Question 1

What is portfolio rebalancing?

Accepted Answer

Portfolio rebalancing is the process of realigning the weightings of assets in your portfolio to maintain your desired asset allocation. Over time, as different assets grow at different rates, your actual allocation drifts from your target. Rebalancing involves selling overweight assets and buying underweight ones to restore balance.

Question 2

What is tax-efficient asset location?

Accepted Answer

Tax-efficient asset location means placing investments in the account type where they receive the most favorable tax treatment. Bonds and REITs (which generate ordinary income) are best held in tax-deferred accounts like Traditional IRAs. High-growth stocks belong in Roth accounts for tax-free growth. International funds work well in taxable accounts due to the foreign tax credit.

Question 3

How often should I rebalance my portfolio?

Accepted Answer

Most financial advisors recommend rebalancing once or twice per year, or whenever your allocation drifts more than 5% from your target. Over-rebalancing can increase transaction costs and tax consequences, while under-rebalancing lets risk drift unchecked. Using a threshold-based approach (rebalance only when drift exceeds your tolerance) is often the best strategy.

Question 4

What is the difference between age-based and three-fund portfolio strategies?

Accepted Answer

An age-based strategy (similar to target-date funds) automatically adjusts your stock/bond split based on your age, typically using the '110 minus age' rule for equity allocation, and may include REITs and cash. A three-fund portfolio uses just three asset classes — US stocks, international stocks, and US bonds — for simplicity and low cost, with the equity/bond split still adjustable by age.

PORTFOLIO REBALANCER

Your Portfolio

Current Allocation

Target Allocation

Rebalance Trades

Net Changes by Account