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Rebalance How Often?

INVESTORS TAKE ALL kinds of approaches toward rebalancing: Some rebalance every quarter, some every year and some only after major market moves. What’s the right strategy? Rebalancing every year has the virtue of simplicity and it introduces a healthy dose of self-discipline. But there are five reasons to be a little more flexible.

First, you should pay attention to the investment costs involved. This shouldn’t be an issue if, say, you own no-commission mutual funds bought directly from the fund companies involved. If there’s any sort of trading cost involved, however, you should factor that into your decision.

Second, you need to consider the tax consequences. That isn’t a worry if you are rebalancing within a retirement account. But if you are handling a taxable account, selling could trigger capital gains taxes. That may prompt you to rebalance less often.

Third, a sharp rise or fall in the stock market may push you far off your target percentages. Your portfolio might suddenly be substantially more aggressive or conservative than you intended, and you might want to rebalance right away.

Fourth, because stocks tend to fare better over time, there’s a decent chance you will earn better long-run returns if you rebalance, say, every two years. The reason: You will give your stocks longer to earn returns before you cut them back. This, of course, means you will have more in stocks, on average, and thus it’s a riskier strategy.

Finally, in the stock market, there is evidence of momentum, the tendency for shares to continue performing well if they’ve recently had strong returns. That also might lead you to rebalance less often, especially if stocks are recovering from a bear market and are in the early stages of a rebound. There’s a chance that the upward share-price momentum from the initial recovery will carry over into the year ahead.

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