Portfolio Rebalance

description: Analyze portfolio allocation drift and generate rebalancing trade recommendations across accounts. Considers tax implications, transaction costs, and wash sale rules. Triggers on “rebalance”, “portfolio drift”, “allocation check”, “rebalancing trades”, or “my portfolio is out of balance”.

Workflow

Step 1: Current State

For each account, capture:

• Account type (taxable, IRA, Roth, 401k)
• Holdings with current market value
• Cost basis (for taxable accounts)
• Unrealized gains/losses per position

Step 2: Drift Analysis

Compare current allocation to IPS targets:

Asset Class	Target %	Current %	Drift	$ Over/Under
US Large Cap Equity
US Small/Mid Cap
International Developed
Emerging Markets
Investment Grade Bonds
High Yield / Credit
TIPS / Inflation Protected
Alternatives
Cash

Flag positions exceeding the rebalancing band (typically ±3-5%).

Step 3: Trade Recommendations

Generate trades to bring allocation back to target:

Tax-Aware Rebalancing Rules:

• Prefer rebalancing in tax-advantaged accounts (IRA, Roth) first — no tax consequences
• In taxable accounts, avoid selling positions with large short-term gains
• Harvest losses where possible while rebalancing
• Watch for wash sale rules (30-day window) across all accounts
• Consider directing new contributions to underweight asset classes instead of trading

Trade List:

Account	Action	Security	Shares/$	Reason	Tax Impact
	Buy/Sell			Rebalance / TLH	ST gain / LT gain / Loss

Step 4: Asset Location Review

Optimize which assets are held in which account types:

• Tax-deferred (IRA/401k): Bonds, REITs, high-turnover funds (highest tax drag)
• Roth: Highest expected growth assets (tax-free growth)
• Taxable: Tax-efficient equity (index funds, ETFs, munis), tax-loss harvesting candidates

Step 5: Implementation

• Total trades by account
• Estimated transaction costs
• Estimated tax impact (realized gains/losses)
• Net effect on allocation drift

Step 6: Output

• Drift analysis table
• Recommended trade list (Excel)
• Tax impact summary
• Before/after allocation comparison

Important Notes

• Don’t rebalance for rebalancing’s sake — small drift within bands is fine
• Tax costs can outweigh rebalancing benefits in taxable accounts — calculate the breakeven
• Consider pending cash flows (contributions, withdrawals, RMDs) before trading
• Check for any client-specific restrictions (ESG, concentrated stock, lockups)
• Document rationale for every trade for compliance records
• Wash sale rules apply across accounts — coordinate trades across the household