Cash-Flow Rebalancing
Use contributions and withdrawals to restore allocation before selling holdings
- Difficulty
- Easy
- Time to result
- ~ongoing to results
- Steps
- 5
- Confidence
- 95%
Faber's rebalancing approach prioritizes consistency and low friction over frequent trading. Start with a diversified target allocation, then review it roughly once a year or when holdings breach predefined tolerance bands. Before selling anything in a taxable account, use cash flows to repair the imbalance: direct salary, bonuses, or other contributions toward assets that have fallen most, and take required withdrawals from assets that have appreciated most. Trade only if those flows do not restore the portfolio sufficiently. The mechanism captures the discipline of buying lower and trimming higher while reducing taxes and transaction costs. Faber argues that exact timing matters less as the portfolio contains more uncorrelated assets; what matters is rebalancing eventually without turning maintenance into constant activity.
Origin
Extracted from Masters in Business
Core principles
- 01Rebalancing matters more than rebalancing frequently
- 02Costs and taxes can erase benefits from excessive activity
- 03New money should flow to underweight assets
- 04Withdrawals should come from assets that appreciated most
How to run it
- 1
Set target weights
Define the strategic allocation that matches the portfolio's objectives and risk tolerance.
- 2
Choose a review trigger
Review annually or use tolerance bands that signal a material deviation.
Pro tip An annual review can support long-term tax treatment.
Watch out Frequent rebalancing can add costs without meaningful benefit.
- 3
Allocate incoming cash
Put new salary, bonuses, or contributions into the assets that are furthest below target.
Pro tip Use normal cash flows before creating taxable sales.
- 4
Source withdrawals intelligently
When money must leave the portfolio, take it from assets that have appreciated most relative to target.
- 5
Close the remaining gap
Buy or sell only as much as necessary after cash flows have been applied.
Pro tip Keep the process simple; exact timing is less important than eventual discipline.
In the wild
Faber advises an investor receiving salary or a bonus in a taxable account to direct the cash into the holdings that are down most rather than selling winners and creating unnecessary trades.
→ New money moves the allocation toward target with lower friction.
When an investor needs money for a house, Faber suggests taking it from what has appreciated most.
→ The withdrawal trims overweight winners while meeting the cash need.
Common mistakes
Rebalancing too frequently
The incremental return can be outweighed by taxes and costs when investors rebalance constantly.
Ignoring available cash flows
Selling first misses the opportunity to rebalance through contributions or planned withdrawals.
Is it for you?
Best for
Long-term investors who regularly add or withdraw money, especially in taxable accounts.
Not ideal for
Portfolios with no meaningful cash flows and allocations far outside their risk limits.
From the transcript
“One year is great because it gives you one of the better tax treatment for long term holdings.”
“If it's in a taxable account, hey, rebalance into you get some money or a bonus or salary, put it into the stuff that's down…”
“You gotta take money out for a house, take it out of what's appreciated the most.”
From the episode
Cambria CIO Meb Faber: Masters in Business (Audio)
Meb Faber