Over the past few weeks, we have reviewed several components of our financial planning process and how these can create value for you. Today, we want to discuss rebalancing your portfolio as a critical technique for keeping your investments in sync.

The basic purpose of rebalancing is to maintain the overall target asset allocation level within your portfolio since some investment positions inevitably move up while others move down. That’s simple enough, but sometimes investors actively resist the discipline of rebalancing because it often involves selling assets categories that have been performing well and adding to categories that have lagged.

When rebalancing in tax-deferred accounts, you don’t have to worry about realizing capital gains; in taxable accounts, however, we always take capital gains/losses into consideration. Also, towards the end of the year in taxable portfolios, we review the possibility of selling positions, (if any), that may show a loss and then repurchasing them, (or others, after 30 or more days have elapsed), as part of the rebalancing process. This is known as tax loss harvesting. Of course, there are some minor transaction costs involved, since you are selling some funds and buying others in order to return the portfolio to equilibrium.

There are inherent risks for not rebalancing. Research confirms that over multi-year timeframes, portfolios that are reasonably rebalanced, (once or twice per year), perform better than those without rebalancing. Remember, by building a globally diversified portfolio, you are acknowledging that the future can’t be predicted. There is no way to know in advance, what asset categories will perform well and which categories won’t in any given year.

Regular rebalancing is a protocol that is designed for your protection as you move towards your most important long-term goals. Rebalancing helps offset the behavioral biases that everyone carries around and avoids the “penalty for neglect” that so often beset investment portfolios. We estimate that about 10% of our total value, of our total fee, is attributable to rebalancing.

The Four Components of Value that we addressed over the past four weeks are:

Quantifying Actionable Goals; Behavioral Coaching; Portfolio Management; and Portfolio Rebalancing.

This is how we create value for you. Ready for a real conversation?

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