The Rebalancing Lie Every Financial Advisor Tells You

0:00Just don't let the tax tail wag the investment dog. Too many people, I find, refuse to rebalance or refuse to sell bad investments because they're scared of taxes. And I get it. Nobody likes paying taxes. But you know what's worse than paying taxes? Losing money because you were too stubborn to rebalance. I'd rather pay the little L than the big L any day of the week. Hello, friends. This is Tyler Gardner, welcoming you to another episode of Your Money Guide on the Side, where it is my job to simplify what seems complex, add nuance to what seems simple, and learn from and alongside some of the brightest minds in money, finance, and investing.

0:46So let's get started and get you one step closer to where you need to be. Welcome back to your money guide on the side. I'm Tyler Gardner, former financial advisor, portfolio manager, and the guy who spends way too much time thinking about expense ratios so you don't have to. Today, we're talking about something that gets treated kind of like financial gospel, but is honestly way less urgent than the industry wants you to believe. Rebalancing your portfolio. I get asked about the importance of rebalancing all the time. How often do we need to do it? Should we even do it? When do we do it? And do we do it if we're going to trigger some old capital gains taxes?

1:29I have heard your asking and your anxiety around this topic, and I will do my absolute best today to help you in any way and every way I can think through what works best for you, your family, and your great plans for future rebalancing. Now, before we dive in, quick and familiar ask, as always, if this show has been helpful to you in any way, if you've learned something, laughed at something, including ourselves, or just appreciated that someone's finally willing to tell you that you don't actually need bonds in retirement if you don't want them, please consider leaving a review on Apple Podcasts or Spotify.

2:07It helps more people find the show, and frankly, it makes me feel slightly less like I'm just shouting into the void. So if you've got 30 seconds, I would genuinely appreciate it. And for those folks who have taken the time to write, thank you. I read them all, and it truly means the world to me that the show has proved helpful for any of you. All right, back to our grand rebalancing act. Let me start by telling you why I'm addressing this head on. And it's because of you, so I'm thankful to you. I owe this episode entirely to those of you who have written to me and said that most of my short form content, you know, those little 60 second clips where I walk through the woods and pretend to explain anything of substance in the amount of time it takes most of us to burn a piece of toast in the morning is about what to do with a certain amount of money, your principle, when you're starting from zero.

3:04I've made clips about investing with anything from a hundred bucks all the way up to about three million dollars. And that's usually the point at which I get told by the social media world that I have my head in the sand and I'm a tone-deaf former advisor for a reason. Now, that type of content is useful, but it's also not where most of us actually are. Most of us don't all of a sudden have a free million or two to figure out what to do and how to invest from scratch. Most of us already have portfolios. We've been investing for years, maybe decades, and now we're looking at our account and thinking, should we be doing something different with this?

3:45Should we rebalance? Should we sell some stocks and buy bonds because we're turning 50? And if we do, what about the taxes? Additionally, many of you have worked with or are working with advisors and are asking the same questions. If they had you invested in X, Y, and Z, and now you're managing your own money, Do you just keep that allocation strategy or shift it to reflect something different, even if it means potentially triggering taxes? Good news. Today, we'll hit on all of that. We're going to talk about the entire rebalancing act, what it actually is, why people do it, when it matters, and most importantly, when you can probably just ignore it and go live your life.

4:34We'll get right back into it after a quick word from one of today's sponsors. I want to talk about something truly useful if you're trying to get your financial life organized in 2026. Copilot money. I'll start with this. Most of my friends already use Copilot money, and they swear by it. Why? Because it's not one of those apps that screams at you for buying coffee. It just shows you where your money is actually going. all your accounts in one place, clean interface, zero judgment. And here's what I like about it. It tracks all your subscriptions automatically, so you're not getting hit with surprise renewals for that streaming service you used once to watch one British detective show.

5:20It helps you set savings goals that actually make sense for you, and it leverages AI to categorize your spending so you don't have to sit there manually tagging every transaction like some kind of digital archaeologist. Also, and this matters a lot to me, their privacy first. They don't sell your data, they're an Apple Design Awards finalist, and they just launched on the web so you can use it on any device now. And here's the deal. Use code Tyler at signup and you'll get two months free. That's worth checking out. Plus, for new users, they're offering 26 % off your first year if you sign up through their web app right now.

