Frequently Asked Questions
What is portfolio rebalancing and why is it important?
Portfolio rebalancing is the process of realigning the weightings of assets in an investment portfolio to maintain a desired asset allocation. It's important because it helps manage risk, ensures your portfolio aligns with your investment goals, and can potentially improve returns by enforcing a 'buy low, sell high' discipline. Without rebalancing, your portfolio can become overweight in assets that have performed well and underweight in those that haven't, exposing you to unintended risk.
How often should I rebalance my investment portfolio?
Most financial advisors recommend rebalancing quarterly, semi-annually, or annually. The best frequency depends on your investment strategy, transaction costs, and tax considerations. This calculator helps you determine when rebalancing is needed based on your specific threshold preferences. Threshold-based rebalancing (like the 5/25 rule) is often more efficient than calendar-based rebalancing because it only triggers trades when allocations have meaningfully drifted.
What are the different methods of portfolio rebalancing?
The three main methods are: 1) Time-based rebalancing (at regular intervals), 2) Threshold-based rebalancing (when allocations deviate by a set percentage), and 3) Hybrid approaches. This calculator supports threshold-based rebalancing, which is considered more efficient by many professionals. Other methods include cash flow rebalancing (using new contributions to rebalance) and tax-efficient rebalancing (focusing on tax-advantaged accounts).
Does portfolio rebalancing trigger tax consequences?
Yes, rebalancing in taxable accounts can trigger capital gains taxes when you sell appreciated assets. It's important to consider tax-efficient strategies such as rebalancing with new contributions or focusing on tax-advantaged accounts first. You can also use tax-loss harvesting alongside rebalancing. Always consult with a tax professional for personalized advice, especially for large portfolios.
What is the 5/25 rule for portfolio rebalancing?
The 5/25 rule is a popular threshold-based rebalancing strategy: rebalance when an asset class deviates by either 5 percentage points (for larger allocations) or 25% of its original allocation (for smaller allocations). For example, if you have a 40% allocation to stocks, you'd rebalance if it moves outside 35-45%. If you have a 10% allocation to gold, you'd rebalance if it moves outside 7.5-12.5%. This calculator allows you to customize your own threshold values.