The Personal Finance Podcast - Should You Rebalance Your Portfolio (The Answer May Surprise You!)

Episode Date: August 30, 2023

In this episode of the Personal Finance Podcast, we’re going to talk about whether you should rebalance your portfolio and my answer may surprise you. How Andrew Can Help You:  Join The Master Money Newsletter where you will become smarter with your money in 5 minutes or less per week Here! Learn to invest by joining  Index Fund Pro! This is Andrew’s course teaching you how to invest!  Watch The Master Money Youtube Channel!  Ask Andrew a question on Instagram or TikTok.  Learn how to get out of Debt by joining our Free Course  Leave Feedback or Episode Requests here.  Thanks to Our Amazing Sponsors for supporting The Personal Finance Podcast. Chime: Start your credit journey with Chime. Sign-up takes only two minutes and doesn’t affect your credit score. Get started at chime.com/ Shopify: Shopify makes it so easy to sell. Sign up for a one-dollar-per-month trial period at  shopify.com/pfp Policygenius: This is where I got my term life insurance. Policygenius is made so easy. To get your term policy go to policygenius.com and make sure your loved ones are safe. Factor 75: Head to factormeals.com/pfp50 and use code pfp50 to get 50% off your first box. These are amazingly easy and nutritious meals. Delete Me: Go to joindeleteme.com/PFP and use promo code PFP you’ll be able to save 20% off your DeleteMe subscription! Protect yourself online! Indeed: Start hiring NOW with a SEVENTY-FIVE DOLLAR SPONSORED JOB CREDIT to upgrade your job post at Indeed.com/personalfinance Monarch Money: Get an extended 30 day free trial at monarchmoney/pfp .  Links Mentioned in This Episode:  William Bernstein Relevant Episodes: How to Find the Perfect Side-Hustle (Plus The 4 Types of Passive Income!) with Nick Loper How to Protect Your Wealth and Assets With a Will The Complete Breakdown of The 2-Fund Portfolio (The Warren Buffett Portfolio) How to Build Your Index Fund Portfolio (Choose The Best Asset Allocation for You) Connect With Andrew on Social Media:  Instagram  TikTok Twitter  Master Money Website  Master Money Youtube Channel   Free Guides:   The Stairway to Wealth: The Order of Operations for your Money  How to Negotiate Your Salary  The 75 Day Money Challenge  Get out Of Debt Fast  Take the Money Personality Quiz Learn more about your ad choices. Visit megaphone.fm/adchoices

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Find your advisor at IG Private Wealth.com. On this episode of the personal finance podcast, should you rebalance your portfolio? And my answer may surprise you. What's up, everybody? And welcome to the personal finance podcast. I'm your host, Andrew founder of mastermoney.com. And today on the personal finance podcast, we're going to be talking about rebalancing your portfolio. If you guys have any questions, make sure to hit this up on Instagram, TikTok, Twitter,

at Master Money Co and follow us on Spotify, Apple Podcasts, or whatever podcast player, you love listening to this podcast on. And if you want to help out the show, consider leaving a five-star rating and review on Apple Podcasts or Spotify. I cannot thank you guys enough for leaving those five-star ratings and reviews. We truly, truly appreciate that. And if you want to watch this, you can watch this on YouTube on the Andergen-Cola YouTube channel.

In addition, if you subscribe to that channel, we have a bunch of additional comments. content on that YouTube channel. We really, really break down portfolios and we go into specific investments as well. So if that is something that you are interested in, check out the Master Money YouTube channel. Now, today, we are going to be going through rebalancing your portfolio. And first, I'm going to talk through what rebalancing is at the top of the show here. And then I'm going to go into a bunch of different factors that you need to consider. I'm going to give the case for why you should not rebalance your portfolio. And I'm going to talk about some of the pros as to why maybe you should rebalance your portfolio. And so we are going to go dive deep into some different

studies and look at some different ways that you can rebalance your portfolio and some tax advantages it may have as well. So I'm excited for this episode because I think you guys can learn a lot. Now, this episode was actually created from a question that we got in on Instagram on how does rebalancing your portfolio impact compound interest and maybe some other factors. And then all the sudden, we were going to answer this question and realize, oh, there's a lot to talk about here when it comes to rebalancing. So making sure that you understand this concept is going to be really, really important for you going forward in Index Fund Pro, but we're going to dive even deeper in this episode, and we're going to talk about it for a longer period of time. So what is rebalancing?

