Re-balance instantly or wait a little while?

[jason]

My stock market holdings are getting very close to 35% (34.84%) to be exact. Do most people re-balance the second they see it hit 35%? Or should I at least wait to see if it closes at 35%? And maybe wait a few days to see if it stays there or if it was just a fluke? Forgive me if there is already a thread on this - I couldn't find it. If I have to re-balance, taxes will be hefty as this is a non-taxable account, so I find the whole thing fairly upsetting . My stock holdings are up around 60% from where I started in mid-2013.
Thanks!
Jason

[ochotona]

Jason, quickly make a gift of appreciated stock to you favorite charity before year end! The capital gains problem goes away

[barrett]

If I have to re-balance, taxes will be hefty as this is a non-taxable account, so I find the whole thing fairly upsetting .

Don't forget that we are close to the end of a calendar year. You could look at selling a portion now and another whack after the first of the year. That way you would split up the gains over two calendar years and not pay the 2nd round of taxes until early 2019.

BTW, you meant to write that it's a "taxable" account, right? In a non-taxable account taxes are not a concern.

[dualstow]

, so I find the whole thing fairly upsetting

I hope you're joking, Jason. Until taxes are 100% of capital gains, I would think rebalancing out of a winner instead of just into a loser is a good thing.
Of course the choice is yours. If it were me, the fear of losing all these stock gains would be gnawing at me more than the tax bite.
But then again, I've already cheated and sold a bit of stock here and there for psychological purposes. (My pp equities are currently up 101% but only constitute 25% of my pp).
Well, you've got what appears to be good advice in the posts above.

I was just reading a Wall St Journal article with this advice:

The broadly simple answer, many financial experts say, is that taking some money off the table could make sense for anyone who needs it soon. But, they add, it might be a really bad idea for those who have a long-term investment horizon and are mainly just worried about another market correction.

source: ‘What to Consider Before You Dash Into Cash’, Michael Pollack

[Tortoise]

If you want to stay within the 15/35 rebalance bands without generating a taxable event, maybe you could just buy more of the other assets so that your stock allocation falls below 35%? (Assuming you have enough cash sitting around that's ready to invest, of course.)

[jason]

Oops, sorry, it's a taxable account. I didn't even think about the fact that it's especially not good to sell in December because if I wait 3 more weeks, I will have an entire year extra to pay the taxes. I'm really torn about this.

[ochotona]

Oops, sorry, it's a taxable account. I didn't even think about the fact that it's especially not good to sell in December because if I wait 3 more weeks, I will have an entire year extra to pay the taxes. I'm really torn about this.

It is all long-term capital gains? What's your capital gains rate?

[Hal]

You will never go broke taking a profit.

Remember what HB said about trying to time the market.
How would you feel if the market dropped between now and the end of the year? No one knows what is going to happen.

[jason]

Oops, sorry, it's a taxable account. I didn't even think about the fact that it's especially not good to sell in December because if I wait 3 more weeks, I will have an entire year extra to pay the taxes. I'm really torn about this.

It is all long-term capital gains? What's your capital gains rate?

Yes, it's all long term capital gains so I guess it would be taxed at 20%. I know I will likely need to rebalance soon but I was wondering if most people rebalance at the exact moment they hit 35% or 15%, or do people wait to see if it stays outside the bands for at least a day or two?

[buddtholomew]

Oops, sorry, it's a taxable account. I didn't even think about the fact that it's especially not good to sell in December because if I wait 3 more weeks, I will have an entire year extra to pay the taxes. I'm really torn about this.

It is all long-term capital gains? What's your capital gains rate?

Yes, it's all long term capital gains so I guess it would be taxed at 20%. I know I will likely need to rebalance soon but I was wondering if most people rebalance at the exact moment they hit 35% or 15%, or do people wait to see if it stays outside the bands for at least a day or two?

“A day or too.”
That can’t possibly make a difference in your decision to rebalance into a lagging asset.
I personally contribute to cash so buy the lagging asset when others outperform to stay within 15/35 bands.

[ochotona]

Jason,

Are you making $470,701 and over for married-filing-jointly? Is that why your long-term cap gains tax rate is 20%? If so, just be thankful that you have such a problem, rebalance your portfolio and pay the damn tax.

For people making below that, there is no 20% capital gains tax rate. Look at the table here.

https://www.nerdwallet.com/blog/taxes/c ... tax-rates/

If you make $75,900 or less married filing jointly, your long-term capital gains tax is ZERO. Above that, it's 15%, until you get to the no-sympathy range of $470,701 and over.

[rocketdog]

Another option: Sell an equal amount of whatever has gone down (I'm guessing gold?) to offset the gain in stocks. The loss on gold will offset the gain on stocks. Then, wait 31 days (to avoid the wash sale rule) and repurchase gold (or whatever you need to get back in balance). Consult a tax preparer if you're not sure how to do all this.

Of course, if you repurchase gold at its new lower level, then your cost basis will be lower and therefore if and when it goes back up again you will owe taxes on those gains when you sell/rebalance (unless you can find a way to offset them again against a loss in something else).

For more details on this strategy, search for "tax loss harvesting".

[barrett]

Jason,

Are you making $470,701 and over for married-filing-jointly? Is that why your long-term cap gains tax rate is 20%? If so, just be thankful that you have such a problem, rebalance your portfolio and pay the damn tax.

For people making below that, there is no 20% capital gains tax rate. Look at the table here.

https://www.nerdwallet.com/blog/taxes/c ... tax-rates/

If you make $75,900 or less married filing jointly, your long-term capital gains tax is ZERO. Above that, it's 15%, until you get to the no-sympathy range of $470,701 and over.

