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Rebalancing your portfolio is supposed to be for managing risk.
So you trim off the excess from the winners and you buy into those that have not performed quite so well so that when they DO start performing, you will make money.

I understand this. Take profits. Invest those profits into lower-cost parts of your portfolio to stay in balance.

But what if you are now retired and living (primarily) off your investments? You must sell some shares in order to live. If you are to keep your portfolio in balance, you must trim off the winners. But since you will have to live on the funds you trim, you will not be able to put that money back into the current under-performers in anticipation of them picking up steam in future.

So what to do?
If you are living off the funds -- do you sell your winners to stay in balance? Or do you sell the losers, allowing your portfolio to get completely out of whack?

Or, do you forget completely about re-balancing and just sell those with long-term gains no matter if they are stellar performers or not?

This is confusing.
Maybe you should just take a little across the board...
And then treat re-balancing as a whole separate issue?

Did I just solve my own problem?

AM
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Perhaps you are making the problem larger than it really is.
Keeping a portfolio balanced to your target allocations is very important. Sometimes it may stay in balance without specific corrections. Other times it may get out of balance. You can rebalance in one of three ways:
(1) Add more money to the underperforming asset.
(2) Take money from the overperforming asset.
(3) Move money within the portfolio from the overperforming assets into the underperforming asset.

If you are living off the portfolio and are not adding new money, option (1) is not available to you therefore you have a choice between options (2) and (3). Do whichever is the easiest keeping in mind transaction costs and tax implications.
I think I would do option (2) and if the portfolio were still out of balance use option (3) if necessary.

Bob
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Perhaps you are making the problem larger than it really is.
Keeping a portfolio balanced to your target allocations is very important. Sometimes it may stay in balance without specific corrections. Other times it may get out of balance. You can rebalance in one of three ways:
(1) Add more money to the underperforming asset.
(2) Take money from the overperforming asset.
(3) Move money within the portfolio from the overperforming assets into the underperforming asset.

If you are living off the portfolio and are not adding new money, option (1) is not available to you therefore you have a choice between options (2) and (3). Do whichever is the easiest keeping in mind transaction costs and tax implications.
I think I would do option (2) and if the portfolio were still out of balance use option (3) if necessary.

Bob

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Thanks so much for your answer.
Can you tell me why you would do option (2) rather than taking equally across the board from winners and those that have under-performed? (I'm thinking of the cap gains taxes being greater from the high-performers)

AM
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This is confusing.
Maybe you should just take a little across the board...
And then treat re-balancing as a whole separate issue?

Did I just solve my own problem?

AM


My portfolio is well balanced. I have more than enough cash to cover monthly MRD withdrawals which go from my IRA to my Trust account. I have an amount of cash in my Trust account to pay for income and emergencies. Normally I take about 4% withdrawals, though at my age I could take more. However, because of the market downturn, I am being conservative about how much I withdraw.

At this point, I do not need to sell off any equities for income. If that should happen, funds would be withdrawn from mutual funds, not selling off individual stocks. Most of my stocks bear dividends which go into the cash pile, except for mutual fund dividends which go to purchase additional units. If I sell stocks, I sell losers, not add to them in hopes that they may recover. I buy good stocks that give dividends and either buy more or buy something new.

My portfolio is a mix of the following:

Domestic Stocks
57.90%
Foreign Stocks
11.39%
Bonds
18.86%
Short-term
10.76%
Unknown
0.03%
Other
1.06%

Portfolios would be considered a Large Blend style following the Wilshire 5000 index, and to conserve capitol. Volatility is average. This has so far worked very well. I am usually able to buy or do what I want (within reason) and yet my spending has not decreased the value of my portfolios. Like everyone else in the market, my portfolio is worth less than last year. Most of us have been through the ups and downs of the market.

I cannot tell you what to do, but this is what I do.

~Birgit
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his is confusing.
Maybe you should just take a little across the board...
And then treat re-balancing as a whole separate issue?


Set things up so you make enough in dividends and interest to cover as much of your life style as possible, preferably all of it of course. Don't forget to include your social security in the calculations (if you feel that social security will not be done away with by the govt.)

Adjust your standard of living to accomplish the things that you can afford to accomplish.
Ted
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