If you've never heard of rebalancing your portfolio, you may be saying, what the heck is rebalancing? So rebalancing is actually a very simple concept. When you build out a portfolio, typically you want to build out your stock portfolio based on what is called your risk tolerance. And your risk tolerance is going to be how much stocks and or how much bonds you want in your portfolio based on your tolerance to when the market goes up and down. That's the simplest way to put it. Now, what do I really mean by that? What I mean by that is how do you react when the market takes a dip or goes down in value over time? Do you panic? Do you not like that feeling? Do you not like when the market goes down? and or are you someone who maybe even get slightly excited when the market goes down because you're buying stocks on sale?

Those are two very different risk profiles. And so each of those individual folks are going to have to buy different assets. So if you do not like when the market goes down, you don't like what is called volatility. I mean when the market goes up and down a lot of bumpy roads when it comes to investing, if you don't like that whatsoever because you don't like the feeling of the market going down, then maybe you want some more bonds in your portfolio. But if the market going up and down does not bother you at all, you have a financial education and you understand that this is just a very normal part of investing, then maybe you are more prone to a more risky,

and I put that in quotations, a more risky portfolio by adding more stocks to your portfolio. And there's no right or wrong answer here because you have to have the right portfolio built out for your personality and your risk tolerance. Otherwise, you're going to make mistakes. and that is one of the most important factors that most people don't talk about. You need the right asset allocation to avoid mistakes because emotions get involved when we invest. And the psychology behind investing is very emotional. So you have to control those emotions with your portfolio choices by making sure you have the right selections in your portfolio.

Now, long term, if you do get jittery and you do worry about your portfolio a lot, one thing I would tell you to do is look less at your portfolio. You don't need to be checking that bad boy every single day because short-term market fluctuations do not impact us as long-term investors. As long-term investors, we know what happens over the horizon down in the distance is that over time, usually investments go up over time. You can look at a stock market chart from 1929 until now, and you can see, hey, this thing has gone in one direction over that long period of time, and it's gone up. So if you ever are worried about that, look at the long time horizon and the long history. Go look at 1980 to now. Go look at 1990 to now. And you can see the stock market still goes in one

direction. Sure, it's going to have a really bumpy ride. You can look at 2007, for example, when we had the Great Recession, and you're going to see stocks are going to dip about 50% during that time frame. But this is a very normal thing that we need to make sure we understand going into this. So selecting your right asset allocation is going to be very, very important. Now, once you select that asset allocation, meaning the amount of stocks you have and the amount of bonds that you have in your portfolio, you want to make sure that you maintain that asset allocation because you chose it for a reason, right? Well, if you do want to do that, if you want to maintain that asset allocation, make sure it's the same year in, year out as you go throughout your working

career and you're building wealth, then you have to do what is called rebalancing. You have to rebalance your portfolio because what's going to happen is over time, stocks are typically going to become more of a higher weight in your portfolio if you do not rebalance. And bonds are going to be a lower rate because over time, typically, historically, stocks have gone up in value more and bonds have not appreciated as quickly as stocks have. So when that happens, your portfolio starts to get out of whack and you have to rebalance it to go back to the asset allocation you originally intended. So say, for example, you wanted a Warren Buffett portfolio.

What is a Warren Buffet portfolio? 90% stocks and 10% bonds. That is what he puts his family's money in. And so if you wanted something like a Warren Buffet portfolio, what's going to happen over time is if you do not rebalance that portfolio, that 90% stocks, 10% bonds will start to turn into 95% stocks and 5% bonds, which is out of whack of what you originally intended. So what you do is you sell some of the stock portfolio and buy more bonds to balance it back out.

That's why they call it rebalancing. So it's a very simple concept in theory, but understanding the background of asset allocation and how you need to construct your portfolio is very, very important. So I wanted to talk about that up top at the top of the show. Now, the question then becomes, and this is the biggest argument, is should you rebalance your portfolio? And so if that's something you're into, let's get into it.

