At Whitford Financial Planning, we use Altruist Financial as the custodian for clients who are receiving our ongoing professional portfolio management. An important role of a custodian is to hold client funds, as Whitford does not hold, directly or indirectly, client funds or securities, or have any authority to possess them. Our clients grant us limited authority to buy and sell securities on their behalf.
With our clients' best interests in mind, we chose our custodian after a careful evaluation of factors including, but not limited to, quality of services, financial strength, competitiveness of prices, trade execution, and breadth of available investment products. We use our own proprietary research and investment strategies, while leveraging their digital onboarding and tax-efficient rebalancing technology - a perfect combination of personal touch and high-tech!
Question: What is rebalancing?
Answer: Over time, the value of various holdings within a diversified portfolio move up and down, drifting away from the target weights that were chosen to achieve diversification. Over the long term, stocks generally rise faster than bonds, so the stock portion of your portfolio will likely go up relative to the bond portion—except when you rebalance the portfolio to target the original allocation. The difference between the target allocation for your portfolio and the actual weights in your current portfolio is called portfolio drift.
Benefit #1 - Portfolio rebalancing, when done effectively, can help manage risk and keep you on track to pursue the expected returns desired to meet your goals.
Question: How often do you rebalance portfolios?
Answer: A high drift may expose you to more (or less) risk than you intended when you set the target allocation. Rebalancing reduces drift, which is done whenever it is necessary, most commonly due to shifts in the markets, dividend payments, and client deposits and withdrawals.
Benefit #2 – The automated rebalancing allows for timely execution of trades, which can be especially valuable during periods of extreme market volatility. Portfolio drift is reviewed daily so rebalancing can be completed, if necessary.
Question: How does rebalancing take place with a deposit, withdrawal, or dividend reinvestment?
Answer: When you make a deposit or receive a dividend, the inflow is used to buy holdings that are currently underweight, reducing their drift. The result is that the need to sell in order to rebalance is reduced. Withdrawals and other outflows are also used to rebalance, by prioritizing selling holdings that are overweight.
Question: How does rebalancing take place in the absence of cash flows?
Answer: Rebalancing is done by selling and buying, or reshuffling assets that are already in the portfolio. When cash flows are not sufficient to keep your portfolio’s drift within a certain tolerance, just enough of the overweight holdings are sold, and the proceeds are used to buy into the underweight holdings to reduce the drift.
For example, if a 70% stock and 30% bond target allocation drifted to 67% stocks and 33% bonds after a stock market decline, rebalancing would involve selling the extra 3% now in bonds and buying 3% more in stocks.
Benefit #3 – Buying low and selling high are typically desired outcomes associated with investing. By implementing a disciplined rebalancing approach, emotional investment decisions can be reduced or eliminated.
Question: How do you work around positions with significant capital gains?
Answer: With any sell trade, we seeks to select the lowest tax impact lots, and stop before selling any lots that would realize short-term capital gains when possible. Since short-term capital gains are taxed at a higher rate than long-term capital gains, higher after-tax outcomes can be achieved by simply waiting for those lots to become long-term before rebalancing, if it's still necessary at that point.
Benefit #4 – Enter the human advisor. During the financial planning process, Whitford gathers details about your current situation, financial goals, risk tolerance, time horizon, and other relevant factors to determine a recommended investment allocation. Your Whitford advisor can also set an annual capital gains allowance (limit) when rebalancing portfolios. This means the advisor (with help from the custodian) will be in control of the investment strategy and capital gains or losses realized each year, so that there can be coordination with other tax and financial planning strategies.