6:01So head to copilot.money, that's C-O-P-I-L-O-T dot money, enter code Tyler for two free months and give it a shot. If you hate it, cancel. But if you're starting 2026 wanting actual clarity around your money, this is worth trying. I need to talk about something most of you are putting off, term life insurance. This is step three in my financial order of operations before creating an emergency fund and before maxing out that Roth IRA. Why? Because if someone depends on your income and something happens to you, term life insurance is the emergency fund for the people you leave behind. Most people skip this step because shopping for insurance sounds, well, miserable.

6:52I get it. But Fabric by Gerber Life is term life insurance you can get done today. It's made for busy parents like you. All online, on your schedule, right from your couch. You could be covered in 10 minutes with no health exam required. Knock it out during one episode of whatever you're currently watching. Done. Covered. And here's what matters most. Lock in rates while you're healthy. A million dollars in coverage can costs less than a dollar a day. And even if you have coverage through work, actually check how much you have, because most people are still shockingly underinsured. Plus, if you leave that job, that coverage tends to disappear.

7:39With almost 2 ,000 five-star reviews on Trustpilot and a rating of excellent, I can think of far worse things to do with the next 10 minutes of your life, then heading to meetfabric.com slash Tyler. That's M-E-E-T-F-A-B-R-I-C dot com slash Tyler. And you will join the thousands of parents who have already handled this and can now return to their regularly scheduled programming. Policies issued by Western Southern Life Assurance Company not available in certain states. Prices subject to underwriting and health questions. So, let's get into it. Number one. What is rebalancing and why do we do it?

8:26As always, let's start with the 1.0 before we roll in to the 2.0. Rebalancing is the process of adjusting your portfolio back to your original target allocation, whatever that target allocation may be. Let's say you decided years ago that you wanted 80 % stocks and 20 % bonds because that's what some advisor told you to want. Over time, stocks do well because they usually do. And now your portfolio is 90 % stocks and 10 % bonds. This is a very common problem for many of us. Rebalancing simply means selling some of those stocks and buying more bonds to get back to 80-20. Sounds simple, right? And here's why the financial world tells you to do it.

9:14Because if you don't rebalance, your portfolio can drift away from your intended risk level. Let's say you wanted 80-20, but you're sitting at 95-5. You're potentially taking on way more risk than you had originally planned for. And if the stock market crashes, or when the stock market crashes, you're going to feel it way more than you had initially expected and intended with your 80-20 split. So the logic is, rebalance regularly, and by that we usually mean just once a year, maybe twice, to keep your portfolio aligned with your current goals and your current risk tolerance. Note, this is where some people start to get confused, as I'm very intentional here about using the word current.

10:02Just because you wanted an 80-20 split five years ago doesn't mean you do today, or that it reflects your goals today. So unlike choosing the beef or the chicken at your friend's wedding, this is a choice you can, in fact, revoke and go back on and modify so that your portfolio is always reflecting who you are and what you want now. Not just that you felt like the chicken back in February, but now you really crave that filet because of your buddy sitting next to you. But here's something that very few financial advisors will say, and I'm not quite sure why they won't acknowledge this. Rebalancing is not nearly as crucial as the financial industry makes it out to be.

10:45The difference between an 80-20 and a 90-10 portfolio over time is just about zero. Let me be clear. I'm not saying don't rebalance. I'm saying it's not some sacred ritual you need to perform every quarter or you'll lose everything. It's a tool, a reminder, a way to make sure your portfolio hasn't drifted so far from your goals that you're either taking too much risk or being way too conservative. But the key words there are your goals, not some textbook formula, not what Dave Ramsey or Susie Orman say you should do based on your age, your actual personal specific goals. Because here's the thing, the rest of the financial world gets 100 % wrong.

11:33And I feel like I'm on crazy pills every time I see this type of commandment recast in another type of stone for the next generation of investors. Just because you're getting older doesn't automatically mean you need to shift or should shift into more bonds and conservative investments. The traditional advice went something like this. Take 100 minus your age, and that's what should be in stocks with the remainder in bonds. So if you were 50, you should have 50 % in stocks and 50 % in bonds. Over time, that shifted to 110 minus your age in stocks. Today, many advisors I know even use 130 minus your age in stocks.

