Only buy to rebalance, never sell?

[Sam Brazil]

Let's assume you're in your earning years with enough disposable income that whenever your PP hits a rebalance band, you always have the choice to either sell the overweight asset and reallocate vs. divert your some of your disposable income to buy more of the  underweight asset. Which is preferable in a non tax-advantaged account?

If you only buy to rebalance, are you missing out on the opportunity to lock in volatility gains?

On the other hand, if you sell to rebalance, you're locking in volatility gains, but you're also getting hit with taxes (often at regular income rate).

What is the best way to think about this?

[Greg]

From a standard PP perspective, there are a couple of things that need to be clarified to answer your question:

1.) Are you higher than 25% in your cash-category within your PP?
2.) If you're not higher than 25% in the PP, do you have cash outside of the PP you can use to rebalance into your PP?

If you're able to answer that yes you do have higher than 25%, then I don't see any issue of rebalancing this way.

Let's say your stocks are high but aren't reaching a rebalancing band yet and gold is at rebalancing band 15%. You either rebalance everything and take the tax hit or only rebalance the minimal needed to avoid taxes. You just have to weigh then the costs for rebalancing for your personally (federal, state, etc.) versus the probability that the appreciated assets you don't sell down could fall at any moment and perhaps defeat the whole purpose of your tax savings in the first place.

Sometimes it's nicer to go with the devil you know (taxes), versus the devil you don't (market has sho gone crazy).

https://www.youtube.com/watch?v=oGKUjcESCcU <-- Three Stooges Clip (0:14)

[Sam Brazil]

From a standard PP perspective, there are a couple of things that need to be clarified to answer your question:

1.) Are you higher than 25% in your cash-category within your PP?
2.) If you're not higher than 25% in the PP, do you have cash outside of the PP you can use to rebalance into your PP?

I'm assuming #2 in the question. That you have cash outside the PP that you don't normally put into the PP, or that you spend on other things, but for rebalancing a lower band asset, you could divert the cash to the PP to rebalance.

[Sam Brazil]

You just have to weigh then the costs for rebalancing for your personally (federal, state, etc.) versus the probability that the appreciated assets you don't sell down could fall at any moment and perhaps defeat the whole purpose of your tax savings in the first place.

I think some of the data I've seen here shows that a lot of the PP's gains historically have come from locking in gains at the high rebalance bands, so if that's true, then long term the probability is that you're better off selling? I suppose you need to know two things to know for sure in a model:

- Your personal regular income tax rate
- Historical % of PP gains that come from locking in upper band gains

[Greg]

- Historical % of PP gains that come from locking in upper band gains

Yep. This has to deal with momentum investing I believe. Our resident guru on this would be MachineGhost. I'm normally myself more of the camp that lately I've been more cash heavy and just rearrange where I put new cash if an asset is lagging.

[KevinW]

This is similar to the "buy the lagging asset" strategy, which has been discussed previously.

I'm not sure I understand the scenario here --- so the investor has a supply of cash that they could invest in the PP to simplify re-balancing, but would prefer not too? I don't know many people who think that way. I don't think my DW would appreciate it if I raided the vacation fund in order to avoid a $7.95 sell commission (or whatever).

Anyway, any policy that maintains the 15/35 bands and keeps transaction costs within reason seems to work alright. Personally I prefer the plain-vanilla policy of routing all inflows and outflows through the cash allocation, and rebalancing the other assets only as needed. It removes all judgement from the process and eliminates a reason to look at portfolio balances. But variations on buy-the-lagging-asset work too.

[Sam Brazil]

This is similar to the "buy the lagging asset" strategy, which has been discussed previously.

I'm not sure I understand the scenario here --- so the investor has a supply of cash that they could invest in the PP to simplify re-balancing, but would prefer not too? I don't know many people who think that way. I don't think my DW would appreciate it if I raided the vacation fund in order to avoid a $7.95 sell commission (or whatever).

Anyway, any policy that maintains the 15/35 bands and keeps transaction costs within reason seems to work alright. Personally I prefer the plain-vanilla policy of routing all inflows and outflows through the cash allocation, and rebalancing the other assets only as needed. It removes all judgement from the process and eliminates a reason to look at portfolio balances. But variations on buy-the-lagging-asset work too.

We allocate a certain % of our income to investments and a certain % to fun (discretionary). So, yes, we could decide to spend the discretionary on investments.

[lordmetroid]

I am saving my incomming salary and dividends earning in a buffer account which I use up and purchase all assets once a year to rebalance. Better to not tax more than absolutely necessary by selling iof one can avoid it.

[Sam Brazil]

I am saving my incomming salary and dividends earning in a buffer account which I use up and purchase all assets once a year to rebalance. Better to not tax more than absolutely necessary by selling iof one can avoid it.

Right, but that lack of selling at highs comes at a cost of locking in volatility gains...so I suppose the outstanding question is how does one net out ahead? By locking in volatility gains or by avoiding taxes from locking in volatility gains?

*fingers crossed that a backtesting pro chimes in on this thread

[Stewardship]

Right, but that lack of selling at highs comes at a cost of locking in volatility gains...so I suppose the outstanding question is how does one net out ahead? By locking in volatility gains or by avoiding taxes from locking in volatility gains?

*fingers crossed that a backtesting pro chimes in on this thread

There is no "cost of locking in volatility gains."  If you have a way to keep your portfolio balanced while avoiding taxes on sales, then go for it.  Anything beyond that would be an attempt to beat the market (which isn't recommended.)

[lordmetroid]

I am saving my incomming salary and dividends earning in a buffer account which I use up and purchase all assets once a year to rebalance. Better to not tax more than absolutely necessary by selling iof one can avoid it.

Right, but that lack of selling at highs comes at a cost of locking in volatility gains...so I suppose the outstanding question is how does one net out ahead? By locking in volatility gains or by avoiding taxes from locking in volatility gains?

*fingers crossed that a backtesting pro chimes in on this thread

No, it doesn't matter. If I had a tax-exempt account and I would first sell and then repurchase to reset to 25% in each asset class or if I would simply buy to have 25% in each asset class, I would have the same amount invested in either case.

In a taxed account however, if I sell anything I would have to pay 30% capital gains taxes in Sweden so if I would sell and then buy I would have less value in total. I prefer to keep as high value as possible.