Quick question about rebalancing…

[Jesteroftheswamp]

Hello everyone hope it has been a great week!

I have a quick question regarding the concept of “rebalancing.” Long story short, my asset allocation has recently, due to market fluctuations, change to 85% stocks and the rest bonds. I want to bring it back up to 90% stocks.

Should I do this with “new money”, meaning money from my paychecks and upcoming paychecks? I sense this is the best route. It may take a couple of months to add to my index funds to get it back to 90% stocks, but would this still be the best option?

Or is it best to sell some bonds and use the proceeds to reinvest into stocks?

Which is the most sensible option? Thanks!!

[20cm]

It sounds like the new money is not enough to get to your desired AA. In that case your decision depends on whether you're okay drifting towards you target AA instead of rebalancing immediately and what the tax implications of selling your bonds are (you may want to do so for tax loss or gain harvesting). There is no right answer.

If your plan was to be at 90/10 on a fixed rebalancing interval and you are at your rebalancing date, then the dogmatic stick-to-the-plan action would be to add to the stock side with the new money and then rebalance the rest of the way from bonds to stocks.

[retiredjg]

There is no "best" if you can work within a tax-advantaged account. This is purely personal preference.

You might do a little of both. Sell enough bonds and buy stocks to get back within a 5% band. It would take very little to get there. And start directing more contributions toward stocks.

[Golf maniac]

I would encourage you not to constantly rebalance. You are buying stock at higher levels and selling bonds that may be underperforming. You can change your allocation to 100% stock, but that may still not be enough. I was constantly chasing my “ideal” allocation. Finally I decided to just go all target date retirement accounts and allow it to rebalance for me and get more conservative over time. This saved me a lot of work and frustration and cost very little in terms of fees.

[Beensabu]

I would encourage you not to constantly rebalance. You are buying stock at higher levels and selling bonds that may be underperforming.

It sounds like they're in the kinds of bonds that have been outperforming the kinds of stocks they're in...

[rkhusky]

I would sell bonds and buy stocks, if in a tax advantaged account. If you wanted to be 85/15 you would have chosen 85/15 for your AA.

[TravelforFun]

Most people don't rebalance until their asset allocation gets out of a 'band' and a 5% band seems to be widely used here; so I were you, I would just put new money into stocks.

TravelforFun

[TravelforFun]

Most people don't rebalance until their asset allocation gets out of a 'band' and a 5% band seems to be widely used here; so I were you, I would just put new money into stocks.

TravelforFun

[arcticpineapplecorp.]

Hello everyone hope it has been a great week!

I have a quick question regarding the concept of “rebalancing.” Long story short, my asset allocation has recently, due to market fluctuations, change to 85% stocks and the rest bonds. I want to bring it back up to 90% stocks.

Should I do this with “new money”, meaning money from my paychecks and upcoming paychecks? I sense this is the best route. It may take a couple of months to add to my index funds to get it back to 90% stocks, but would this still be the best option?

Or is it best to sell some bonds and use the proceeds to reinvest into stocks?

Which is the most sensible option? Thanks!!

depends on whether you're talking about selling in a taxable account or not. You don't want to just generate taxes on gains in taxable just to rebalance. If you're talking about a retirement account then the rebalancing has no tax impact.

In retirement account either option you state is fine (rebalancing or directing new money at the underweighted asset class). Depends on how quickly you want to get your AA where you want it to be.

finally, i'm a little confused that your stocks are down from 90% to 85%. I know stocks lost last year but they're up this year so how did your stocks fall when they're up more than bonds this year (unless you didn't rebalance last year either?)

[Outer Marker]

I have a quick question regarding the concept of “rebalancing.” Long story short, my asset allocation has recently, due to market fluctuations, change to 85% stocks and the rest bonds. I want to bring it back up to 90% stocks.

What are you invested in? The S&P is up nearly 20% year to date, including a nice rally in the last week. Total International is up as well. If anything, it seems like recent fluctuations would drive the need to increase fixed income. I would not be selling bonds to buy stocks at these levels. BND is enjoying a nice rally as well for what it's worth.

[Jesteroftheswamp]

There is no "best" if you can work within a tax-advantaged account. This is purely personal preference.

You might do a little of both. Sell enough bonds and buy stocks to get back within a 5% band. It would take very little to get there. And start directing more contributions toward stocks.

This is a tax disadvantaged account, does that change anything?

[retiredjg]

I guess you mean this is a taxable account (commonly called a brokerage account).

Rebalancing should be done for your portfolio, not one account of the portfolio. If your taxable account is a bit stock heavy, you can sell stocks in an IRA or work plan and buy bond funds (if you have an IRA or work plan) without triggering taxes.

