Portfolio rebalancing is the process of realigning asset allocation weights to target levels, selling assets that have appreciated and buying those that have declined. This contrarian approach systematically enforces buying low and selling high.
Several approaches to rebalancing exist, each with advantages in different contexts. Calendar rebalancing occurs at predetermined intervals, while threshold rebalancing triggers action when allocations deviate from targets by a specified percentage.
Effective rebalancing requires attention to transaction costs, tax implications, and cash flow timing. Tax-loss harvesting opportunities may arise during rebalancing, particularly in taxable accounts. Asset location strategies further optimize after-tax returns.
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