Value portfolios are low maintenance, not “no maintenance.”
While value investing along a buy-and-hold philosophy involves picking stocks from established companies with solid financial footing and keeping them over years or even decades, a value portfolio should be rebalanced to keep original asset allocation plans in place.
What is rebalancing?
Let’s say you started investing with asset allocations of a simple 80/20 - 80 percent equities and 20 percent bonds. Because these investment options can rise or fall in value and increase in percentage due to dividend reinvestment plans, that 80/20 ratio will not stay at that level.
Your stocks might rise to 85% of your portfolio’s worth, and your bonds might fall in value. Now you are at 85/15.
Rebalancing returns a portfolio to those original asset allocation goals through buying and selling stocks, exchange-traded funds and bonds.
How often should you rebalance?
The good news is that rebalancing isn’t something you need to do often. Rebalancing should be done yearly, twice a year or quarterly, and then only if it is needed. If asset allocations are still in the same ratio as planned, then no rebalancing is needed.
This makes rebalancing a low-maintenance move that could have a big payoff over time. It might take less than an hour, depending on research and how many securities you buy and sell in the rebalancing process.
Since we’re at the start of a new year, January is a great time to check asset allocation percentages against original goals. At that point, you can either rebalance to achieve that original goal or reconsider that goal and whether you want to stick with it.
Rebalancing considerations
When rebalancing an investment portfolio, here are a few things to keep in mind.
Taking Profits
When you sell shares of stocks that have risen in value, you are taking profits off the table, securing your gains. Otherwise, your profits can rise and fall with the fortunes of a particular stock or ETF.
Taxes
Taxes are a fact of life when selling stocks that have made gains. Tax-loss harvesting can offset the impact of taxes on rebalancing. This involves selling some securities at a loss while you sell other securities for a profit. Ideally, you’d come out even.
However, wash sales – selling an asset at a loss to dodge tax liability and then repurchasing that same security within 30 days – are not allowed.
You can also add new contributions to buy assets as a way to offset capital gains taxes. Dividends and bond interest payments from existing investments can also be used to rebalance a portfolio.
Capital gains taxes may not be a worry for everyone, though. Those who earn less than $40,000 as single filers or $80,000 filing jointly won’t owe anything on capital gains, so they won’t have to worry about tax-loss harvesting.
Revisit your goals
In rebalancing, transaction costs and taxes should be weighed against the importance of sticking to asset allocation goals. The best idea is to start the year by revisiting value investing goals and deciding if asset allocation changes are needed.
