rebalancing annually with taxable account

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susleni
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rebalancing annually with taxable account

Post by susleni »

I currently max out all tax-advantaged accounts, and have contributed regularly to my taxable account for the past few years, during which I have not reinvested the taxable dividends, but rebalanced quarterly when dividends dropped into my checking account.

The quarterly reinvestment is becoming enough of a headache that I'm wanting to switch to annual rebalancing; however, I feel hesitant about allowing a year's worth of dividends to pile up in a cash account until rebalancing/manually reinvesting at the end of the year.

What would be the optimal dividend reinvestment strategy for rebalancing annually? Will letting dividends sit on the sideline throughout the year make much of a difference in the grand scheme of things? Am I missing an easier way to do this? I appreciate any feedback.

Thanks!!
KlangFool
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Re: rebalancing annually with taxable account

Post by KlangFool »

susleni wrote: Tue Oct 29, 2019 9:16 am
The quarterly reinvestment is becoming enough of a headache that I'm wanting to switch to annual rebalancing;
susleni,

I do not understand how quarterly reinvestment and annual rebalancing are related. Please explain.

A) For quarterly reinvestment and/or new contribution, I just redirect the money to one mutual fund. I just pick one mutual fund most likely to be under-allocated.

B) I may change (A) every few months.

C) Then, once per year, I do my annual rebalancing.

Please note that I have 500K in my taxable account. So, if I have no problem with my system, you should be able to use this system too.

KlangFool
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Clever_Username
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Re: rebalancing annually with taxable account

Post by Clever_Username »

Why not just use any new contributions, which include but are not limited to distributions once they hit your settlement fund, to move closer to your target allocation?
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sport
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Re: rebalancing annually with taxable account

Post by sport »

I let my distributions accumulate for a year, and then reinvest that money in January. The money accumulates in a Vanguard MM fund which has a yield similar to a bond fund. So, I just consider it part of my bond allocation. This minimizes the number of taxable events for record keeping purposes.
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galawdawg
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Re: rebalancing annually with taxable account

Post by galawdawg »

Assuming you are not yet retired, I agree with the others, go ahead and have dividends reinvested when they are distributed.

As needed, you can adjust where your contributions are invested to ensure your asset allocation in your overall portfolio matches your target. If you still need to sell some funds and buy others annually to rebalance to your target allocation, you can do that in your tax-advantaged accounts to avoid capital gains taxes.
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goingup
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Re: rebalancing annually with taxable account

Post by goingup »

Consider just auto-reinvesting dividends. That way you stay invested and give that money a chance to compound/grow immediately. I always felt buying more shares immediately was the best move.

I know many here suggest sending dividends to a sweep account for rebalancing. For me, that would not have been a good idea. I would have mulled, dithered and delayed and our portfolio would likely be smaller for it. (In retirement, we now send dividends to checking account.)

Rebalance by adding new contributions.
KlangFool
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Re: rebalancing annually with taxable account

Post by KlangFool »

goingup wrote: Tue Oct 29, 2019 11:52 am Consider just auto-reinvesting dividends. That way you stay invested and give that money a chance to compound/grow immediately. I always felt buying more shares immediately was the best move.

I know many here suggest sending dividends to a sweep account for rebalancing. For me, that would not have been a good idea. I would have mulled, dithered and delayed and our portfolio would likely be smaller for it. (In retirement, we now send dividends to checking account.)

Rebalance by adding new contributions.
goingup,

The auto-reinvesting does not have to go into the same source fund. All my mutual funds auto-reinvest into one specific mutual fund.

KlangFool
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anon_investor
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Re: rebalancing annually with taxable account

Post by anon_investor »

KlangFool wrote: Tue Oct 29, 2019 11:59 am
goingup wrote: Tue Oct 29, 2019 11:52 am Consider just auto-reinvesting dividends. That way you stay invested and give that money a chance to compound/grow immediately. I always felt buying more shares immediately was the best move.

I know many here suggest sending dividends to a sweep account for rebalancing. For me, that would not have been a good idea. I would have mulled, dithered and delayed and our portfolio would likely be smaller for it. (In retirement, we now send dividends to checking account.)

Rebalance by adding new contributions.
goingup,

The auto-reinvesting does not have to go into the same source fund. All my mutual funds auto-reinvest into one specific mutual fund.

KlangFool
Can you do that at Vanguard? How do you do that?
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goingup
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Re: rebalancing annually with taxable account

Post by goingup »

KlangFool wrote: Tue Oct 29, 2019 11:59 am
goingup wrote: Tue Oct 29, 2019 11:52 am Consider just auto-reinvesting dividends. That way you stay invested and give that money a chance to compound/grow immediately. I always felt buying more shares immediately was the best move.

I know many here suggest sending dividends to a sweep account for rebalancing. For me, that would not have been a good idea. I would have mulled, dithered and delayed and our portfolio would likely be smaller for it. (In retirement, we now send dividends to checking account.)

Rebalance by adding new contributions.
goingup,

The auto-reinvesting does not have to go into the same source fund. All my mutual funds auto-reinvest into one specific mutual fund.