If your taxable account is the only account you have, just change your contributions to all bondsstocks for awhile. Being 5 points off your target is perfectly acceptable. Try to keep it from going further by changing contributions.

If the difference gets to be more than 5%, you'll have to consider if you want to sell in taxable, possibly triggering taxes, to get it back near target.

If your taxable account is the only account you have, you might need to reconsider and start putting money into a work plan or IRA.

[Jesteroftheswamp]

I would sell bonds and buy stocks, if in a tax advantaged account. If you wanted to be 85/15 you would have chosen 85/15 for your AA.

So if it isn’t a tax advantaged account would you add new money to stocks?

[Jesteroftheswamp]

I guess you mean this is a taxable account (commonly called a brokerage account).

Rebalancing should be done for your portfolio, not one account of the portfolio. If your taxable account is a bit stock heavy, you can sell stocks in an IRA or work plan and buy bond funds (if you have an IRA or work plan) without triggering taxes.

If your taxable account is the only account you have, just change your contributions to all bonds for awhile. Being 5 points off your target is perfectly acceptable. Try to keep it from going further by changing contributions.

If the difference gets to be more than 5%, you'll have to consider if you want to sell in taxable, possibly triggering taxes, to get it back near target.

If your taxable account is the only account you have, you might need to reconsider and start putting money into a work plan or IRA.

Confused why you suggest changing to contribution to bonds, would I contribute more to stocks to get it back to 90%?

[retiredjg]

I guess you mean this is a taxable account (commonly called a brokerage account).

Rebalancing should be done for your portfolio, not one account of the portfolio. If your taxable account is a bit stock heavy, you can sell stocks in an IRA or work plan and buy bond funds (if you have an IRA or work plan) without triggering taxes.

If your taxable account is the only account you have, just change your contributions to all bonds for awhile. Being 5 points off your target is perfectly acceptable. Try to keep it from going further by changing contributions.

If the difference gets to be more than 5%, you'll have to consider if you want to sell in taxable, possibly triggering taxes, to get it back near target.

If your taxable account is the only account you have, you might need to reconsider and start putting money into a work plan or IRA.

Confused why you suggest changing to contribution to bonds, would I contribute more to stocks to get it back to 90%?

Sorry, I meant all stocks. Fixed it.

[Hyperchicken]

If you have bond tax lots with losses, you could sell these now, and combine rebalancing with tax loss harvesting.

If you only have bond tax lots with gains, you could rebalance with new money, since you are stating that would only take you 2 months.

Alternatively, rebalance in tax-advantaged account if you have enough bonds in there.

[Jesteroftheswamp]

finally, i'm a little confused that your stocks are down from 90% to 85%. I know stocks lost last year but they're up this year so how did your stocks fall when they're up more than bonds this year (unless you didn't rebalance last year either?)

Not really sure, just added some to total bond index like once or twice all year and purchased some CDs.

[Jesteroftheswamp]

I guess you mean this is a taxable account (commonly called a brokerage account).

Rebalancing should be done for your portfolio, not one account of the portfolio. If your taxable account is a bit stock heavy, you can sell stocks in an IRA or work plan and buy bond funds (if you have an IRA or work plan) without triggering taxes.

If your taxable account is the only account you have, just change your contributions to all bondsstocks for awhile. Being 5 points off your target is perfectly acceptable. Try to keep it from going further by changing contributions.

If the difference gets to be more than 5%, you'll have to consider if you want to sell in taxable, possibly triggering taxes, to get it back near target.

If your taxable account is the only account you have, you might need to reconsider and start putting money into a work plan or IRA.

Why sell bonds from a retirement account that Im planning on keeping for decades though, just to rebalance 5% inside a taxable account that honestly I don’t even feel is a big deal or difference? The only reason I’m even asking is because I’ve read hear asset allocation is a huge deal, to be honest I could care less if my allocation is 90% or 85% stocks. Selling bonds that I’ll use in retirement just to fund a taxable account just because of an imaginary asset allocation number I’ve created for myself seems crazy

[Jesteroftheswamp]

[Jesteroftheswamp's post has been merged into the ongoing discussion. Jester, you will get better advice if you keep the discussion in one place - moderator Kendall]

I’ve got money in a taxable account made mostly of index funds and about 10% bonds thag I planon using over time in the distant future, if ever. I also have plenty in a 401k and Roth.

Regarding the taxable account, when do people actually create realized gains?? I’m so confused do I just let the money sit there and grow as long as I can?? I was considering selling some of the bonds in the account and using the profits to get my stock allocation back to 90% (it is currently at 85%), but I think rationally it is better just to fund that taxable stock index fund with money from my paycheck to get it back to 90%. So when am I supposed to sell anything and actually realize gains?

