Buying and selling securities to keep your investment allocation on track can be costly. Short-term gains are taxed just like ordinary income (up to 39.6%) while long-term gains are taxed at a much lower rate (15% for most people). By avoiding short-term gains, you can keep as much as 20% more of the gains your portfolio generates. We aim to minimize short-term gains by rebalancing once every 366 days. Our research and back-testing have showed that rebalancing annually improves your after-tax returns. Vanguard estimates that rebalancing annually adds 0.35% of performance vs buy and hold strategies. Click here for more information.
How it works: Buy Low, Sell High
Rebalancing annually forces you to sell a portion of those positions that have performed the best and buy more of those that have done the worst. It might seem counter intuitive to sell your best performing position, but our research has found that this process produces better long-term results.
Keep in mind, it’s rare to have the same investment in a portfolio perform the best year-after-year. It’s far more common for an investment that performed poorly last year, to become next year’s best performer. Rebalancing annually, forces you to sell some of your appreciated positions (selling high) and buying more of those positions that performed poorly (buying low).