Rebalancing your portfolio can be a savvy strategy. Suppose you want 20 percent of your investments in foreign stocks but they’ve been strong performers so they’re now up to 25 percent of your portfolio. You might sell enough foreign stocks to bring your allocation down to 20 percent, reinvesting the proceeds in asset classes that have not done as well.
Advantage: This discipline leads you to sell high and buy low, a proven formula for investment success.
Disadvantage: By selling winners, you may owe capital gains tax.
Fortunately, there are ways to trim the tax bill:
* Take gains inside your IRA. You’ll defer tax until the money is withdrawn.
* When you are selling some shares of a stock or a fund, specifically instruct your broker or fund company to sell the highest-cost shares. That will trim your taxable gain or even produce a capital loss.
* Take losses elsewhere. If you take taxable gains on foreign stocks, for example, you might take offsetting losses on domestic stocks. After you sell one domestic stock fund to get a loss, you can reinvest in another domestic stock fund with a comparable strategy, to maintain your asset allocation.