[alex_686]

Regarding the taxable account, when do people actually create realized gains??

When they want to pay taxes.

Strickly speaking, from a rational viewpoint, ignoring taxes, there is no difference between a realized gain and a unrealized gain. Or loss.

Thinking about realized / unrealized gains leads to a host of cognitive errors as explained by Behavioral Economics. So please don't.

[ruralavalon]

I’ve got money in a taxable account made mostly of index funds and about 10% bonds thag I planon using over time in the distant future, if ever. I also have plenty in a 401k and Roth.

Regarding the taxable account, when do people actually create realized gains?? I’m so confused do I just let the money sit there and grow as long as I can?? I was considering selling some of the bonds in the account and using the profits to get my stock allocation back to 90% (it is currently at 85%), but I think rationally it is better just to fund that taxable stock index fund with money from my paycheck to get it back to 90%. So when am I supposed to sell anything and actually realize gains?

I sell whenever I need/want some money to spend.

I buy whenever I have extra money available for investing.

[Jesteroftheswamp]

Regarding the taxable account, when do people actually create realized gains??

When they want to pay taxes.

Strickly speaking, from a rational viewpoint, ignoring taxes, there is no difference between a realized gain and a unrealized gain. Or loss.

Thinking about realized / unrealized gains leads to a host of cognitive errors as explained by Behavioral Economics. So please don't.

So would you recommend someone rebalance using new money from their paycheck instead of selling bonds to use the proceeds to get their stock allocation from 85% too 90%?

[Hyperchicken]

You just created a nearly identical thread for much the same subject:

viewtopic.php?t=416947

Best to keep your questions in one place.

[ruralavalon]

Regarding the taxable account, when do people actually create realized gains??

When they want to pay taxes.

Strickly speaking, from a rational viewpoint, ignoring taxes, there is no difference between a realized gain and a unrealized gain. Or loss.

Thinking about realized / unrealized gains leads to a host of cognitive errors as explained by Behavioral Economics. So please don't.

So would you recommend someone rebalance using new money from their paycheck instead of selling bonds to use the proceeds to get their stock allocation from 85% too 90%?

Avoid rebalancing by exchanging between funds in a taxable brokerage account, because that's likely to create unnecessary incomes tax liability.

Instead rebalance by exchanging between funds inside a tax-advantaged account or by how you invest new contributions in the taxable account.

[alex_686]

So would you recommend someone rebalance using new money from their paycheck instead of selling bonds to use the proceeds to get their stock allocation from 85% too 90%?

Ignoring taxes and costs (it does time to rebalance, and that is a cost), if a IPS says the asset allocation should be 90% then I would rebalance to 90%.

It makes no difference if it is coming from new funds or if you need to sell a bond fund.

For context, I used to work in mutual fund accounting. Our lifestyle funds, which had different sleeves for equities and bonds, continuously rebalanced daily. The only restraint was the of cost rebalancing. I don't have time to continuously rebalance. Once a year works well. Or bands of +/- 10%.

[sailaway]

I’ve got money in a taxable account made mostly of index funds and about 10% bonds thag I planon using over time in the distant future, if ever. I also have plenty in a 401k and Roth.

Regarding the taxable account, when do people actually create realized gains?? I’m so confused do I just let the money sit there and grow as long as I can?? I was considering selling some of the bonds in the account and using the profits to get my stock allocation back to 90% (it is currently at 85%), but I think rationally it is better just to fund that taxable stock index fund with money from my paycheck to get it back to 90%. So when am I supposed to sell anything and actually realize gains?

I sell whenever I need/want some money to spend.

I buy whenever I have extra money available for investing.

And rebalance in tax deferred.

[Doctor Rhythm]

I haven’t needed to tap my stocks to pay for expenses. I’ve only sold to tax loss harvest, rebalance, or to divest from funds that aren’t appropriate for me and immediately reinvested the proceeds.

It’s not like pocketing some gains after you’ve won a few bets in the casino. It’s more like, “let it ride” until you need to cash in some chips to pay for the buffet.

[Onlineid3089]

Regarding the taxable account, when do people actually create realized gains??

When they want to pay taxes.

Strickly speaking, from a rational viewpoint, ignoring taxes, there is no difference between a realized gain and a unrealized gain. Or loss.

Thinking about realized / unrealized gains leads to a host of cognitive errors as explained by Behavioral Economics. So please don't.

So would you recommend someone rebalance using new money from their paycheck instead of selling bonds to use the proceeds to get their stock allocation from 85% too 90%?