12:18That alone should tell you that things change over time, and we always need to be adapting to new market conditions. But frankly, I don't care if it's 100 or 130, because every formula we use just says you are the identical 50-year-old to the person sitting next to you. And that's utter nonsense. Someone might have millions upon millions and be looking to treat their estate more like an endowment, knowing that they're setting up future generations for growth. Others might be sitting on$500 ,000 and be looking for that to last for the next 25 years. These are drastically different investing scenarios and deserve to be treated outside of a formulaic approach.

13:03These formulas would absolutely make more sense if we were all planning to spend every penny of our own portfolios over the next 10 years. But most retirees don't do that. Most retirees die with way more money than they started with in retirement. And if you're one of those people, if you've got, let's say, Social Security, a pension, maybe some rental income, and you're not even touching your portfolio, why on earth would you be putting 60 % of it in bonds that barely keep up with inflation? So note, here's your added value pro tip number one of this episode. Treat social security, rental income, and pensions as a form of fixed income.

13:49So all of that should be part of that 20 % allocation if you wanted an 80-20 split, not in addition to it, or you're actually way more conservative than you think you are. Pro tip number two while we're at it, your time horizon isn't how old are you, It's how long do you want this portfolio to last, and when do you want the money. And for a lot of people, that's still at least 20 or 30 years, even in retirement. So when we talk about rebalancing, the first question isn't how old am I? It's what am I actually trying to accomplish with this money? That's why, honestly, I do chuckle to myself when someone responds to one of my videos online by saying, well, what do I do if I'm 50?

14:37Heck, I don't know, because there are endless types of people who are 50, and they have endless types of differentiated goals. So the next time an advisor tells you how to invest based on age alone, that's a sure sign they really should not be managing your money or you, because it's oversimplified and, again, utter nonsense. But if they're a little better and start from the personal questions and ask things like, are you trying to preserve capital because you're living off of this portfolio right now? Cool. Bonds might make more sense. Or are you trying to grow this money for another decade or two because you've got other income sources?

15:21Then maybe you don't need to be 50 % bonds just because you're 60 years old. Rebalancing is about keeping your portfolio aligned with your goals, not your age, not some formula, your actual plan. All right, so that's the conceptual framework. Now let's talk about how rebalancing actually works in practice and why even after everything I just said, if you're an investor who does want to get more conservative with your investments as you age, you can basically automate it at this point and never have to think about it again. Number two, target date funds and the set it and forget it approach. If you don't want to think about rebalancing, if you're already overwhelmed just having listened to the first part of this episode, and you're like, dude, not for me, I'm out.

16:15If you just want to set it and forget it, there's a really simple solution. Target date retirement funds. Target date funds are mutual funds that automatically adjust your stock-to-bond ratio as you get closer to retirement. You pick a fund based on when you plan to retire, let's say 2050, and the fund starts more aggressively, mostly invested in stocks when you're young, then gradually shifts toward bonds as you approach 2050. It's almost always based on your age alone, and it is almost always invested in a mixture of domestic and international stocks, and domestic and international debt or bonds.

16:54It's brilliant in its simplicity. You contribute money, the fund does the rebalancing for you, and you never have to think about it. For many of us, that's a great approach. Because you never have to think about it, you never have to think about where markets are or aren't, and these funds are much cheaper today than when they were first invented. And for a lot of people, especially people who don't want to manage their portfolios or who get too paralyzed by too many choices, target date funds are fantastic. Vanguard, Fidelity, Schwab, they all offer low-cost target date funds with expense ratios, fees, around 0.1 % annually or less.

17:38And just so you know, that's one-tenth of what you would pay most financial advisors to manage your money and allocations for you. So again, if you're okay with simplicity, this is a great low-cost option. You're basically paying pennies on the dollar for someone or an algorithm to rebalance your portfolio automatically. But once again, just remember, target date funds assume all 50-year-old investors are the same based on their being 50 years old. Now, if you're retiring in 2050, the fund assumes you want to be, let's just say, 90 % stocks in 2025, 70 % stocks in 2040, and 50 % stocks by 2050.

