Getting back on track: A guide to smart rebalancing

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Getting back on track: A guide to smart rebalancing

Post by financial.freedom »

Stay the course and be smart about rebalancing :beer

From the paper

1. Rebalance to manage risk
and emotion.

The purpose of rebalancing is to
maintain a portfolio’s risk and return
characteristics, not to maximize
returns. Once you construct the
appropriate allocation for your
goals, remove yourself from difficult
decisions by implementing an easyto-follow, consistent rebalancing rule.

2. Set a rebalancing “trigger.”
Generally, more frequent rebalancing
will ensure tighter tracking to your
target asset allocation, but this
potentially comes at the cost of lower
returns, increased turnover, and
a heavier tax burden in the current
period. We find that, over the long
term, no one rebalancing strategy is
dominant. Selecting and sticking with
a reasonable rebalancing approach is
better than not rebalancing at all.

3. Minimize the transaction
and tax costs of rebalancing.

Frequent rebalancing can be costly
from a tax perspective, but there
are ways to minimize taxes while
maintaining an appropriate risk
profile. Once you’ve determined
your rebalancing strategy, consider
your overall tax situation to make
strategic decisions such as which
accounts to rebalance, which could
improve your after-tax returns and
reduce your overall tax liability.
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