ETF Investing Guide: Summary: How to Manage Your ETF Portfolio

by: David Jackson
  • Make sure you assemble your core ETF portfolio in an online brokerage account, where the trading costs of managing the portfolio are low (The 4 Criteria for Picking a Brokerage).
  • Tax loss selling can help you in two ways. It can allow you to swap short term capital gains or current income tax liabilities for long term capital gains liabilities, which are generally lower. Also, it can defer your tax liability, allowing you to save more upfront and benefit from the compounding effect of long term investing (Turning Taxes to Your Advantage).
  • If you are investing in a regular taxable account, then at least once a year sell the tax-lots of ETFs that are trading below where you purchased them, and switch into similar but not identical ETFs (Turning Taxes to Your Advantage).
  • Consider tax-loss selling (moving sideways into a similar ETF) whenever an asset class moves dramatically lower (Turning Taxes to Your Advantage).
  • Tax-loss selling is easy with ETFs in an online brokerage account that tracks individual lots. It’s harder or impossible with many mutual fund accounts because they often don't report the tax basis of individual lots, and they don't offer enough alternatives for sideways moves within the same asset class. And if you own mutual funds in a brokerage “fund supermarket”, you shouldn’t: the fees are too high (Turning Taxes to Your Advantage).
  • Portfolio rebalancing offers two significant benefits for investors: it reduces the risk of your portfolio by preventing over-concentration in a single asset class, and it imposes a "buy low, sell high" rule on your trading behavior (How to Make Money By Rebalancing) Rebalancing could have saved a lot of people a lot of money during the recent US stock market "bubble".
  • Rebalance your ETF portfolio by setting regular time intervals, or (better) percentage limits for each asset class as rebalancing triggers (Rebalancing Rules).
  • Decide on a rebalancing rule, and stick with it. When you rebalance, either return your portfolio to its original asset composition, or consider “overcompensating” in the other direction by a preset amount (Rebalancing Rules).
  • Be careful not to rebalance too frequently in taxable accounts without offsetting tax-loss selling; you’ll end up realizing capital gains (Rebalancing Rules).
  • Rebalancing is easy with ETFs in an online brokerage account, where you can track your asset allocation easily, transfer assets among numerous ETFs, and set limit orders to buy and sell funds at pre-determined target prices. It’s harder in a mutual fund account where only a limited number of low-cost index funds are offered and you can’t use limit orders (How to Make Money By Rebalancing) and (The Seven Advantages of ETFs Over Index Mutual Funds) .
  • If you’re investing in a taxable account, consider combining tax-loss selling and portfolio rebalancing. Tax-loss selling allows you to benefit from portfolio rebalancing without incurring capital gains. And if you execute the two together, you minimize both your tax bill and trading fees (Combining Tax Loss Selling & Rebalancing).
  • Don’t let tax-loss selling and rebalancing turn you into an active trader if your transaction costs will rise too much (Combining Tax Loss Selling & Rebalancing).

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