Method to rebalance to target asset allocation

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Method to rebalance to target asset allocation

Post by rickberg » Fri Mar 20, 2015 2:17 pm

What is the recommended way to re-balance your portfolio when it deviates from your asset allocation? I would assume that the answer to this will vary based on age and how close you are to retirement.

In my situation where I am in my early 30's and still in the process of building my nest egg, would the best way to re-allocate is to buy more into the area where I am under to bring my allocation back into balance? (assuming you have the means to contribute more $)

For example:
If my target allocation is 70% US Equities, 20% Intl Equities, and 10% Bonds
but if my Current allocation is 75% US Equities, 22% Intl Equities, and 3% Bonds

In this situation, would you sell US Equities and Intl Equities to bring your bond allocation to target, or would you buy more Bonds to bring it the bond allocation to the target allocation? (assuming you have the means to contribute more $)

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Re: Method to rebalance to target asset allocation

Post by asif408 » Fri Mar 20, 2015 2:31 pm

Here's the Bogleheads wiki on rebalancing:

Everyone has their own method (and some don't rebalance). I prefer to use new proceeds (if available) to rebalance rather than selling.

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Re: Method to rebalance to target asset allocation

Post by jjface » Fri Mar 20, 2015 2:32 pm

Your choice.

If you can't buy you have to sell.

If you are selling low then it may be better to buy if you can buy low and visa versa.

Assuming no tax consequences for a sale.
Last edited by jjface on Fri Mar 20, 2015 2:37 pm, edited 2 times in total.

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Re: Method to rebalance to target asset allocation

Post by Globalviewer58 » Fri Mar 20, 2015 2:32 pm

The tax implication would guide my actions. If you are rebalancing inside a tax deferred account so there is no tax consequence then sell the equity funds and buy bonds. If all assets are in taxable accounts I would not sell if it resulted in a taxable gain.

One way to rebalance is to steer new investment to the under target asset. Turn off automatic reinvestment of dividends in the over target funds and steer distributions into the under target fund. This may take some time to reach your desired allocation.

If you can't sleep at night due to your situation then rebalance even if it is a taxable event.

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Re: Method to rebalance to target asset allocation

Post by grabiner » Fri Mar 20, 2015 9:06 pm

The decision whether to sell or buy is determined by how much you are adding to your portfolio or withdrawing from it. If you have a $140K portfolio which should be 70% stocks ($98K) but is currently 75% stocks ($105K), then you can get back to 70% by selling $7000 in stock to buy bonds, or by adding $10K in bonds to make the total $150K.

If the portfolio is taxable, you probably don't want to sell to rebalance, as you would owe tax on the capital gain; if you don't have the $10K right now, wait and direct new investments to bond until you do. (And don't reinvest dividends in your stock funds; use the dividends to buy more of whatever fund you need to buy.)
Wiki David Grabiner

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