Now, the first thing I want to get into is I'm actually going to talk about the case as to why maybe you should not rebalance your portfolio. Most people you talk to who are into this stuff, who are into the investing world, will say you need to rebalance, your portfolio. But what if that's actually not the case? Because if you can think about this, maybe you are selling some of your top dogs, your winners, and you are adding them to losers. And so I'm going to show you first what Jack Bogle talks about when it comes to rebalancing your portfolio. And if you don't know who Jack Bogle is, he is the founder of Vanguard. And he is

well known as the original inventor of index funds. And if you look at Jack Bogle, he wrote this book, and if you're watching on YouTube, I'm showing the book on the screen. He wrote this book called the little book of common sense investing. If you are brand new to investing, I would pick up this book. This book is a fantastic read for most people who are trying to understand passive investing in overall, which is index funds and ETFs. But in addition, this also gives you the philosophy behind it. And so this is a fantastic book for new investors, if you are brand new. We're going to talk about parts of this book actually in this episode. But in addition, I'm going to actually read this word for word. I know that's not the best, most entertaining thing in the world. But I'm going to read what he said,

word for word in a recent interview with Morningstar about rebalancing a portfolio. So they basically asked him what he feels about rebalancing. And he said, I am in a small minority on the idea of rebalancing. I don't think you need to do it. The data bear me out because the higher yielding asset is going to be stocks over the long term. That's the way the capital markets work. Not in every 10 year period or even for that matter every 25 year period. But the higher returning asset, you're getting rid of to go into a lower returning asset. So it dampens your returns. And the differences turn out to be, if you look at a 25 year periods, very, very small. And sometimes rebalancing improves your returns. Sometimes it makes them worse. So what he's saying here is that he is not really

that interest in rebalancing, A, because he thinks you are selling your winners and then you were buying your losers, which to him is counterintuitive over time, because it's a longer period of time. Now, some people will do this when they are individual investors because they are buying low and selling high. But in this instance, you're selling the appreciating asset, which can also have a taxable event, and you are buying the asset that is not doing as well. Now, in this book, the little book of common sense investing, like I said, fantastic book, check it out if you are brand new to investing. In this book, he goes even further talking about this because Vanguard did a bunch of different studies and Vanguard is amazing at doing. some of these studies when it comes to rebalancing. And so he talks about it in there. He says, we've just done a study for the New York Times on rebalancing. So the subject is fresher in my mind.

Fact, a 48% S&P 500, 16% small cap, 16% international, and 20% bond index over the past 20 years earns a 9.49% annual return without rebalancing in a 9.71% return if rebalanced annually. That's worth describing as noise and suggest that formulaic rebalancing with precision is not necessary. We also did an earlier study of 25-year periods beginning in 1826 using a 50-50 stock and bond portfolio and found that annual rebalancing won in 52% of the 179 periods. Also, it seems to me, noise. Interestingly, failing to rebalance never costs more than about 50 basis points. But when that failure added return, the gains were often in the 200 to 300 basis point range.

Doing nothing has lost small, but it has one big. And then he goes on to say, my personal conclusion, rebalancing is a personal choice, not a choice that statistics can validate. There's certainly nothing to matter with doing it, although I don't do it myself. But also, no reason to slavishly worry about small changes in equity ratio. Maybe, for example, if your 50% equity position grew to, say, 55% percent. to 60%. Basically, what he's saying here is that overall, rebalancing is a very personal choice, but really it does not make a huge impact over very long periods of time. And he looked at 25-year

periods, but then went all the way back to the 1800s as well to check out, really, does this make any impact whatsoever? And so what he's saying here is rebalancing means that you'll be selling winners, which is counterintuitive. And it also means that you'll have a lower allocation of stocks, which have outperformed bonds historically. Those are his two arguments against doing it, but really, if you do do it, in some cases, it has actually brought greater returns than in other cases. Now, diving deeper, I saw a video from Rob Berger, who, Rob Berger originally, he had a podcast called Do Roller, and his original podcast had a major impact on my investing philosophy when I was first learning how to invest, and he does not do that podcast anymore. Now he has a YouTube

channel and I highly recommend his YouTube channel if you're new to investing also or if you are a pro investor because he really does dive deep into some of this stuff and we're going to get him on the podcast. We are working on dates now. But he went back and looked at a 6040 portfolio using a tool called Portfolio Visualizer. And he went through a date range of from 1972 to 2021 using 60% stocks and 40% bonds. And he looked at how much $10,000 would grow over the course of this 49 years. So 1972 to 2021, he looked at how much $10,000 would grow. If you rebalanced annually, it grew to $984,910. But if you rebalance quarterly, it grew through $997,37. So if you rebalance quarterly, it had barely any dramatic increase whatsoever. It's probably not even worth the stress

to go through that every single quarter if you don't like rebalancing. So the difference between the two is about $13,000. So if you really want to make it. maximize your portfolio and you want to rebalance, that's what it looks like over there. However, if you did not rebalance your portfolio, and here is kind of one of the things that Jack Bogle is talking about here, if you did not rebalance, you ended up with $1,107,458. So really, you're looking about $200,000 difference based on that 50 year period. Now, this is only 150 year period, but based on that 50 year period with a 6040 portfolio. Now, that is not the end of the story. And that is not the end of the story, obviously, because if we think about this, if it's in a taxable account, rebalancing