18:27So if you don't, if you've got that pension and Social Security, and you're planning to stay aggressive with your portfolio because you don't need to touch it for another 20 years, well, too bad, because that's what the target date fund will do. Quick pro tip number three. If you love the concept of target date funds, but want to be more or less conservative, just invest in a fund that reflects a different year of retirement. As in, if I'm retiring in 2050, but want to be more aggressive, then I might choose to invest in the 2060. Note, same rebalancing theory applies with 529 college savings plans based on age.

19:09And most 529s will offer these age-based portfolios that automatically get more conservative as your kid approaches college age. Great idea in theory. But if your kid's 17 and you've got the money covered, or if they're getting scholarships, or if you're planning to use that 529 for grad school down the road, you might not want to be 80 % bonds when they start undergrad. But the 529 age-based portfolios don't care. However, it's shifting you into bonds based on age of the recipient, not based on your or your child's actual plan. So target date funds and age-based portfolios are awesome if you fit the mold.

19:54If you're an average investor with an average risk tolerance and an average plan to retire at 65 and start spending your portfolio immediately, these funds could work beautifully for you. But if you're not average, and let's be honest, most of us listening to the show probably aren't. You might want a little more control. Or maybe that's just me. But heck, let me now address those who share some traits with me and really like being a little bit more in control of their own money. Number three, DIY rebalancing the mechanics. All right. So let's say you've decided you want to manage this rebalancing act yourself.

20:36You got a portfolio, you've set a target allocation, and now you want to rebalance. How do you actually do it? Well, it's actually incredibly simple. Let's say your target is 90 % stocks and 10 % bonds. You check your portfolio at the end of the year, and because stocks had a great year, you're now sitting at 95 % stocks and 5 % bonds. You've drifted. Your portfolio is riskier than you had intended. So if you don't want to be riskier, you rebalance. You sell 5 % of your stock holdings, and you buy more bonds until you get back to 90-10. That's it. That's rebalancing. You're just selling what's done well and buying what's lagged to get back to your target.

21:22And the good news, that also reflects solid textbook investing theory. Sell high, buy low. Now the question comes up is how often should you do this? Some people say once a year. Some say twice a year. Some say only when your allocation drifts more than 5%. And if you've been listening to me for a while, you might be able to guess what I'm going to say. You do you. And don't think for one second that your rebalancing once every two years versus five years is going to somehow be the difference maker between your being a multimillionaire and your winding up with nothing because you didn't rebalance your portfolio in time.

22:01That's just not how it works. Studies show that rebalancing annually, quarterly, or only when your allocation drifts by 5 % or more, all produce just about the exact same results over the long term. The difference is marginal. So here's my take. Rebalance once a year. And that doesn't even mean you have to actually rebalance or do anything. Just look once a year to see what's happened so you're aware. Pick a date. Your birthday. New Year's Day. Tax day. Whatever. and just check in. If your allocation has drifted significantly, rebalance. If it hasn't, leave it alone. Or if it has and you don't care, also leave it alone.

22:43Don't overthink this. We're not day traders. You're just making sure your portfolio still reflects your goals, give or take. And now we'll take a quick break to talk about a sponsor who helps support our mission to keep financial literacy free and accessible for everyone. Here's a question I bet you've never asked yourself. What's the difference between a tax preparer and a tax strategist? A tax preparer shows up once a year, collects your documents, fills out forms, and tells you what you owe. That's it. Transaction complete. A tax strategist, they're getting in touch with you in October, saying, hey, you're about to cross into a higher bracket.

23:27Let's talk about accelerating some expenses. Or they're emailing you in December. Don't take that distribution yet. Let's run the numbers first. If you're a small business owner or a high earner, that distinction can be worth tens of thousands of dollars a year. That's why I want to tell you about Gelt. Gelt isn't your dad's CPA firm. They're proactive. They reach out throughout the year with actual strategy, not just compliance? Should you buy the equipment before year-end? Should you pay yourself a bonus or leave it in the business? And what's your estimated payment schedule look like to avoid penalties?

