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The best strategy for rebalancing a portfolio is one that is straightforward and easily implemented. I prefer systems which incorporate semi-annual or annual monitoring with stock/bond rebalancing thresholds of 5% or 10%. This should provide adequate risk control without undue time commitments or costs. Tax-deferred accounts should be targeted (to the extent possible) during the rebalancing process.
In addition to rebalancing per my current asset allocation ratio once or twice a year, I revisit my ratio with every major life or financial change. For example, I changed my asset weightings a few years ahead of my kids going to college, so I could be sure of sufficient stable value assets while paying their tuition. Not all at once, but a gradual shift in asset ratio in support of that big goal. Now I’m changing back over a few cycles to a higher equity weighting.
Target date funds haven’t been a good choice for me so far, because my life “stages” haven’t matched the age-appropriate allocations these funds set. Maybe when I finally grow up and settle down…
I was not in this camp until recently, but I like the target date fund approach. That’s truly the set it and forget it approach. Read all about it: https://humbledollar.com/2021/10/target-dating/
My advisor at Vanguard and I typically touch base twice a year to review the portfolio and make any adjustments as needed based on my personal situation. At those times, we typically talk about whether a rebalancing is needed. If so, he (the advisor) will make the adjustments and advise me when it’s done. In the six or seven years I’ve worked with him, we haven’t changed our target portfolio mix, but he has rebalanced things several times along the way. It’s worked out well so far.
A regular schedule is best. Whether it’s annually, quarterly or monthly. Evaluate your portfolio at pre-defined intervals and take action according to a pre-defined plan. For instance, your rebalancing rule could be to act when your stock/bond mix strays from your target by X% by the end of whatever period you’ve set. Waiting for month-, quarter- or year-end relieves you of the temptation to be overactive. Say the market plunges and your stock allocation gets below target. You may be tempted to jump right in to buy more stocks. But of course we never know where the bottom is. Waiting until the end of your evaluation period and acting then—making things mechanical—can ease your anxiety.
Keep it simple. Do it once per year–perhaps at tax time when we are all reviewing our finance anyway. Also, consider tax impacts. For example, selling stocks in a taxable account might cause an unwanted tax hit. If possible, rebalance in IRAs and 401(k)s to avoid capital gains and wash sales. But know that sales in IRAs can also trigger wash sales.
Unfortunately, many of us have many accounts, so we can’t simply click a button to rebalance everything. It might take a little strategy, but that’s also why you don’t want to do it too often. Our time is valuable.
One of the benefits of Target Date Funds and Target Risk funds is that they do the rebalancing for us, so that can be an ideal investment choice within a 401(k) for an individual’s working years.