can also trigger taxable events when you do something like this. So you've got to make sure that you are understanding the tax implications as well, which we are going to talk about later in this episode on how you can rebalance and not trigger those taxable events. A little bit of hack for you there. We're going to give you a couple of different hacks here on how you can do that. But that is something else that you need to consider if this is in a taxable account, should you rebalance and or do you need to make sure it is in tax advantage accounts to rebalance as well. So I'm going to give you a couple of different reasons on why you should maybe rebalance, although Jack Bogle is talking about here are some reasons why you should not

rebalance. He thinks it's just a kind of a waste of time for him personally and that it is a very personal decision. I'm going to give you some reasons on why maybe you want to consider rebalancing. And at the end of this episode, I'll tell you if I rebalance or not. So number one is if you picked that asset allocation for an inherent reason, you have an investing philosophy, You picked an asset allocation for a specific reason based on your risk tolerance, then really you may want to stick to that asset allocation because you had a philosophy and you want to stick to it over a long period of time. That is the number one reason.

Listen, our asset allocations are not always the most optimized and they're not always the most optimized because we are trying to control emotions, which is a bigger factor when it comes to your money. And this is what we try to talk about in this podcast a lot, is your psychology and your emotions. Controlling those two things is going to be imperative for you to make sure that you are actually being successful with your finances over the long term. So you got to control those two things. And so if you pick an asset allocation for a specific inherent reason, you need to stick to that asset allocation over time. Or if you don't really care, if you just picked it to have the original

asset allocation, you don't care if it drifts one way or the other, and you don't care about that whatsoever, then that's not as big of a deal. But if you care about it, you care about it. You that asset allocation, you want to keep that 6040 portfolio, you want that 70-30 portfolio, you picked it for a reason, you read something on the Bogleheads Reddit Forum or you did something along those lines, then you got to make sure that you stick to that asset allocation. Number two, in retirement, a 100% stock portfolio is risky. So in retirement, if you have a 100% stock portfolio, it is going to be more risky than having some bonds within that portfolio. because the more stocks you have, the higher the inherent risk.

Now, I personally am willing to take on that risk. So a large, large portion of my portfolio is stocks. Because I understand how stocks have worked over the past 100 years. And so for me, I have a larger allocation of stocks. For some of you, that is not going to be the same thing. Because you don't like when the market volatility is happening. You don't want that volatility to be happening in your portfolio to your specific dollars. You're brand new to investing.

There is no reason for you to have 100% stock allocation. if that is the case, if you're nervous about that stuff. So you've got to make sure that you're thinking through this as you go through this process. Having more bond exposure decreases your risk, and you also have fixed income in cash, which also provides additional stability. So that's something you've got to think about. Number three, this reduces your max drawdown. So, for example, if you invested $100 in a 6040 U.S. stock bond portfolio in 1960 and never

rebalance it again over the next 30 years, the worst point of your portfolio would be down about 30% from its highest value. So if no rebalancing, your portfolio would actually dip about 30% from its highest value. And this is the maximum drawdown over that 30 year period. But if you rebalanced your portfolio and made sure you stuck to that 6040 allocation, the lowest point your portfolio would go be 25% of the highest point. So what that means in simple terms is you will have a little bit less of a max drawdown, meaning your portfolio will decrease less in the bad times if you actually rebalance your portfolio. So it just decreases that volatility a little bit more. It's only a 5% differential. So if it's down 30% and it's down 25%, you're still going to be

sweating bullets if you worry about that stuff. But it will still decrease the amount that it goes down over time. Historically, that's what it's done. So it reduces that max drawdown of your portfolio, and allows you over time to just weather the storm a little bit more. And then another reason to rebalance, number four, is when markets change. So when markets change, your portfolio may need to change as well. Not doing so can lead to losses that you may not have expected. So for most people, I want you to pick an asset allocation and just kind of stick to it over time.