Ocho is, of course, right about all this, including the "no-sympathy range".

I just wanted to add that a lot of people don't appreciate what a plus it can be to hit retirement with a relatively high cost basis in taxable accounts. If one is planning to do significant Roth conversions from ages 59.5 to 70.5, being able to pull money from taxable to live on without getting hit with a lot of taxes is absolutely YUGE.

Jason, it could be to your long-term benefit to take some gains & pay some taxes at this point (depending on all kinds of factors that only you know).

[Kbg]

Jason,

I’ll bite.

Two options:

1. Stick a tight fitting moving average on the stock component, something like a month would work. Pull the trigger when your ETF/mutual fund closes below it. Advantage: If the market continues to go up you get a little bit of it. Disadvantage if it does so before the end of the year you have taxable event for this year.

2. Pull the trigger in January. Advantage: Guaranteed tax deferment. Disadvantage: The market goes straight down from here and you didn’t bank the profits you could have.

I assume you know your ~ tax bill if you pull the trigger on a rebalance. A little math will tell you exactly how far the stock market would need to go down before you really started to regret not rebalancing and paying the tax bill. Somewhere before that is when you definitely should pull the trigger.

However...seriously who knows what the market is going to do over a given period of time? Unless you do why wring your hands over it? As I’ve said umpteenth times on this board...rebalancing is first and foremost about risk control (and taxes in a taxable account).

Do the math, pick a “when this happens I’m rebalancing period”, then do it. The discipline and sticking to it will pay out far more over time than trying to time the market by a couple of days here or there.

[ochotona]

Buy some options for protection until January 2 sale?

[Kbg]

They are certainly cheap right now. However, December is usually one of the best months of the year historically and consistently. If it would help one sleep, as of the close on Friday the insurance cost to January 3 is .007 of your portfolio value.

[jason]

OK, I'm officially over 35% on stocks right now - 35.06% to be exact. Thanks for all the input. I'm leaning towards waiting until after January 1st to re-balance in order to defer the taxes. The question is, WWHD (what would Harry do)?

[jason]

Jason,

Are you making $470,701 and over for married-filing-jointly? Is that why your long-term cap gains tax rate is 20%? If so, just be thankful that you have such a problem, rebalance your portfolio and pay the damn tax.

For people making below that, there is no 20% capital gains tax rate. Look at the table here.

https://www.nerdwallet.com/blog/taxes/c ... tax-rates/

If you make $75,900 or less married filing jointly, your long-term capital gains tax is ZERO. Above that, it's 15%, until you get to the no-sympathy range of $470,701 and over.

Ocho is, of course, right about all this, including the "no-sympathy range".

I just wanted to add that a lot of people don't appreciate what a plus it can be to hit retirement with a relatively high cost basis in taxable accounts. If one is planning to do significant Roth conversions from ages 59.5 to 70.5, being able to pull money from taxable to live on without getting hit with a lot of taxes is absolutely YUGE.

Jason, it could be to your long-term benefit to take some gains & pay some taxes at this point (depending on all kinds of factors that only you know).

My annual income is around $250k per year including my typical dividends and interest on Treasuries. So I guess I'm at 15% for long term capital gains during a typical year. But if I do a major rebalancing, that could push me to 20% for long term capital gains right?

[buddtholomew]

OK, I'm officially over 35% on stocks right now - 35.06% to be exact. Thanks for all the input. I'm leaning towards waiting until after January 1st to re-balance in order to defer the taxes. The question is, WWHD (what would Harry do)?

Since you seem stressed on doing the right thing, sell a little now (perhaps down to 32% equities) and then reasses next year. Seems like a win-win to me.

[Kbg]

Assuming you aren’t selling today or haven’t sold yet, at this point I would go the trailing stop route. Ride the bull for as much as it will give you as taxes will now be pushed into 2018...and if you do this, pull the freaking trigger on the rebalance as soon as price closes below the moving average. All we are doing here is trying to get a little bit extra return. Risk profile is still the paramount concern.

[jason]

I did not pull the trigger in 2017 to re-balance. Now, in 2018, my stocks are not over 35% anymore. So should I wait until it hits 35% again before re-balancing? I know HB said to only check the account around once a year so if I had not been checking it, I would not have known it had temporarily moved over 35%. But Murphy's Law says that if I don't re-balance based on the fact that it did exceed 35% a couple of weeks ago, it will come back to bite me.

[dualstow]

{ self-censored. not very new yearsy }

[bedraggled]

By not rebalancing, and if the stocks are in a taxable account, it seems you avoided a taxable event- no Schedule D yet. That should be good. Also, commission costs were avoided. We all may be better if all our positions stayed at 34.9% through 2024. Just an idle thought for the new year.

[eufo]

I did not pull the trigger in 2017 to re-balance. Now, in 2018, my stocks are not over 35% anymore. So should I wait until it hits 35% again before re-balancing? I know HB said to only check the account around once a year so if I had not been checking it, I would not have known it had temporarily moved over 35%. But Murphy's Law says that if I don't re-balance based on the fact that it did exceed 35% a couple of weeks ago, it will come back to bite me.

There's not really a right or wrong answer here, so don't overthink it. I'm currently at 35% stocks, myself, but my desired allocation is 40%. So it's all a matter of perspective. You're hesitant to sell, while I'm hesitant to buy. I'm cash heavy and that helps me sleep at night. I'm willing to give up some gains for that feeling.

Given the state of things, if I were in your shoes I'd gladly sell since stocks have had such a nice run. It doesn't mean they won't keep going , however. The future's not ours to see... so do what feels right to you.