KlangFool
Klang-
I suspect you are a Vanguard customer on the old platform, not brokerage platform. It's not possible to direct dividends to another mutual fund on the "upgraded" Vanguard brokerage platform. It's either auto-reinvest, sweep account or to external bank account.
KlangFool
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Re: rebalancing annually with taxable account

Post by KlangFool »

anon_investor wrote: Tue Oct 29, 2019 12:01 pm
KlangFool wrote: Tue Oct 29, 2019 11:59 am
goingup wrote: Tue Oct 29, 2019 11:52 am Consider just auto-reinvesting dividends. That way you stay invested and give that money a chance to compound/grow immediately. I always felt buying more shares immediately was the best move.

I know many here suggest sending dividends to a sweep account for rebalancing. For me, that would not have been a good idea. I would have mulled, dithered and delayed and our portfolio would likely be smaller for it. (In retirement, we now send dividends to checking account.)

Rebalance by adding new contributions.
goingup,

The auto-reinvesting does not have to go into the same source fund. All my mutual funds auto-reinvest into one specific mutual fund.

KlangFool
Can you do that at Vanguard? How do you do that?
On the screen that you choose what to do with dividend and distribution, instead of reinvesting, choose "Transfer to some other Vanguard fund". Then, pick the fund.

KlangFool
KlangFool
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Re: rebalancing annually with taxable account

Post by KlangFool »

goingup wrote: Tue Oct 29, 2019 12:05 pm
KlangFool wrote: Tue Oct 29, 2019 11:59 am
goingup wrote: Tue Oct 29, 2019 11:52 am Consider just auto-reinvesting dividends. That way you stay invested and give that money a chance to compound/grow immediately. I always felt buying more shares immediately was the best move.

I know many here suggest sending dividends to a sweep account for rebalancing. For me, that would not have been a good idea. I would have mulled, dithered and delayed and our portfolio would likely be smaller for it. (In retirement, we now send dividends to checking account.)

Rebalance by adding new contributions.
goingup,

The auto-reinvesting does not have to go into the same source fund. All my mutual funds auto-reinvest into one specific mutual fund.

KlangFool
Klang-
I suspect you are a Vanguard customer on the old platform, not brokerage platform. It's not possible to direct dividends to another mutual fund on the "upgraded" Vanguard brokerage platform. It's either auto-reinvest, sweep account or to external bank account.
Thanks for letting me know. Another good reason not to upgrade.

KlangFool
rkhusky
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Re: rebalancing annually with taxable account

Post by rkhusky »

susleni wrote: Tue Oct 29, 2019 9:16 am Will letting dividends sit on the sideline throughout the year make much of a difference in the grand scheme of things? A
No. (With a 2% yearly dividend and an average 5% annual stock return, that works out to about $50 in lost yearly return per each $100K in investment (0.05%). Worrying about tax efficiency and lowering expense ratio would be more productive.)
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anon_investor
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Re: rebalancing annually with taxable account

Post by anon_investor »

KlangFool wrote: Tue Oct 29, 2019 12:07 pm
goingup wrote: Tue Oct 29, 2019 12:05 pm
KlangFool wrote: Tue Oct 29, 2019 11:59 am
goingup wrote: Tue Oct 29, 2019 11:52 am Consider just auto-reinvesting dividends. That way you stay invested and give that money a chance to compound/grow immediately. I always felt buying more shares immediately was the best move.

I know many here suggest sending dividends to a sweep account for rebalancing. For me, that would not have been a good idea. I would have mulled, dithered and delayed and our portfolio would likely be smaller for it. (In retirement, we now send dividends to checking account.)

Rebalance by adding new contributions.
goingup,

The auto-reinvesting does not have to go into the same source fund. All my mutual funds auto-reinvest into one specific mutual fund.

KlangFool
Klang-
I suspect you are a Vanguard customer on the old platform, not brokerage platform. It's not possible to direct dividends to another mutual fund on the "upgraded" Vanguard brokerage platform. It's either auto-reinvest, sweep account or to external bank account.
Thanks for letting me know. Another good reason not to upgrade.

KlangFool
Yea, I have the brokerage platform and do not see that option, bummer.

For the OP, I get a bonus annually and use that money to help me re-balance in my taxable accounts (when I get paid my bonus is when I do my annual balancing). I usually have dividend reinvestment on, but the dividend distribution period right before I get my bonus, I may turn it off (to avoid wash sale rule) if I see that I have the potential for tax loss harvesting if one of my index funds has some losses.
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Stinky
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Re: rebalancing annually with taxable account

Post by Stinky »

Clever_Username wrote: Tue Oct 29, 2019 10:14 am Why not just use any new contributions, which include but are not limited to distributions once they hit your settlement fund, to move closer to your target allocation?
I like this idea. It’s “constant rebalancing”.

Also, OP didn’t state whether he was looking at his taxable funds separately from his tax-preferred funds when looking at asset allocation. If he were to look across all of his accounts, he might be able to rebalance in the tax-preferred accounts and have no current capital gains or losses as a result of rebalancing.
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Topic Author
susleni
Posts: 24
Joined: Thu Apr 06, 2017 12:04 pm

Re: rebalancing annually with taxable account

Post by susleni »

I'm able to rebalance from within tax-preferred accounts, so no taxable event needed when rebalancing. I have only total US and total international stock indices in my taxable account. Dropping in quarterly dividends from my checking account to whichever of the two funds is underperforming, then doing an annual rebalance, seems more hands-off than the way I've been doing things. Thanks to all for responding!!
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