Taxes & Insurance

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Rebalancing your portfolio can be a savvy strategy for reducing taxes on investment gains.

Suppose your goal is to have 20 percent of your investments in a certain class of stocks—growth or large-capitalization, for example—but that segment of the market has performed especially strongly so they’re now up to 25 percent of your portfolio. You might sell enough of that segment—whether you hold individual stocks or invest in a mutual fund specializing in that market segment—to bring your allocation down to the desired 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 You’ll defer tax until the money is withdrawn.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 what you sell, for example, you might take offsetting losses by selling investments in other segments. After you sell one to get a loss, you can reinvest in another domestic stock or fund with a comparable strategy, to maintain your asset allocation.

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