This week I’m talking about how to rebalance your investment portfolio. Rebalancing is the process of realigning your portfolio back to its intended position. We all get a little out of what sometimes in all areas of life, but when it comes to your investment portfolio, I can’t emphasize enough how important it is to bring things back into alignment when it gets out of whack. 

For the last 2 days, I’ve been sharing with you how to review your current mix of stocks, bonds, and cash to determine if you need to rebalance and by how much. 

Today, I’m sharing with you step #3 on how I rebalance portfolios (which I have done literally thousands of times), and how you can follow this same process for rebalancing your own portfolio.

Once you’ve reviewed your current allocation and determined how much it’s drifted and how much it’s going to take to get it back into alignment, we need to look at what to sell. 

And this isn’t as simple as it sounds. It’s determined by several factors - what type of account it is, taxes, and future prospects of what you’re looking to sell. Continuing the example from yesterday, let’s say that you need to sell $25,000 of stocks in your portfolio to get your portfolio back in balance. 

Where do you begin? What do you sell? First of all, we need to determine the tax implications of selling. If you’re planning to sell within an IRA or a 401k account, this isn’t an issue since there are no taxes for selling. So if you’re selling in an IRA or 401k or other tax-deferred type account, you can move on looking at each individual position. Are there any that you’re not too keen on for future prospects or that have become too bloated. Are there 1 or 2 positions that you think would be good candidates or do you want to sell a little bit of everything? It’s usually best to sell as few as the positions as possible as this often keeps things simple and cuts down on any transaction costs of selling.

If you are rebalancing in a taxable account, then taxes are more of a consideration. You’ll want to know the tax implications of selling before you sell. If you have a loss in anything, it’s a good place to start since you can always buy the stock back later, while minimizing the taxes of rebalancing by selling something that has a loss. 

If you don’t know how to get started with rebalancing, a good place to start is to figure out your ideal asset allocation to stocks, bonds, and cash based on your age. I’m happy to share our age-based asset allocation cheat sheet that we use to find the right target for each client. Just send me an email - [email protected], that’s [email protected], and I’ll send along the cheat sheet so you can figure out the asset allocation that’s right for you. 

That’s it for today. Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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