Calendar Rebalancing
Periodic rebalancing involves committing to rebalancing your portfolio with a fixed
interval. Periodic rebalancing allows you to monitor your portfolio regularly. However,
some investors may fall into the trap of overdoing rebalancing when not needed.
You need not rebalance if your portfolio still suits you.
Threshold-Based Rebalancing
When you set your rebalancing according to the changes is asset allocation, it is
called threshold-based rebalancing. As we have discussed earlier, the goal is to
maintain a certain asset mix. If your desired assets mix changes, you may decide
to rebalance accordingly.
Risk Parity Rebalancing
You may decide to rebalance your portfolio when the overall risk of the portfolio
increases. You may also decide to rebalance when the asset allocation to risky assets
go beyond a certain point. This form of rebalancing is called risk parity rebalancing.
Do tax considerations when rebalancing
If you need to sell assets to rebalance your portfolio, take time to consider any
tax implications.
Instead of selling, investors may also stop making new contributions to certain
asset classes and redirect those funds to underweighted holdings as a way to rebalance
over time. This strategy minimizes potential tax liabilities.
When rebalancing, it’s important to pay attention to the type of account your assets
are in and the length of time you’ve owned them. These factors will determine how
your capital gains or losses are taxed.
Before making any changes, you may want to consult with a tax professional.
If you have questions
about Portfolio Rebalance, consider reaching out us
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