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Rebalancing your portfolio: Here’s what that means and how often you should do it

Giovanny Moreano, Bankrate.com on

Published in Home and Consumer News

Despite how often you check, the objective is to maintain a balanced risk profile over time.

Does rebalancing your portfolio cost money?

For the do-it-yourself investor, rebalancing a portfolio these days can be done at low or no-cost. Many brokerage firms offer no-fee trades, while low-cost options abound.

Automated investing has also made portfolio rebalancing simple. Robo-advisors automatically re-align asset allocations as part of their service based on investors’ profiles.

Many investors are still most comfortable working with a financial advisor. Of course, that personalized attention may come at a higher cost.

For retirement planning, it’s worth noting that target-date funds — mentioned earlier — usually come with a slightly higher cost than pure index funds.

Also, certain mutual funds might have early redemption fees, or even load fees. A load fee is a commission an investor pays when buying or selling mutual funds. These fees are determined by mutual fund companies and their intermediaries.

When deciding, it’s important to take note of these costs upfront. The more you can minimize unnecessary fees, the more you can invest toward your financial future.

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 paramount 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.

For example, rebalancing your assets in tax-advantaged accounts like a 401(k), IRA, or Roth IRA, may not incur any short- or long-term capital gains taxes. Alternatively, capital gains generated in standard investment accounts are taxed differently by the US government.

Before making any changes, you may want to consult with a tax professional.

Bottom line

Rebalancing your portfolio is a great way to be in tune with your finances. It ensures you remain diversified and on track to reach your long-term financial goals.

By staying engaged, you will feel more empowered to make better investment decisions and avoid potentially costly mistakes.

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