Managing an investment portfolio requires careful consideration of its mix of assets and risk management strategy. Over time, it also requires ongoing maintenance through the process of rebalancing, which involves periodically adjusting a portfolio’s asset allocation by buying and selling assets to maintain risk and return settings.

There are multiple strategies available when undertaking rebalancing, and investors will also need to consider any potential tax considerations, however, rebalancing helps ensure a portfolio remains ‘fit for purpose’ to meet an investors goal.

Portfolio Rebalancing Strategies

• Threshold-Based: Establishing predetermined thresholds for asset allocation can trigger rebalancing if a portfolio deviates significantly from the target allocation. This approach ensures that the portfolio remains aligned with the investor’s risk tolerance and investment objectives. This method allows investors to take advantage of market trends and strategically adjust their portfolios to capitalise on opportunities while managing risk.

• Time-Based: Implementing a regular schedule for rebalancing, such as quarterly or annually, can help investors maintain portfolio alignment without having to react to short-term market fluctuations. This approach provides discipline and reduces emotional decision-making in response to market volatility. It also helps ensure a portfolio does not become too heavily weighted in certain assets due to market fluctuations. By rebalancing on a regular schedule, investors can maintain their desired risk profile and potentially enhance long-term returns.

• Strategic: This involves adjusting a portfolio based on changes in market conditions or long-term investment objectives. This approach takes a more holistic view of a portfolio and considers factors such as economic trends, sector performance, and overall market outlook. By strategically rebalancing a portfolio, investors can position themselves for better risk-adjusted returns over the long term.

• Performance-based: A process that monitors the performance of individual assets within a portfolio and adjusts based on relative performance. Assets that have underperformed may be sold to realise losses, while assets that have outperformed may be trimmed to lock in gains. By systematically reviewing and rebalancing based on performance metrics, investors can optimise a portfolio’s returns and manage downside risk.

 Tax-Efficient Rebalancing Considerations

When rebalancing a portfolio, investors should consider the tax implications of buying and selling assets. Tax-efficient rebalancing involves prioritising selling assets with minimal tax consequences, such as those held for over a year to qualify for long-term capital gains rates. Strategies can include:

• Capital Losses: One of the most common tax efficient strategies is to sell investments that have experienced losses to offset capital gains. By realising losses, investors can reduce their taxable income for the year and potentially carry forward excess losses to offset future gains.

• Tax-Loss Selling on Underperforming Stocks: Investors can strategically sell underperforming stocks to realise losses and potentially reinvest their capital into similar securities to maintain exposure to a particular sector or industry.

• Dividend Income: Another strategy involves timing the receipt of dividends to minimise tax impact. By receiving dividends at a time when overall income is lower, investors can reduce their tax liability on dividend income.

• Tax-Gain Harvesting: Involves selling investments at a profit to utilise any available capital losses contained in a portfolio. When rebalancing an investment portfolio, tax gain harvesting and capital loss offsets can be used to sell overperforming assets to maximise gains and rebalance allocations.

Rebalancing methodologies play an important role in managing stock portfolios effectively. By employing a systematic approach to rebalancing, investors can maintain their desired risk and return profiles, capitalise on market opportunities, and adapt to changing market conditions. Whether through time-based, threshold-based, strategic, or performance-based rebalancing, investors can enhance the overall performance of a share portfolio.

An individual investor’s tax circumstances should also be taken into account when approaching rebalancing. By strategically realising losses, timing dividend income, and rebalancing a portfolio based on predetermined criteria, investors can achieve their financial goals while minimising tax liabilities. It is crucial for investors to work closely with financial advisors and tax professionals to develop personalised strategies that align with their unique circumstances and investment objectives. Through careful planning and execution, investors can navigate the complexities of taxation laws and capital markets to build a tax-efficient and well-balanced stock portfolio.

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Important Information

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB recommends that you consider any relevant disclosure documents and seek independent financial and taxation advice before acting on any information in this article. Past performance is not necessarily indicative of future results. 

No warranty is made as to the accuracy, reliability or completeness of the information. Examples are illustrative only. To the extent permitted by law, neither NAB or any of its related entities accept liability to any person for loss or damage arising from the use of this information. ©2024 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.