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rebalancing question for relative newbie

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  • rebalancing question for relative newbie

    hi folks, I am learning a lot from this forum - and also see how much I have to learn!

    Question re rebalancing. I'm having trouble understanding any difference between rebalancing methods: 1) selling over-performers / buying under-performers, versus 2) just adding money to the under performer (bonds or whatever). Is it sufficient to add money to the latter to get back to the desired allocation?

    Haven't been great about investing regularly to take advantage of DCA; what we've been doing is seeing cash build up and then moving money over to our Vanguard taxable every ~1-2 months, but with the market run-up we have found that to maintain an 80/20 allocation we just add most of the money to bonds.

    My fee only FA is advising me to sell some stocks *in addition* to adding more to bonds. But does that make sense? Wouldn't selling stocks also trigger fees and taxes? Or, I am missing something.

    I plan to try to semi-automate the taxable account investing this year with my new job/higher salary. (we already max out retirement/backdoor roth)



  • #2
    The two main differences are the immediacy of attaining your AA and the taxes paid.  If you sell and buy you can correct to your AA more quickly.  On the other hand, you incur more in taxes.  My personal preference is to buy into the underperforming asset, because I'm patient and loathe paying the government more of my money.


    • #3
      During the accumulation phase, buy more of what you’re underweight in order to rebalance.

      During retirement, sell more of what you’re overweight in order to rebalance.


      • #4
        I would certainly recommend not selling stocks in taxable. No need to pay capital gains tax (and likely NIIT and state income tax) on the gains.

        To the extent possible, continue to buy the underperforming asset class (bonds in your case). If that's not enough to get you back to 80 / 20, rebalance in your retirement accounts (IRA, 401(k) or similar). Exchange stocks for bonds tax free in those accounts.