Portfolio Rebalancing: Save on transaction costs

Everyone should be re-balancing their retirement portfolios once per year. This normally involves the sale of part of one asset and the purchase of another. One little trick to save on transaction costs is to have your re-balance scheduled for when you expect to receive a tax refund you intend to invest.


Your portfolio is overweight in stocks. They did well this year and you need to move some money to your bonds portion to get things back in order. Lets say the amount you need to move is $2,000. Lets also say you are also expecting an income tax refund totaling $2,000. It is best to wait!

If you re-balance now and sell off $2,000 worth of stocks and reinvest it into bonds you could be paying transaction costs for the two trades. If your mutual funds are no transaction fee then this does not apply. Either way it is easier to wait on your tax refund and the invest the new monies appropriately to get you back into the proper asset mix. Less transactions means less record keeping and hassle on your part.

This strategy particularly works well if you are invest in ETF's or in mutual funds that cost you for each trade. Keeping our portfolios in balance is very important but we also need to minimize our transaction costs and possible tax consequences (if trading in a taxable account) whenever we can. Taxes would not apply to IRA or 401(k) accounts but transaction costs are levied on all types of accounts.

The less we spend in transaction costs the more money we can keep invested and growing for us for the years to come. Try to select investments that meet your needs with the least transaction costs associated with them. Lots of brokerage houses have long lists of no transaction fee mutual funds and free dividend reinvestment. A little research can save a lot of money!