Given a tax-advantaged account with commission-free funds, is there any disadvantage to frequent rebalancing?

Question

In my retirement accounts, I have lazy portfolios consisting of a few index fund ETFs that my broker offers commission-free trades on. I would like to rebalance these funds not only to keep my portfolio in line with my desired risk, but to take advantage of the upswings and downswings of the market (buy a fund as it dips, sell it as it rises).

Most of the advice about rebalancing suggests that you should not do it too often for one of two reasons:

1. You pay trading fees each time that eat into your profit.
2. Selling a stock creates income, which generates taxes.

However, neither of these applies to these accounts. Given that, are there other reasons (other than the value of my time) that I should rebalance, say, quarterly instead of daily or weekly?

Answer 1

A number of funds and/or broker/services charge a fee for short term holdings, typically short term is 90 days or less and it's typically referred to as a "short term redemption fee."

Either the broker/service may charge the fee, or the fund may charge a fee, or both may charge the fee.

Answer 2

Just a few things that come to mind:

• Many mutual funds or brokers have some sort of short-term trading restrictions or fees, to try to avoid the transaction costs to the fund from needing to handle a lot of transactions. You'll want to ensure that you're not running afoul of any of these.
• For ETFs specifically, there's generally a "spread" like with any market, where for instance a security with a "real" value per share of $100.00 may be offered for sale to you at $100.01 and the market would bid $99.99 for a share you wanted to sell. Some ETFs are well-traded with a small spread, but others don't trade very often and have larger spreads. Particularly with some "commission-free trades", it may be that your broker gets some amount of money per trade by giving you slightly worse prices than in the "real" market to varying degrees. It's probably not a deal breaker, but it's worth looking at that whenever you trade there is generally some level of transaction cost, and sometimes it's more hidden than you would expect.
• It's just probably not really going to matter much in the long run. Unless you're investing in some really volatile stuff (which it doesn't sound like), the percentage change in a quarter from your "ideal" portfolio mix is just not going to be that different from reality. If you insist on checking your portfolio more often, giving yourself a "rebalancing band" ("I'll rebalance if anything is more than X% out of whack") is probably good enough.

Answer 3

Be aware of 3. that you didn't list:

3. If you think you can beat the market by 'seeing it come before the others', you are wrong, and you will lose money.

Basically, you will lose money by bad decisions, which in average are unavoidable (you might have a lucky day here and there). That is probably a more significant factor than fees and other cost.