How To Rebalance Your Portfolio For Beginners

All right, so you're probably worried about what's happening in the stock market right now. On Monday, your portfolio drops from $100,000 to say $97,000. The next day to $93,000. And by Friday, it's sitting around $91,000. And now your allocation is not what it was before and you're wondering if you should buy or sell your stocks to rebalance and protect your portfolio. So in this video, I want to break down exactly how I rebalance my portfolio, what you need to watch out for, and exactly what you can do for your portfolio as a complete beginner. So what exactly is rebalancing? If your portfolio is underperforming, your first instinct might be to sell your losers and buy new winners. But rebalancing often follows the exact opposite logic. Instead of chasing what's going up, it's about keeping your portfolio aligned with how you originally plan to invest. So, let's say that Monica decides it's time to rebalance her portfolio. Over the last few days, she's watched one of her tech positions creep from 30% to 34% of everything she owns. And she's already opened her app three times, hovered over the sell button, and then backed out the last second. She originally had a $40,000 portfolio split between three ETFs. Let's say it's 50% into SPY or around $20,000, 30% into QQQ or around $12,000, and 20% into SCHD, which is around $8,000. But after a few strong days, QQQ has jumped to about $15,000. SPY has edged up to around $20,800, and SCD is now sitting closer to $8,600. Now, this is great news for Monica because she's probably doing a little victory dance in her kitchen, but her heart isn't fully in it because the portfolio no longer looks like the way that she planned it. She stares at the percentages, which now read 34%, 47%, and 19% instead of her original setup. So, she decides to fix it. She starts by looking at her original targets. 50% in spy, 30% in QQQ, and 20% into SCHD, and works out what that should look like based on the current value of her portfolio, which is now around $44,400. This means bringing QQQ down to $13,300 and using the proceeds of $1,700 to top up SPY and SHD, bringing everything back to her original split. She goes back to her brokerage app, sees 50 3020 lined up perfectly again, and lets out a long satisfied sigh of relief. Now, this is exactly what rebalancing looks like. But there are also consequences to making these quick decisions. First, there are tax implications. You see, every time that you sell an investment in a taxable brokerage account like a TVA, you trigger a capital gains tax, even if you're moving the money straight into something else. So, in Monica's case, the $1,700 she sold from QQQ isn't just a simple switch. A portion of that gain now belongs to the IRS, depending on how long she held the investment and her income bracket. Remember, her QQQ investment grew from $12,000 to $15,000. That's a $3,000 gain or about a 25% increase overall. But she doesn't have a separate profit bucket she can withdraw from. Her gains are built into each share she owns. So, when she sells $1,700 worth of QQQ, she's selling a mix of her original investment and profit. Since the investment is up about 25% overall, roughly 25% of that $1,700 or $425 is profit, while the rest is just her original money. If we assume she's earning around $65,000 a year and held the investment for less than a year, she likely falls into the 22% federal tax bracket. And 22% of $425 is $94. This isn't automatically deducted when she makes the trade. She'll receive the full proceeds now, but she'll have to pay her $94 when she files her taxes. Now, if she held it for longer than a year, that same gain would likely be taxed at the long-term capital gains rate, closer to 15%. Which would bring that tax down to around $64. The reason it's lower is because the US tax system gives preferential rates to long-term investors, encouraging people to hold investments for longer instead of trading in and out of them frequently. Now, there is a way Monica could have reduced or even avoided this tax bill altogether. Let's say that she also had another investment in her portfolio that was down $425. If she sold that losing investment at the same time, she could have used that $425 loss to offset the $425 gain from QQQ. So instead of reporting a $425 gain, she'd report a net gain of $0, meaning that she wouldn't owe that $94 in taxes after all. This is known as tax loss harvesting, where you deliberately realize losses to offset gains and reduce your overall tax bill. And if her losses were even bigger than her gains, she could go a step further and reduce her taxable income by up to $3,000 per year. But the key difference is that it requires planning. Monica didn't sell QQQ because she was thinking about taxes. She sold it because the percentages were triggering her OCD. Early on in my investment journey, I also lost around, I want to say, $30,000 by investing in random stocks and ETFs and then selling them without tax loss harvesting into account. I pretty much just did it because I just did it. However, I'm now intentional with using tax loss harvesting. So for example, I used to have a lot of shares of Starbucks, but after the company had started having some issues and the stock just dropped, I purposely sold my shares at the end of the year to reduce my taxes from the gains that I made from my other investments. And by the way, this is why I like investing in Roth IAS first before a TBA because you don't trigger these taxable events in a retirement account. You can essentially rebalance your account as many times as you want and you don't owe the government anything at all. Also, something to consider is that if you don't want to sell anything to trigger a taxable event, but still want to make sure that your allocation is something that you're comfortable with, what I'll usually do is I'll add more shares to other parts of my portfolio. So, as a simple example, if I have, I don't know, like 60% in VXUS and 40% in SCHD, but I want a 50/50 split, I wouldn't sell any VXUS shares. I would just simply add more shares of SCHD so that it gets to that 50/50 split. But all in all, just to be clear, I'm not a tax professional. I'm just sharing my personal experience and what I've learned along the way. You can just use this as a starting point, but make sure to do your own research or speak to a tax professional before making any final decisions. Now, besides tax implications, there are also transaction costs and fees that you need to be aware of when rebalancing your portfolio. When Monica sold her QQQ shares and bought more spy and SHD, she wasn't just moving her money around. She was also paying to do it. First, there's this thing called the bid ask spread. And this is basically the small difference between the price buyers are willing to pay and the price sellers are asking. So, whenever you sell your shares, you basically have to pay a little difference. Maybe it's a couple cents or a couple dollars depending on how many shares you're selling to your brokerage account. Then, there are brokerage fees and commissions. Now, many US platforms advertise commissionfree trading, but this doesn't necessarily mean that it's completely free. Of course, there are still some of these brokerages that charge a small