.
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The simple yet scientifically proven Wealth DNA method laid out in the report allows you to effortlessly start attracting the wealth and abundance you deserve.
Learn More »[Update 2020: Over the last year or two we've been updating a lot of our classic posts that regular readers have never seen. Jill, our content manager, is in charge of selecting them (along with guest posts and the Saturday WCI Network posts). When she saw this one she said, “It's cool to see your investing strategy hasn't changed since 2011.” Little did she know, it hasn't changed since 2004. I guess it's kind of boring to buy, hold, and rebalance a fixed asset allocation of low-cost, broadly diversified index funds. But it is effective. Fund it adequately and it'll get you to your goals with a minimum of risk and very little effort. Today, we'll hit that third part–rebalancing. Be sure to include a line about rebalancing in your written investing plan. No written investing plan? You're not alone (see the poll below), but you'll do better if you get one.] My long-time readers (as if there are any on a 3-month-old blog) know that I am an advocate for a low-cost, buy-and-hold, static-asset-allocation portfolio. A key component of a “static asset allocation” is that in order to keep it “static” you must occasionally rebalance back to the desired allocation. A portfolio that is 50% stocks and 50% bonds has a different expected return and level of risk than a 75/25 portfolio.
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The simple yet scientifically proven Wealth DNA method laid out in the report allows you to effortlessly start attracting the wealth and abundance you deserve.
Learn More »The second school of thought is to follow the 5/25 rule. This rule has you rebalance using bands. The downside to this is you actually have to pay some attention to the market occasionally to know if you've gone outside your bands. The upside is that it ensures your asset allocation stays within bounds that you set.
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The simple yet scientifically proven Wealth DNA method laid out in the report allows you to effortlessly start attracting the wealth and abundance you deserve.
Learn More »It is also wise to avoid accumulating unwanted taxes by rebalancing. If you're careful, you can rebalance while eliminating or at least minimizing taxes by following these steps: Direct new contributions to lagging asset classes. Don't reinvest dividends/capital gains distributions in a taxable account. Direct these to lagging asset classes. In a taxable account, sell investments with a capital loss. This doesn't happen often, as you usually need to buy more of the classes that have recently performed poorly, but through careful tax-loss harvesting, you can often sell some losing investments to cancel out some or all of the capital gains you may generate through rebalancing. Try to do all or most of the necessary selling in a tax-protected account. Although commissions or fees may be generated (hopefully not), there are no taxes due from buying and selling in a Roth IRA, 401K, or similar accounts. When selling investments in a taxable account, consider less frequent rebalancing intervals, perhaps even every two years. Also, only sell investments with a long-term capital gain (one year) rather than a short-term capital gain. Be careful not to let the tax tail wag the investing dog, but keeping expenses, including taxes, down is an important part of investing. Investing, more than anything else is about managing risk. Rebalancing is an important risk management tool. When markets trend down like they have recently, you should always consider if it is time to rebalance (as well as tax-loss harvest.)
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The simple yet scientifically proven Wealth DNA method laid out in the report allows you to effortlessly start attracting the wealth and abundance you deserve.
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