But for some people, when you see markets shift, maybe you don't want to have as much exposure to specific markets. So say, for example, there's some sort of crisis with small cap stocks. and you own a portfolio that owns, you know, the small cap index, a Vanguard small cap index fund or a Fidelity one or a Schwab one. And so you're holding that portfolio and there is a major crisis either looming or coming up. And those markets are going to shift. And so maybe you want to exit some of that small cap portfolio and move more money into some of the large cap portfolio so that you can weather that storm. Some people like to do stuff like that. That is not something I

personally do. But if you are interested in things like that and making sure your portfolio is weathering some of these storms and you want to protect it against market changes, then that may be another reason why you want to continue to rebalance your portfolio to keep it balanced exactly so that when those market shifts happen, you're balanced accordingly to your plan. And that is another reason to make that shift. Now the question then comes up. Well, if I am going to do one of those four things and one of those four reasons actually resonates with me personally, how often should you actually rebalance your portfolio. So the ideal frequency is not something that's very certain, and there's nobody that is correct on the ideal frequency. You can do it quarterly, and maybe, like we said, we showed the

previous example with Rob Berger, where you had an additional $13,000 if you did it quarterly. But that means you're rebalancing four times a year instead of one time a year. So over the course of 30 years, you are rebalancing 120 times instead of 30 times. So it's a lot more work to do that for that additional $13,000 just during that time frame. That's only one example with one portfolio. So is there an ideal time to do this? And Vanguard conducted analysis of the optimal rebalancing frequency for a 50-50 portfolio. And their research came back that there's really not much different in a portfolio if it's rebalanced monthly, if it's rebalanced quarterly or annually.

However, the frequency of rebalancing events and the associated costs rise considerably with more frequent adjustments. So Vanguard study came back and said costs are going to rise significantly. especially transaction costs. If you are doing things like buying Vanguard funds and Fidelity, for example, you're going to have transaction costs when it comes to index funds. You won't have those transaction costs if you buy ETFs. But when it comes to index funds, you may have some transaction costs.

So costs can significantly rise. Taxable events can significantly rise if you are doing that more frequently. So you've got to consider that when you go through this. Then William Bernstein's observation. So William Bernstein is a financial writer if you've never heard of him. And he came back and found no dominant rebound. period when he studied rebalancing frequencies between pairs of global equities. And basically, he came back and said specific timing of rebalancing isn't as crucial as ensuring

it is done periodically. So if you're trying to think of a timeframe of when you should rebalance, once a year, in my opinion, is going to be plenty for most people. A, you can just do it around tax time and just have a time a year or the end of the year or the beginning of the year. Just have a time of year when you are going to rebalance your portfolio if you are going to want to do this. And I just think it's, A, more efficient. So it saves you more time because you're doing it annually. You're only doing it 30 times of the course of 30 years instead of, like I said, if you're doing it quarterly, you're doing 120 different times. So it's more efficient. It saves you time. It also helps you during pack season because you can remember when you actually

did that specific event, because it only happens once a year. So your CPA may be asking you, hey, why did you do this with your portfolio? You could say, oh, that's just my annual rebalancing. I only do that once a year. And you can figure out the reasons exactly why you. do that. So it helps with tax implications. It helps with your time frame. And it helps with just making sure you're on par with your risk tolerance at that time. So you don't have to do something where you're just making some drastic decision based on what the markets are doing during that time. Instead, you're just doing it once a year and you're just kind of wading it out through the market as markets go up and down. Now, there are two other options that you have here on when you can

rebalance. One is you can just rebalance only when your target asset allocation strays by five or 10 percent. So some people do it this way. So say, for example, your target allocation is 60% stocks, 40% bonds. Well, once it strays past 65% stocks and 35% bonds, then maybe you rebalance and get it back, or you can do it by 10% or you can do it by 15%. It doesn't really matter. But if it strays by a certain percentage, then you do it. That is another way that you can make sure that you are rebalance. And sometimes that's going to be more frequent in some years. And some years, you may not even rebalance whatsoever. And so it's going to balance out that way. Or you can do it again, according to a set time frame, but only if your asset allocation has strayed by a certain percentage.

So you could do it yearly, but only if it's strayed by that 5 or 10%. If it has not strayed by that percent, then you just wait until the next year and then you do it that way. And you're going to rebalance even less frequently if you do it that way. I really like that idea because what's the point of rebalancing if it hasn't really strayed that much from your actual asset allocation. So making sure that you do it maybe annually, I like to. combination of the two, you can do it annually, but if it doesn't stray enough to make it really worth your time to rebalance your portfolio, then you can do it that way. So I really like that idea of rebalancing based on percentages. And if that percentage has not straight far,

then you can just go ahead and move on and wait until the next year. So I don't think you need to be rebalancing quarterly. I don't think you need to be doing it monthly for sure. And I just think that's just a waste of time for most situations when we look at the data here. Now, let's look at ways to rebalance your portfolio and avoid paying taxes. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be. That's where Indeed comes in.

