Rebalancing can be child's play. The concept is simple. Sell part of your assets that are overweighted (the boy on the seesaw). Buy an equal amount of underweighted assets (the girl). However, rebalancing gets hard if there are extra kids (assets) on the seesaw or several seesaws (accounts) to deal with simultaneously. 

Easy

Specify targets for the percentage of each asset or asset class in your portfolio. Rebalance by selling enough of each asset that is above its target to bring its percentage back to target. Then use the proceeds to buy assets that are below target to bring them up to their targets. Your portfolio will again be balanced, except for the impact sales commissions.

The case of a single individual account with just a few asset classes (e.g., one domestic stock fund, one foreign stock fund and one bond fund) requires only basic arithmetic. A spreadsheet makes the problem easy even with many asset classes.

Not So Easy

It gets complicated when you have more than one fund in a given asset class. For example, you might have two foreign stock funds.  You could sell both funds in their overall proportion if your foreign asset class is above target. The sales commission would be higher than if you sold only one of them. Selling one is okay because the two funds are in the same asset class. As the number of asset classes and multiple assets in each class increases, the not-so-easy rebalancing gets harder to do right.

Capital gains in a taxable account adds another facet to rebalancing. Ideally your rebalancing calculation will include this effect. Keep in mind that gains (or losses) can be short or long term. Also, wash sale restrictions could impact your rebalancing calculations.

Hard

Rebalancing gets hard when you have multiple accounts, especially with a mix of taxable and tax-advantaged accounts. Rebalancing accounts individually almost guarantees that your total rebalancing cost (commissions and taxes) will be greater than if rebalancing is done across the overall portfolio. What you want to do is find the best combination of what to sell and what to buy. This is an optimization problem and its pretty hard. It gets much harder when you realize that your buy/sell decisions should be done for each tax lot.

The reason for solving the hard optimization problem is simple. The "answer" to this problem will reduce your rebalancing cost compared with simpler alternatives.

Professional Rebalancing Software

Investment advisors often use commercially available software to rebalance their client's accounts. Sometimes this software is integrated into a larger system used by the advisor. Stand alone rebalancing software is also available. It's expensive. The annual license for a small advisory firm is likely to be around $5000.  Prices increase as the firms "assets under management" get larger. These costs are ultimately paid by you, the customer. It's all part of the management fee charged by the advisor.

Consumer Rebalancing Software

There was no such software. Until now. That changed upon the release of BalancingAct -- Investment Portfolio Rebalancing for the rest of us.  BalancingAct transforms that "hard" problem into one that is easy. The tricky math details are built into the software. All of the issues described for the hard case are addressed by BalancingAct.

Here is the information you enter:

  • Income and capital gains tax rates
  • Asset class targets, as a percentage
  • Account type (taxable, IRA, etc.) for each account
  • Custodian for each account (used to calculate commissions)
  • For each asset (stock, bond, fund) enter:
    • Ticker symbol
    • Date acquired
    • Number of shares
    • Cost basis
    • Asset class
    • Asset type

Updated prices are obtained from online sources. Then click one button to calculate the required trades.  Execute those trades in each individual account.

A database is retained on your computer so that subsequent rebalancing is even easier. Simply update items that have changed. Security of your private information is important. Except for downloading stock quotes, all calculations and data remain on your system. You have total control of your private information.

Remember, at StateSpaceTech we have a simple focus. "Build software that enables real people to achieve expert results." You can rebalance like an expert with BalancingAct.

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