What's your philosophy on the topic of portfolio rebalancing? Mine used to be one of mechanistic precision. Lately, rebalancing my portfolio is something I do less and less of. And I think as we become more successful, and by that I mean wealthier, we will all gravitate toward less frequent portfolio rebalancing.

The argument for rebalancing your portfolio on a periodic basis - quarterly is usually the recommended interval - remains sound. From time to time it makes sense to sell a few shares of your investments which have outperformed the others in your portfolio and use the proceeds to buy more shares of those investments which have lagged in your portfolio. That is, provided you're still convinced the laggards still warrant your investment.

Portfolio rebalancing is sort of a dollar cost averaging philosophy applied after the fact of investing. The effect is much the same as dollar cost averaging. You're buying less of - selling, actually - securities which are higher in proportion to your overall portfolio, and buying more of those which are lower in proportion to your overall portfolio.

I think rebalancing your portfolio still makes perfect sense. I always have. I'm coming to a realization, however, that the rebalancing interval may need to be adjusted as we become more wealthy. Here's why I'm starting to think that way.

At the beginning of this year I made two investments of approximately $125,000. Today, about six months later, those investments are worth $132,000 and $143,000. Now, suppose for the sake of argument these are my only two investments. The logic of portfolio rebalancing would have me sell $5,500 worth of the outperforming investment and buying $5,500 worth of shares in the under performing investment. Unfortunately for me, my sale would trigger $5,500 worth of short term capital gains. Where I live that equates to more than $800 in additional taxes than if I were to wait until my short term gains become long term gains.

As I said, I still think the idea of rebalancing your portfolio is a good one. It's a sound investment practice. On that point I can't argue against it. As for how frequently you should rebalance, my experience is pushing me toward less frequent rebalancing as my wealth grows and the tax implications of rebalancing gain importance.