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and there are some ways where you just do not have to pay taxes when you rebalance your portfolio. Because tax implications are going to be a major factor, especially if you were revaliener, balancing frequently. You really want to make sure that you are avoiding taxes. Now, the first one I'm to talk about is called the Accumulation Rebalance Strategy. And the name was created by Nick Majuli in the book, Just Keep Buying. If you've never read, Just Keep Buying, it's a fantastic book that came out last year and Nick came on this podcast talking about it. I highly recommend that episode. We will link it up in the show notes if you have not checked it out. But Nick has this accumulation rebalance strategy inside of his book that I think is a great, great option for some people who are trying to

reduce some of the taxable events that happens when it comes to their portfolio. So instead of making a sale. So selling your winners and then adding to your losers, what you can do, if you're in the accumulation phase of your life, is you can just buy more of the asset that is underperforming. So say, for example, you want a 70% stock, 30% bond portfolio, and all of a sudden it strays to 80% stocks and 20% bonds. What if you just started buying out the bonds with your investment money and you started buying out some of your bond portfolio until it gets up to 30% to balance it out. That way, you're not selling any assets and creating taxable events on your winners because if you sell your winners inside of a taxable brokerage account, you are going to be paying

capital gains tax on that money. And depending on how long you've held the asset, it's either going to be short-term capital gains, which you never want to be paying because it's a really high tax rate, and or you want to pay any long-term capital gains, which is either going to be 0%, 15% or 20% of your income based on how much money you make. So between those two things, you could just actually just buy up the losers. And this is much easier to do if you have a smaller portfolio. So if you have a portfolio that is small, this is much easier to do. It's a lot harder to do if you have a multi-million dollar portfolio because you're going to be buying bonds for a very long period of time to would make that adjustment. And stocks are going to continue to rise over time potentially and increase the

disparity of that gap. But this is something where if you are early on in your accumulation phase, it can be very good for you to be able to reduce that taxable event. And in addition, doing this would actually help you, Nick argues this, would help you actually reduce those drawdowns again we were just talking about earlier in this episode, and you would experience a smaller maximum drawdown in that portfolio if you do something like this. But like I said, larger portfolios,

it's going to be much more difficult to make this work. So if you have a million dollar portfolio or more, this is probably a lot more difficult of a strategy. You may have to do traditional rebalancing or some of these other options I'm going to talk about here. Now, the second option is if you are a charitable person and you love to give money away to causes you, That is one thing we truly believe here is that you need to be giving money in addition to building

wealth, especially as you start to accumulate wealth. Now, if you're just trying to get by paycheck to paycheck, I understand. But I love, and I've always done this even when I had no money, is I love giving money away to causes I believe in. And I truly believe building wealth, if everyone learned how to build wealth and they also gave, gave a portion of their income or gave when they felt inclined, it would truly make the world a better place. And this is one really, really cool thing that you can do. So if you are someone who loves giving money away or you are a charitable person, then this is something that you can definitely do is you can pair rebalancing with charitable contributions. So here's how it works. I'm going to explain how this works first because you can

donate some of your appreciating positions. So many investors currently review their portfolios to adjust for market conditions. And then rather than selling appreciated positions to rebalance your portfolio, what if you sold those appreciating positions and made them a charitable gift via something like a donor advised fund. Now, we're going to have a full entire episode on donor advised funds coming up in the near future because I really, really think there's some cool stuff that you can do with them. And it's a way that you can have charitable giving, saving on taxes. There's a lot of cool, cool benefits with that.

But if you do this, the potential benefits are you are eligible to take a tax deduction at the fair market value of the asset and eliminates capital gains tax and Medicare surtax. So between those two things, this allows you to reset your basis. on the equity position, as noted above, and reduce your vulnerability to stock market corrections. So, you can sell this asset. You can actually give it away in a donor advised fund. This is much easier in a donor advised fund. Daffy is a tool that you can utilize that if you're interested in donor advised funds. There's a bunch of them out there. Daffy's one. And you can go out there and you can actually give this asset away to a charity that you are interested in giving money away to.

