Extra Security For Your Federal Tax Return
May 1, 2026
By Bradley Miller
As we move through the year, I wanted to take a moment to discuss a fundamental practice that supports sound financial planning: portfolio rebalancing. It’s not a topic that generally garners a lot of discussion; however, it is an important tool in the background of your portfolio.
One of the many benefits of working with a financial advisor, such as those at TrustWell, is being able to outsource your investment emotions to us. You may have heard the old adage, “Buy low, sell high,” but this can be difficult to actually do in practice. In essence, you are selling or trimming an asset that has been performing well (taking gains off the table), and potentially buying an asset class that has underperformed. By using us as your financial advisor, we are focused on rebalancing your portfolio with discipline and confidence, knowing your long-term financial goals.
Markets are always moving. When equities (stocks) increase in value, this can expose you to higher risk and volatility within your portfolio unknowingly. Rebalancing is the mechanism we use to bring your portfolio back into alignment with your financial goals. With that said, each of our clients’ portfolios is unique, and the type of investment accounts that one has determines how aggressively we look to rebalance your portfolio.
Why Rebalancing Works in Your Favor:
- Risk Management: Rebalancing keeps your portfolio aligned with your target risk tolerance. By not rebalancing, a strong bull market in equities could leave you overexposed to stocks, making you vulnerable to larger losses in a downturn.
- Enforces Discipline: Rebalancing provides a systematic and disciplined, emotion-free approach: trim what has run up, add to what has lagged. It’s a natural counterweight to the herd mentality that causes so many investors to buy at peaks and sell at troughs.
- Prevents Portfolio Drift: Over time, asset classes perform differently, causing your portfolio to drift from its original intent. Within several years, a 60% stock/40% bond portfolio can become an 80% stock/20% bond portfolio simply due to market appreciation. Rebalancing corrects this drift and keeps your strategy on track.
- Psychological Comfort: Knowing your portfolio is being reviewed and rebalanced can help reduce anxiety, especially during volatile markets, as rebalancing helps to proactively manage risk.
Trade-offs to Keep in Mind:
- Tax implications: Selling appreciated assets in a taxable account at a gain can trigger capital gains taxes. The good news is that losses can be used to help offset gains. For clients with retirement accounts, we generally seek to rebalance or sell gains in these more tax-advantaged accounts, leaving sales in a taxable account as a last resort. Additionally, with clients who are adding funds to their portfolio, we are able to avoid portfolio sales and instead simply buy asset classes that may have lagged. Conversely, we seek to use interest and dividends from existing investments in order to purchase underweight securities, once again seeking to avoid sales for gains inside of taxable accounts.
- Disciplined Upside: One additional downside to rebalancing is that it may cap potential upside as your best-performing assets are being trimmed. With that said, we seek to let asset classes run up in value by allowing an acceptable drift percentage towards the upside before triggering a sale. We do not want to be quick to sell an asset just because it is “over-target”.
Key Considerations
| Factor | Implication |
| Account type | Rebalancing in tax-advantaged accounts (IRA, 401k) avoids capital gains taxes |
| Frequency | Threshold-based (e.g., ±5%) rebalancing tends to be more efficient than calendar-based |
| Method | Using new contributions to rebalance (“cash flow rebalancing”) can minimize selling and taxes |
| Investor age | Younger investors may tolerate more drift; those near or in retirement may benefit more from strict rebalancing |
Bottom Line:
Rebalancing is not about performance-chasing or market timing. It is a disciplined, risk-management tool. Done thoughtfully – with attention to taxes – it is one of the most reliable levers we have to keep your financial plan on track.
In working with our clients, we understand and focus on your long-term goals and ensure that your portfolio is consistently allocated to help achieve these goals across various stages of life.
One of the benefits of having a globally diversified portfolio is that in times where cash is needed, we have a variety of asset classes to tap into to provide our clients with that cash flow. For clients who have fixed income (bonds) in their portfolio, we may tap into these specific assets if stock prices are down. Conversely, if equity markets are up, we may use a cash need as an opportune time to rebalance the portfolio.
Ultimately, each client’s portfolio and cash needs are unique. We work with our clients to understand what you are trying to accomplish and ensure we do everything in our power to help optimize your portfolio, both in the name of rebalancing and the potential tax impact. Yet another reason to work with a holistic financial advisor (like TrustWell) who looks at a client’s big picture and seeks to provide sustainable AFTER-TAX returns to our clients.
We consistently analyze each of our clients’ portfolios and determine the pros and cons of a potential rebalance. If you would like to learn more or have questions about your own portfolio, please don’t hesitate to contact your advisor.
