Buy and Hold Stock Rebalancing: A Hybrid Strategy

The buy and hold stock rebalancing strategy is one that combines two of the most popular stock investment strategies. This method utilizes a long-term investment approach with some adjustments for short-term fluctuations. Here are a few things to consider about this hybrid strategy of investment.

Buy and Hold 

One of the most time honored methods of stock investment involves buying and holding a stock. Investors that utilize a buy and hold approach actively look for the right stock when they are deciding what to invest in. Once they have made their purchase, they do not pay much attention to the stocks performance. The stock will fluctuate, but these are irrelevant to the buy and hold investor. The hope is that the stock will continue to increase in value over the long-term.

Problems With Buy and Hold

Even though buy and hold can work, there are some problems with it. For example, when an investor uses this method for an extended period of time, their portfolio could become too risky. They might be invested into an industry that has completely changed and does not have good prospects. For example, if you invested in companies that produced pagers before cell phones were invented, your long term prospects would not have been good.

Rebalancing

Rebalancing is a technique that is used to alter the composition of a portfolio. Many investors rebalance their portfolio frequently, which creates a method of active management. You would choose a particular investment mix that you want and then continually buy and sell stocks to meet that mix. For example, you might specify in advance that you want 60 percent growth stocks and 40 percent dividend stocks. As the value of these stock increase or decrease, the percentages in your portfolio will change. 

Buy and Hold Rebalancing

A hybrid strategy made up of both of these strategies is the buy and hold rebalancing strategy. This strategy allows investors to purchase stocks for the long-term, but they will periodically rebalance their portfoliios as well. For example, many investors that use this strategy will rebalance their portfolios annually. This allows the stocks to appreciate in value and it allows the investor to make sure that the portfolio is performing according to their investment objectives. If the portfolio is not performing as well as it should, some of the stocks can be sold and others purchased. 

Tax Implications

When you employ this strategy, you may want to take into consideration the tax implications. Many investors will rebalance their portfolios every 15 months. This allows them to take advantage of the long-term capital gains tax rate on any of the stocks that they sell. They will then pay a cheaper tax rate than if they had sold the stocks prior to 15 months.

Performance

This strategy has performed well when implemented correctly. Investors can limit the amount of risk in their portfolios and take advantage of capital appreciation at the same time. This strategy represents the best of both worlds for investors that like to buy and hold and investors that like to actively trade. 

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