Are your bond funds even up after the last couple years? I'd think you'd have at least some lots that could be sold at a loss to rebalance.

[Raspberry-503]

If you have a 401(k) or an IRA you can also possibly rebalance by looking at your portfolio as a whole, not account by account and rebalance in accounts were trading doesn't include immediate tax events
I have no bonds in my brokerage, but a mix of bonds and stock funds in my tIRA, so if we need to sell bonds and buy stock, I can do it there.

When you do need the money, you can cash out some stock from the brokerage, hopefully at long-term capital gains, then rebalance both accounts overall by transacting in the tIRA.

[toddthebod]

Regarding the taxable account, when do people actually create realized gains??

When they want to pay taxes.

Strickly speaking, from a rational viewpoint, ignoring taxes, there is no difference between a realized gain and a unrealized gain. Or loss.

Thinking about realized / unrealized gains leads to a host of cognitive errors as explained by Behavioral Economics. So please don't.

So would you recommend someone rebalance using new money from their paycheck instead of selling bonds to use the proceeds to get their stock allocation from 85% too 90%?

I think most people rebalance in their tax-advantaged accounts, looking at your accounts as a whole. Like if you are 60/40 overall, and your money is split 50/50 between a 401(k) and a taxable account, you are 100/0 in your taxable and 20/80 in your 401(k).

[White Coat Investor]

I’ve got money in a taxable account made mostly of index funds and about 10% bonds thag I planon using over time in the distant future, if ever. I also have plenty in a 401k and Roth.

Regarding the taxable account, when do people actually create realized gains?? I’m so confused do I just let the money sit there and grow as long as I can?? I was considering selling some of the bonds in the account and using the profits to get my stock allocation back to 90% (it is currently at 85%), but I think rationally it is better just to fund that taxable stock index fund with money from my paycheck to get it back to 90%. So when am I supposed to sell anything and actually realize gains?

Never. Seriously. I NEVER have and expect to NEVER realize any taxable gains in my taxable account. We harvest losses. We donate appreciated shares instead of cash to charity. When we actually need to live off the portfolio the distributed dividends will be adequate for our living costs.

Rebalancing is not that beneficial and doesn't need to be done very often so I'd be pretty hesitant to realize much in gains just to rebalance.

Now, if you're like most people and will need/want to spend some principal during retirement then sure, you'll realize some gains, but not that much if you tap the high basis shares first.

But this idea of "taking profits" suggests that you are investing in something that you do not feel comfortable holding forever. I don't do that. That just sounds like realizing capital gains that don't need to be realized.

[runner3081]

Only when I need to pull it out to fund retirement in the future.

[chance]

When I retire and need the money. Taking profits is a short-term market timing strategy.

[retiredjg]

I guess you mean this is a taxable account (commonly called a brokerage account).

Rebalancing should be done for your portfolio, not one account of the portfolio. If your taxable account is a bit stock heavy, you can sell stocks in an IRA or work plan and buy bond funds (if you have an IRA or work plan) without triggering taxes.

If your taxable account is the only account you have, just change your contributions to all bondsstocks for awhile. Being 5 points off your target is perfectly acceptable. Try to keep it from going further by changing contributions.

If the difference gets to be more than 5%, you'll have to consider if you want to sell in taxable, possibly triggering taxes, to get it back near target.

If your taxable account is the only account you have, you might need to reconsider and start putting money into a work plan or IRA.

Why sell bonds from a retirement account that Im planning on keeping for decades though, just to rebalance 5% inside a taxable account that honestly I don’t even feel is a big deal or difference? The only reason I’m even asking is because I’ve read hear asset allocation is a huge deal, to be honest I could care less if my allocation is 90% or 85% stocks. Selling bonds that I’ll use in retirement just to fund a taxable account just because of an imaginary asset allocation number I’ve created for myself seems crazy

Rebalancing is optional. It is not a required activity. People use it to keep their portfolio at or near a risk level at which they are comfortable.

If the ratio in the taxable account does not bother you, there is no need to rebalance.

The fact that you asked the question seemed to indicate you wanted to fix it. If that is incorrect, just ignore the answers.

[Jesteroftheswamp]

Regarding the taxable account, when do people actually create realized gains??

When they want to pay taxes.

Strickly speaking, from a rational viewpoint, ignoring taxes, there is no difference between a realized gain and a unrealized gain. Or loss.

Thinking about realized / unrealized gains leads to a host of cognitive errors as explained by Behavioral Economics. So please don't.

So would you recommend someone rebalance using new money from their paycheck instead of selling bonds to use the proceeds to get their stock allocation from 85% too 90%?