24:05And here's what continues to surprise me. Their platform doesn't feel like tax software from 1997. It's actually organized, intuitive, and built for people who run businesses, not accountants who love pivot tables. So if you've been avoiding finding a real tax partner because you assume it's expensive or complicated, just take a breath. Gelt can help identify areas where you might save money, they'll help simplify your life, and they'll give you a free consultation to see if it's the right fit for you. Sign up by January 31st, and they'll even help you calculate your taxes due by April 15th. No surprises, no last minute scrambling, just a clear plan.

24:46Head to joingelt.com slash Tyler. That's J-O-I-N-G-E-L-T dot com slash Tyler. Pro tip number four. So if you have some financial advisor trying to sell you their services because they'll always be watching your portfolio and rebalancing accordingly, that is the silliest reason in the world to pay someone 1 % of your assets. This is literally something you could do once a year in five minutes and makes just about no difference. And great news that will lead into the next section. If you're investing in tax advantaged accounts, meaning 401ks, IRAs, HSAs, anything where taxes are either deferred or they're tax-free in the sense of the Roth accounts, Rebalancing is completely tax-free.

25:43Sell stocks, buy bonds, no taxes owed because technically nothing has been realized because these are all tax-deferred or tax-free accounts. Easy enough. But let's finally get to the crux of this episode. What if you're investing in a taxable brokerage account and you want to rebalance assets you already have or have inherited? Well, now we've got a way more interesting discussion. Number four, the tax problem, when rebalancing actually gets complicated. All right, here's where most people completely fairly get stuck, including me. I do get stuck here. Let's say you've got a taxable brokerage account, which I do.

26:29You've been investing for years, which I have been. or your advisor has been investing for years and you're now managing the portfolio yourself or maybe your allocation has drifted maybe you're sitting at 95 stocks when you wanted 80 you know you should rebalance but if you sell you're going to trigger capital gains taxes so now you're going well what's better do i pay the taxes or be misaligned with my current goals and risk level. Let me start by being very clear about something. At some point in your life, unless you're like me and get more value from your money by watching it grow than by actually spending it, you're going to have to sell some assets.

27:17At some point, you're going to pay taxes. Unless you're planning to hold these investments until you die and pass them on to your heirs, which is a really legitimate and awesome estate planning strategy, by the way, you will eventually need to sell and use this money. And when you do, you're going to pay taxes. So the question isn't, should I avoid taxes forever? The question is, are these taxes worth paying now to get my portfolio back on track? And the answer, as should come as no surprise, it depends on a few things. But here's a framework that I truly believe will prove helpful for when you should rebalance in a taxable account, even if it means paying taxes.

28:02Guideline number one. If your allocation is way too risky or way too conservative for your long-term goals, yes, rebalance. If you're supposed to be 70 % stocks, but you're sitting at 95 % because of a decade-long bull market and you're five years from retirement, yeah, you should rebalance, even if it means paying some capital gains taxes. Why? Because the risk of being overexposed to stocks right before you need the money is way higher than the cost of paying 15 % or 20 % in long-term capital gains taxes. You're trading a known cost, taxes, for a reduced risk of catastrophic loss. For most of us, that's a pretty good trade.

28:54On the flip side, if you're 35 years old and sitting at 40 % stocks and 60 % bonds because you got scared during a market crash and never rebalanced back, yeah, you should probably sell some bonds and buy stocks. Even if you owe taxes on the bond gains, though honestly, bond gains in a taxable account are usually pretty minimal. Being too conservative for too long is also very expensive. Inflation eats away at your purchasing power, and you're missing out on decades of potential compound growth. Guideline number two. If your funds are way too expensive, switch to lower-cost options, even if it means triggering taxes.

29:36Here's what I mean by way too expensive. If you're paying more than, let's just say, 0.2 % in expense ratios, that's my completely arbitrary but pretty fair line, you're overpaying for what you're getting. And I'm going to go to my grave with that one, my friends. Let's say you've got$100 ,000 in an actively managed mutual fund that's charging you 1 % annually. Now, that's not your advisor charging you 1 % annually, which they might be doing as well, but that's an expense ratio, an annual fee, for the fund that you're in. That's$1 ,000 a year in fees just to be in that fund. Over 20 years, assuming 7 % growth, you're giving up over$40 ,000 in returns to that fund for them to pretend to outperform an index, which they rarely do.