We all should rebalance our portfolios at least annually or when they deviate from our desired asset allocation by a set percentage. I know, I know … portfolio rebalancing is right up there with pulling out the refrigerator and cleaning behind it. However, may I propose that rebalancing your portfolio is much more financially rewarding from a risk reduction perspective than one might imagine.

Now that we are entering our eleventh year of a bull market, an individual’s stock allocation could be off by more than 20% from their original 2009 asset allocation. For example, if your asset allocation in 2009 was 50% stock and 50% bonds, your stock exposure could exceed 60% or even 70% stock at this point (if you have not been rebalancing along the way). And, if you are on the cusp of entering retirement, this level of stock exposure is just too high for most investors.

If this sounds familiar, then the question you should be asking yourself is not “if” the stock market will experience a correction, but “when.” Since a decline in the stock market is inevitable at some point in the future, it then becomes a question about your sequence of returns risk (i.e., the order of your annual investment returns and withdrawals) and do these sequence of returns forecast a statistically successful retirement. Stated another way, if your stock allocation is too high and you experience a significant market decline in the early years of your retirement, you may be going back to work. Yuck.

With the before mentioned premise in mind, some folks might still balk at rebalancing because they are worried about triggering tax consequences. As such, here are some ways to rebalance while minimizing tax consequences:

Rebalance inside of your tax advantaged accounts first (think IRAs and your 401k) because these trades will not trigger taxable events;
If you are still directing money into your portfolio, use the “new” money to purchase additional shares of your underweight asset class(es);
If you are subject to a Required Minimum Distribution (RMD), use the RMD to sell assets from the appreciated or overweight asset class(es);
Rebalance by selling assets with a high cost basis, thereby reducing your tax liability; and/or
Gift low cost basis assets to a charity, thereby removing these high capital gain assets from your portfolio while receiving the full appreciated value as a deductible donation.

If you have question about rebalancing your portfolio, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

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David L. Hogans, Esq. is an author and the founder of Intelligent Investing, Inc., a registered investment advisor firm located in Albuquerque, NM. He earned his Bachelor of Science in Chemical Engineering (ChE) from Virginia Tech and his Juris Doctorate (JD) from the University of Dayton. Mr. Hogans is licensed to practice law in the states of Virginia and New Mexico, as well as, before the Federal Patent Bar. For more information about Mr. Hogans and his firm please see his filing with the Securities and Exchange Commission (SEC) (https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=602988).