Avoid rebalancing by exchanging between funds in a taxable brokerage account, because that's likely to create unnecessary incomes tax liability.

Instead rebalance by exchanging between funds inside a tax-advantaged account or by how you invest new contributions in the taxable account.

Thanks for the response. And is rebalancing basically all up to personal preference? For example for myself personally, it makes no difference to me if my stocks are 90% or 85%. Is there a right way, or just whenever someone is uncomfortable with their personal allocation?

[Jesteroftheswamp]

So would you recommend someone rebalance using new money from their paycheck instead of selling bonds to use the proceeds to get their stock allocation from 85% too 90%?

Ignoring taxes and costs (it does time to rebalance, and that is a cost), if a IPS says the asset allocation should be 90% then I would rebalance to 90%.

It makes no difference if it is coming from new funds or if you need to sell a bond fund.

For context, I used to work in mutual fund accounting. Our lifestyle funds, which had different sleeves for equities and bonds, continuously rebalanced daily. The only restraint was the of cost rebalancing. I don't have time to continuously rebalance. Once a year works well. Or bands of +/- 10%.

Thanks for the response! I’ve heard once a year works well and is suggested as well. I’ll be honest with you: 85%-90% stocks in my portfolio really means nothing to me. It just doesn’t effect or make a difference in my life right now one way or another. I say that because it leads me to my question for you: if I am happy/content with where it’s at and what I have right now, am I ok to not rebalance? I ask because I’ve always heard how important it is to rebalance but I don’t want to do it just because I feel like “it’s the thing to do”, if I don’t have to.

[Jesteroftheswamp]

Regarding the taxable account, when do people actually create realized gains??

When they want to pay taxes.

Strickly speaking, from a rational viewpoint, ignoring taxes, there is no difference between a realized gain and a unrealized gain. Or loss.

Thinking about realized / unrealized gains leads to a host of cognitive errors as explained by Behavioral Economics. So please don't.

So would you recommend someone rebalance using new money from their paycheck instead of selling bonds to use the proceeds to get their stock allocation from 85% too 90%?

Are your bond funds even up after the last couple years? I'd think you'd have at least some lots that could be sold at a loss to rebalance.

They are a little. I’d rather not sell anything, period. I’m only asking because I’ve read it’s like the thing to do or something. Finance books act like if my stock allocation goes from 90% to 85% it’s some kind of big deal or something so it’s got me overly curious. I’d rather just stay right where I’m at honestly as I don’t have any reason to sell anything and I get paid frequently so could just add more money to my taxable stock funds

[alex_686]

Thanks for the response! I’ve heard once a year works well and is suggested as well. I’ll be honest with you: 85%-90% stocks in my portfolio really means nothing to me. It just doesn’t effect or make a difference in my life right now one way or another. I say that because it leads me to my question for you: if I am happy/content with where it’s at and what I have right now, am I ok to not rebalance? I ask because I’ve always heard how important it is to rebalance but I don’t want to do it just because I feel like “it’s the thing to do”, if I don’t have to.

I would write up a Investment Policy Statement.

https://www.bogleheads.org/wiki/Investm ... _statement

I would then stick to the plan.

At this point it probably doesn't matter. However, creating a plan and then walking through your plan is a good habit. Do it when the stakes are low. This will help you develop good habits when things are challenging.

[rkhusky]

I would sell bonds and buy stocks, if in a tax advantaged account. If you wanted to be 85/15 you would have chosen 85/15 for your AA.

So if it isn’t a tax advantaged account would you add new money to stocks?

Yes.

[ruralavalon]

Regarding the taxable account, when do people actually create realized gains??

When they want to pay taxes.

Strickly speaking, from a rational viewpoint, ignoring taxes, there is no difference between a realized gain and a unrealized gain. Or loss.

Thinking about realized / unrealized gains leads to a host of cognitive errors as explained by Behavioral Economics. So please don't.

So would you recommend someone rebalance using new money from their paycheck instead of selling bonds to use the proceeds to get their stock allocation from 85% too 90%?

Avoid rebalancing by exchanging between funds in a taxable brokerage account, because that's likely to create unnecessary incomes tax liability.

Instead rebalance by exchanging between funds inside a tax-advantaged account or by how you invest new contributions in the taxable account.

Thanks for the response. And is rebalancing basically all up to personal preference? For example for myself personally, it makes no difference to me if my stocks are 90% or 85%. Is there a right way, or just whenever someone is uncomfortable with their personal allocation?

Rebalancing is not required, it's a matter of personal preference. If 5% off target makes no difference to you, then don't rebalance.

Maybe 10% off target would be suitable for you? Or more? Wherever would make you uncomfortable is the answer.