And this will actually help you with your tax situation come tax time as well. So that is another great option for some people who are charitable client. Number three is you can actually pair rebalancing with tax loss harvesting. So there's a number of different ways. We'll do a full episode on this also, but there's a number of different ways that you can pair rebalancing with tax lost harvesting. So tax loss harvesting, if you don't know what that is, it is when your portfolio is down for a certain period of time. So you sell some of your portfolio in order to offset the gains of your portfolio. We'll do a full episode on it because we have a ton of, ton of thoughts on tax loss harvesting and tax gain harvesting as well. And then number four is you can also make sure that if you're

going to rebalance your portfolio, you're rebalancing your portfolio in your Roth accounts. Why does this matter? Why does it matter to rebalance your portfolio in your Roth accounts? Well, think about this for a second. When your Roth accounts have gains, the growth of your money is not taxed inside of a Roth because you already pay taxes when you put the money in. And so your money grows tax free and you can pull the money out tax free. So once the money's in there, nothing is getting taxed after you you get the money into your Roth account. So once it's inside of your Roth account, you already pay taxes on the money that you put in.

And so your money grows tax-free, and you can pull the money out, tax-free, meaning that you can start to rebalance in there as much as you want, and you're not going to be paying taxes on that money. So I'm starting to see, like, another reason why I love the Roth account, fantastic for stuff like this

is going to allow you to rebalance without having to worry about that. So if there's like a portion of your portfolio, the majority of your portfolio is in a Roth IRA, or a Roth 401k, then make sure if you want to rebalance, that's a great place to do it because you don't have the tax implications. So those are four different ways that you can avoid taxes when rebalancing your portfolio. I think some of those are some pretty cool ways that are going to help you save some money

on rebalancing if you are interested in rebalancing. Next, we're going to talk about ways to rebalance a portfolio. All right, so we are now diving into ways to rebalance a portfolio. And your boy is going to go into a couple of these so that you understand. some different ways. And I'll show you how to DIY rebalance your portfolio as well. So the first one is automatic portfolio rebalancing. So the best way to describe this is target date retirement funds. So if you invest in something like target date retirement funds, this is going to automatically rebalance your portfolio for you. So you don't even have to think about it or you don't have

to sweat about it. So that is one pro to target date retirement funds. And if you don't know what they are, those are the funds in your 401k or your traditional 401k or SEP that have the year in front of the portfolio and then it has target date retirement funds is typically what it says. So you can see something like it'll say 2060 target date retirement fund, whatever the advisor is. So it'll be like 2060 Vanguard target date retirement fund. And so when you look at these funds, I really like target date retirement index funds because it's index funds inside of a target date retirement fund. But when you look at these, first of all, they will help you rebalance your portfolio

over time. This is like the full proof way to invest is you just buy a target date retirement fund. Just make sure you're looking at what is called the expense ratio because that's how much paying and fees, and anything above 0.30 is going to be too high, in my opinion. So make sure you are monitoring those fees. You don't want to have really high fees in a target date retirement fund. And then what happens in those target date retirement funds is the glide path will kind of take that fund over time. It will adjust overtime to your age and where they think you need to be with your stock and bond portfolio. So it will actually adjust and change over time. But if you have a

higher risk tolerance, it doesn't, you don't need to put the actual year you're going to retire. If you have a higher risk tolerance, you can put the later years, and that'll have more stock allocation in that portfolio. Number two is Robo Advisor rebalancing. So there's a bunch of Robo advisors out there, Betterment, Wealthfront. There's a bunch of them out there that will actually rebalance your portfolio for you. And they'll actually fully automate this investment process. So they will actually rebalance your portfolio for you.

They will do tax loss harvesting for you, which I think is the biggest pro for robo advisors is the tax loss harvesting. And they will do all this stuff that will allow you to make sure that your portfolio is balanced. And so it does all the work for you, and then it just does it for a little bit of a higher fee than would be a Vanguard fund traditionally or a Fidelity Fund traditionally or Schwab, whatever. And so the price they typically charge is like 25 basis points or 0.25%, which is okay in most situations. So if you want to go with the Robo Advisor because you want that set it and forget a thing,

I have no problem with that. Sometimes you just got to make sure that they don't have a huge 1099 at the end of the year that they give you during tax time and make sure that you actually understand what. what they are doing with your portfolio instead of just doing all these different taxable events that you really don't need. So that is another thing. They charge fees and commissions. And so it's 0.25% is typically what it lands at. So then the third option is DIY rebalancing your portfolio. And this is the cheapest way to do it obviously is to do it yourself. You can also have your financial advisor doing it. But if you have assets under management and your financial advisor is charging a fee

for your assets under management like a one to two percent fee, you know I don't like that. So if you haven't heard that episode or those multitude of episodes that we talk about that, definitely check those out because it is millions of dollars that you are giving away. So how to DIY rebalance your portfolio? So the first thing you want to do is obviously review your asset allocation. And that is the number one thing. Make sure your asset allocation is on par. If it's not, you're going to look at your ideal asset allocation and figure out

what the current asset allocation is. And then you're going to buy and sell shares to rebalance your portfolio. It's actually a very simple process. And you can track this over time. in a spreadsheet or something like that if you want to, but you just buy and sell shares in your portfolio that's going to allow you to get that rebalance back to the asset allocation that you want.

