Rebalancing and "settlement account"

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bfeenix44
Posts: 15
Joined: Thu Dec 26, 2019 8:05 pm

Rebalancing and "settlement account"

Post by bfeenix44 » Wed Feb 12, 2020 11:13 pm

DO NOT use the funds' automatic dividend reinvestment option in your taxable account.
Use fund/ETF dividend income from the funds/ETFs just as you would new savings: to rebalance, i.e., to put into the fund(s) that are lagging per your AA.

Over time your funds will grow out of sync. You can always rebalance within your tax deferred accounts with no tax penalty. In your taxable accounts, assuming you are still accumulating new money, you should be adding money to the funds that are lagging. All dividends should be directed to the underperforming fund. That's really it. Pick a date once a year that you want to rebalance and go for it.

Take your dividends in cash (every quarter from the equity funds, every month from the bond funds) and use the cash to buy underweighted assets. That should be all the rebalancing you will ever need to do. Also for tax efficiency, only sell purchases with losses.

Rebalancing your total portfolio once a year is acceptable. Make sure your turn off automatic reinvestments in taxable. Send the dividends to your settlement account and manually reinvest when and where desired.
Regarding distributions and rebalancing, some people refer to a "settlement account" where they are directing their distributions for use in future rebalancing. Is this "settlement account" an additional account -- some kind of cash reserve account? -- where you direct interest, dividends, etc.?

I'm also seeing some advice against automatic reinvesting. I'd like to know more about how different distribution types should be handled in both a taxable account, and in a Roth, to make future rebalancing simple?

Do some people take their distributions as income? Do other people reinvest automatically?

I will have small opening accounts to start (one taxable, one Roth) and am in 10-12% tax bracket. Starting slow but want to develop some good habits up front.

Thanks!
Tamara

22twain
Posts: 2236
Joined: Thu May 10, 2012 5:42 pm

Re: Rebalancing and "settlement account"

Post by 22twain » Wed Feb 12, 2020 11:55 pm

bfeenix44 wrote:
Wed Feb 12, 2020 11:13 pm
Regarding distributions and rebalancing, some people refer to a "settlement account" where they are directing their distributions for use in future rebalancing. Is this "settlement account" an additional account -- some kind of cash reserve account? -- where you direct interest, dividends, etc.?
Brokerage accounts generally include a "settlement account" where the proceeds go when you sell shares, and where dividends and capital gains distributions go if you choose not to have them automatically reinvested. This is usually a money-market fund which pays some interest.

I have two settlement accounts, one associated with my taxable brokerage account, and one associated with my brokerage Roth IRA, both at the same investment company.

In a mutual-fund-only account, you usually have the option of directing sales, dividends, etc. directly to your bank checking account. In a brokerage account, they go to the settlement account, and you have to transfer the money to your bank checking account in a separate step.
My investing princiPLEs do not include absolutely preserving princiPAL.

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Duckie
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Joined: Thu Mar 08, 2007 2:55 pm

Re: Rebalancing and "settlement account"

Post by Duckie » Thu Feb 13, 2020 5:30 pm

bfeenix44 wrote:Do some people take their distributions as income? Do other people reinvest automatically?
In my taxable account I have it set to send all types of distributions (interest, dividends, and capital gains distributions) to my settlement fund. At that point I can decide what goes where. Sometimes it is manually reinvested in the distributing fund, sometimes in another fund, sometimes it gets transferred to my checking account.

In my Roth IRA I have it set to automatically reinvest everything. In an IRA, unlike in taxable, there are no tax consequences for selling if I want to move from one fund to another.

sycamore
Posts: 275
Joined: Tue May 08, 2018 12:06 pm

Re: Rebalancing and "settlement account"

Post by sycamore » Thu Feb 13, 2020 5:51 pm

Duckie wrote:
Thu Feb 13, 2020 5:30 pm
bfeenix44 wrote:Do some people take their distributions as income? Do other people reinvest automatically?
In my taxable account I have it set to send all types of distributions (interest, dividends, and capital gains distributions) to my settlement fund. At that point I can decide what goes where. Sometimes it is manually reinvested in the distributing fund, sometimes in another fund, sometimes it gets transferred to my checking account.

In my Roth IRA I have it set to automatically reinvest everything. In an IRA, unlike in taxable, there are no tax consequences for selling if I want to move from one fund to another.
+1, that's what I do as well.

Tamara, FWIW, here's a link to info about a settlement fund used with Vanguard brokerage accounts. It works the same at other companies' brokerage account (Fidelity, Schwab, etc.)

Vanguard old-style mutual fund accounts have a separate account for the settlement fund.

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