Comments (scroll down to add your own):

1. Of course, this could also be coupled with annual checkups–to make sure that the contributions adjustment did what you actually wanted (because of stock prices and whatnot).

   Comment by Mrs. Micah — Dec 3rd 2007 @ 12:51 pm

2. Absolutely. Because this is a less immediate method of rebalancing, you really need to keep an eye on things and make sure it’s having the desired effect.

   Comment by nickel — Dec 3rd 2007 @ 1:02 pm

3. Buying more of a certain fund/stock is one way but it will probably be a very slow process once your portfolio gets to a bigger size. Sometimes you just have to bite the bullet and take the commissions.

   Comment by MoneyNing — Dec 3rd 2007 @ 7:03 pm

4. I’m aiming to use the 2008 0% on capital gains rule to sell off a bunch to rebalance. I’ve been planning for it, and will be doing everything under my power to get into the 15% tax bracket.

   Comment by My Dollar Plan — Dec 4th 2007 @ 11:37 am

5. I’ve read some who believe that simply making contribution adjustments to bring asset allocations in line partially defeats the purpose of re-balancing. The argument being that if an asset class is over-represented that means that it has been performing well and the price has increased. However, if an asset class is under-represented that asset class has not been doing as well. By selling the over-represented assets and buying the under-represented assets, it is an automatic form of buying low and selling high. Obviously the assumption is that the under-represented asset class will catch-up and/or the over-represented asset class may have risen too high and will fall back down to some extent.

   Consequently, I have heard that you should actually rebalance by buying and selling, not simply changing contribution allocations. What are your thoughts?

   Comment by Brad — Dec 4th 2007 @ 6:54 pm

6. Brad… I agree with what you said, making contribution adjustments to bring asset allocations in line does defeat the purpose of re-balancing.

   Re-balancing a portfolio acts like a buy/sell discipline. You are trimming the fat off of investments that have performed well and adding to starved areas that have underperformed.

   If you’re a student of the market then you know many of these asset classes, sizes and styles are cyclical. What hasn’t done well, may be more likely to going forward.

   For instance, if the small cap portion of your portfolio dramatically underperforms the large caps, you sell a little of what has done well (sell discipline) and buy something that’s potentially undervalued and poised to have better relative performance in the short term (buy discipline).

   As far as taxes, i think that should be a secondary concern. Clients often ask me that question, saying they don’t want to sell something because of the tax consequence… then the sector that had a nice run up, gives back a portion of the gains. We no longer have a tax problem because we never locked in the gain. Taxes should be viewed as secondary.

   Commissions… well Zecco makes sense for as long as they keep it free. That will probably change at some point. I think the same thinking that applies to re-balancing should apply here. In my case, clients don’t pay commissions, its all included in the wrap fee.

   At the end of the day, re-balancing is the way to go. The frequency is up to you. I prefer twice a year, although once may work for many… a concession to those worried about taxes and commissions:)

   Comment by CHM @ chancefavors — Dec 6th 2007 @ 4:08 pm

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