fee or they make money through, of course, the spread and the execution. If Monica uses a major broker like say Fidelity or Charles Schwab, which is the brokerages that I personally use, then she would typically pay $0 commission for buying and selling ETFs online. But remember, that doesn't mean that there are no costs. So for example, even at these platforms, sell trades still incur tiny regulatory fees, sometimes just a few cents. And more importantly, every trade still goes through the market where bid as spreads and even execution pricing can create hidden costs. If Monica were using other platforms, especially international brokers or older style platforms, she may also be charged a few dollars per trade, meaning she paid once when selling QQQ and again when buying spy and CHD. And of course, there are some regulatory fees like SEC and FINRA charges on sales. Now, of course, these are extremely small, often just a few cents on typical trades and sometimes even temporarily set to as zero. Individually, these costs might seem small, but when Monica rebalances frequently, like over and over again, making these multiple trades each time, then yeah, they can kind of add up over time. And again, this goes back to me liking investing in ETFs over individual stocks. Because if you really think about it, the people managing the ETFs are the ones who have to deal with all the buying and selling and all the crazy complexities that come with it, which doesn't affect us as the ETF investor. Now, if you're new to investing and wondering what my community's favorite ETFs are, you can always check out my free road map to give you some ideas. And if you still have trouble figuring out all this investing stuff by yourself, especially if you already make six figures and even after watching all my free YouTube videos, I may potentially invite you to jump on a call with me or my team members to see how we can guide you in the right direction. I'll leave the link to the road map down below if you're interested. Third, rebalancing your portfolio might result in a loss because of timing. When Monica decides to trade quickly, especially in volatile moments when she's driven by emotion, she might get a slightly worse price than expected, which can cost her more than the visible fees. Let's say that QQQ is bouncing up and down all around during the day. Let's say in the morning it's I don't know, I'm just making this up. It's trading at $375 and then it drops to say $370. Then it jumps back to $378 an hour later. Monica sees a dip, panics, and sells at $370, only to watch it recover just minutes later. That $5 difference per share might not sound like much, but across multiple shares, that could easily cost her $50 to $100 on one trade alone. And if she's doing this repeatedly, selling during dips and buying back in at higher prices, these small mistakes can drag down her returns. [snorts] Now, as you may have seen, rebalancing itself isn't a bad thing, but when and how you do this can make a big difference in the overall cost. Most sources might tell you to rebalance your portfolio every quarter or at least once a year. And if that works for you, then yeah, sure, go for it. Just do whatever you're comfortable with. Personally, I think it's more important to review your portfolio regularly, but only rebalance when something actually needs fixing. This could be when your long-term allocation drifts too far from your original plan, say more than, I don't know, like 10%. Or when something in your life changes, like your income, your goals, or your time horizon. So, let's say Ross, Monica's slightly less neurotic brother, copies her portfolio exactly. Knowing his sister, she already called in every investment firm, grilled them on their ETFs, and cross-cheed every answer until she knew exactly which ones were the most perfect ones. So this way, Ross is confident that it's the best portfolio in the market. But unlike Monica, when QQQ climbed from 30% to 34%, Ross was completely oblivious. He was in the middle of yet another life crisis, which let's just say involved a couch, a staircase, and a lot of shouting. When the quarter came to an end, he finally logged in and saw that QQQ was only sitting at 32% of his portfolio, while SPY and SHD had only moved slightly. Without another thought, he closed the app and went on with his life. Only two more quarters later did he notice that QQQ had increased to around 40% of his portfolio and decided that this was a good time to rebalance. But instead of making a hasty decision, he took a step back to see if he could use tax loss harvesting to reduce his taxes at the same time. Lucky for him, another position in his portfolio had gone down during the same period. So, while he sold some of his QQQ shares at a gain, he also sold his losing positions to offset it, reducing the taxes he would have owed on the trade. Since he wasn't constantly rebalancing, he also saved on transaction costs. and being distracted by everything else going on in his life meant he wasn't obsessing over small changes that didn't actually matter in the long run. Rebalancing can help you improve your portfolio, but only if you can show some restraint. Now, for me, there were times when my individual stocks grew too much, becoming more than 10% of my portfolio. For example, I had Mastercard for many years and after it grew significantly, I sold off some shares and reallocated it into something more broader, uh, something more stable like SPYM. Like what I mentioned before, I also had some losses with Starbucks and decided to cut those positions, freeing up capital to reinvest somewhere else. And in some cases, I reallocated into a dividend focused ETF like my favorite dividend paying ETF, SCHD. If you're going through a stock market drop right now and you notice that you're panicking, you might want to reduce your individual stocks and tech growth ETFs since they're more volatile. Of course, like what I said before, you can do this by selling some of your shares if you're okay with it and investing in something more stable like VXUS or maybe VTI or whatever it is that you're comfortable with. Or if you want to be even more on the conservative side, you can even keep some of that money as cash maybe in a money market fund or park some of that money into a bond. Or if you actually don't mind the stock market volatility, the stock market drop and you have a longer 10 to 20 year time horizon. You could even dollar cost average into more growth and tech ETFs. In the end, you just want to make sure that you do whatever fits your goals and your risk tolerance. Since none of this is financial advice, you just want to make sure that you are the person who chooses what you do with your own portfolio. Again, if you still need help with investing, especially if you have more than six figures just sitting in a regular bank account and you don't know where to start, my road map below will show you exactly what to do as a complete beginner. And if I have any more spots on my calendar for the next couple of weeks, I might invite you to jump on a one-on-one call with me or one of my team members to see what else we can do to help support you. If any of this sounds interesting, you can download the road map down below. And I will see you in the next video here.