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:)

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