written by reader Rebalancing your portfolio

By rodger27, May 18, 2018

Most financial advisors recommend that you rebalance your portfolio every few years. This may be bad advice. I purchased Netflix many years ago and have a huge gain. I am also in the 23.9% tax bracket. If I sell any Netflix stock I will end up paying over 20% in long-term capital gains tax. The only way that selling makes sense is if I believe that the stock will go down by more than what I have to pay in taxes. What is wrong with keeping your winners and selling your losers each year? Eventually, you will die and your winners will get a new stepped-up basis and your relatives will not have to pay any tax on this huge gain – unless your net worth is high enough for estate taxes come into play. Also, if you sell your losers each year, you get short-term capital loses – much more valuable tax-wise.

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Travis Johnson, Stock Gumshoe
May 22, 2018 3:36 pm

Warren Buffett would agree with you, he has noted that diversification is only for those who don’t know what they’re doing… though if you get to an extreme concentration in one stock, you’ll have to do some mental gymnastics to deal with the volatility — I’d have a hard time if I had more than 10-20% of my portfolio in a single high-volatility and richly-valued stock like Netflix, so even if I weren’t willing to take some of those gains I’d look at making certain the rest of my portfolio reacts very differently than NFLX does to macro moves… or think about hedging in other ways if that lets you sleep better (having more cash, having puts on NFLX or on large tech stocks in general, etc.)

I think of balance in other ways, too — like the fact that Berkshire Hathaway is a huge part of my portfolio means I’m more willing to be a little riskier with some other positions, since I expect Berkshire to do substantially better than the S&P 500 if we have a bear market.

I don’t actively rebalance among individual stocks by selling winners and buying losers, but it is important to check in on your portfolio and see where it stands every now and then, assessing the risk and thinking about what’s reasonable for your age and your future financial needs.

I wouldn’t worry about getting too precise with your tax concerns — it’s great to defer taxable gains when you can, but don’t let the taxes drive the bus.

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