So it's very simple to do with a spreadsheet. You can just put together the dollar amounts and it'll tell you percentages very easily. There's also a bunch of online calculators that you can use to be able to do that and DIY it. Really, it's just making sure you do the calculation, right? And the calculation is just a percentage. That's all it is.

So making sure you do it that way is pretty simple. Now, the final question, before we wrap this episode up is do I personally does Andrew rebalance his portfolio nothing like a little third person talk there so do I rebalance my portfolio personally I do not and the reason why I do not is I have a very high risk tolerance so my personal risk tolerance is extremely high at this current point in time I have a long time for money to compound still I am not really worried about market fluctuations whatsoever if the market does have a major fluctuation or a major impact. I will go back out there and work on earning more money to build up that portfolio again

because I have more time to do that. And so for me personally, I have a very high risk tolerance and I do not rebalance. Now, I tend to have a much higher asset allocation towards stocks than I would bonds. And so I have a higher risk profile when it comes to my investment portfolio. And so for me, there's not much to rebalance anyways because I have so much invested into a higher portion of stocks. Now, My bond side of my portfolio would be more so my cash, where I have like T bills, things like that. And so that is really like where my emergency fund is, that kind of stuff, or I bonds. That is where I have cash. So I consider that my less risky part of my portfolio is maintaining cash in my emergency fund in T bills,

in I bonds, in high yield savings accounts. Then when I'm investing my dollars, I have a larger allocation inside of stocks than I do inside of bonds. Now, if I do rebalance, I tend to do it, but I just buy more of one out. asset than the other. So I tend to do the Nick Majuli method where I just buy more of an asset. I don't actually sell winners and losers. Now, I do tax loss harvest. That's a different story. But rebalancing is not something that I am truly, truly doing much of. And then that is just a personal preference. That's the reason why if you rebalance, there is nothing wrong with that. Don't take this as you

should not rebalance because I don't think that at all. I think that you need to make sure you understand your personal preference. And there was a lot of things out there where people believe that they need to rebalance or they don't need to rebalance. And more power to you, I have nothing wrong with rebalancing. In fact, if the data came back and told me that rebalancing would help my return significantly, I would be rebalancing all day long. The reason why I don't do it is that the data, as it stands right now, the studies that I have gone into, and there's way more studies than even the ones I've talked about on this podcast. I've looked at all the studies and rebalancing has not made a major impact on my portfolio. And I don't care if my portfolio strays to a higher

stock asset allocation. Between those two things, those are the reasons why I don't rebalance. If you care that it strays to a higher stock asset allocation, you should probably rebalance because you got to make sure that the asset allocation is exactly what you want it to be. So no, I do not rebalance my portfolio, but it's for those reasons. It's because I have a very high risk tolerance. If there was a recession today in my portfolio got cut in half, I honestly wouldn't even lose a wink of sleep. Because I know what happens over the long term with markets and it just does not phase me anymore. At beginning, when I was a new investor, it definitely fazed me. And then as I started to continue my financial education over time, it doesn't phase me at all anymore. So that is the main thing about

rebalancing today. I hope you guys learned a ton about rebalancing. We worked really hard to put these episodes together for you guys. If you guys have any questions, make sure to ask me on any socials or if you're on the master money newsletter, which you definitely need to be, if you're not, then you can reply to any of those newsletters there. And I will answer some of your questions there as well. Thank you guys so much for listening to this episode. And thank you for investing in yourself because that's exactly what you're doing is you are investing in yourself and it is so powerful for you to listen to these episodes and listen to podcasts, read books, all these other things. It is going to change your life if you get a financial education and understand how money works.

And congratulations on doing that today. Thank you guys so much for listening. I truly appreciate each and every single one of you and we will see you on the next episode. Rosen lasagna, medium power, 15 minutes. Sounds like Ojo time. Let's play. Feel the fun with Play-Ojo, the online casino with all the latest slot and live casino games. What you win is yours to keep with no wagering requirements, instant payouts, and no minimum withdraws.

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