Dollar-cost averaging, rebalancing and the disposition effect (invest like a pro)

I've been pondering the advice given in Invest like a Pro book, when doing the rebalancing based on risk strategy. Sell high, buy low, to return to the desired risk allocation. It makes sense how it's written, but it sounds to be the opposite of what's suggested in the idea of avoiding the Disposition effect - the tendency to avoid losses and thus holding onto underperforming assets and selling performing assets. Selling performers means higher taxes compared to saving taxes on selling losers. Also, performers allegedly tend to continue to perform whereas losers tend to lose more over time. 

How to reconcile these two opposing ideas and advice?

edit: Reading on dollar-cost averaging on the internet, it's actually just the strategy of buying the same assets using the same amount of money on a regular basis, which means you buy different amounts based on the price at the time of purchase. It doesn't seem to have anything to do with the rebalancing pointed out in that subchapter.

From the book

> So you sell $2,000 of your stocks, and purchase $2,000 of bonds. You've now sold stocks when they were high, and bought bonds when they were low. It's very true that stocks may still continue to rise, and bonds may continue to fall, but as you hold your ground on this principle over the long haul, and as long as the market rises over the long-term, you will end up buying low, and selling high. Its fancy name is dollar-cost averaging.

Can someone clear this up?

I am mostly interested in the idea of rebalancing and how to avoid rebalancing bringing excessive taxes.

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  • Okay, more research lead to answers, so I'll just answer it here myself for others who would ask the same questions.

    Yes, rebalancing is a good idea, yes, it means you incur taxes when you sell performers. One way of circumventing is that if the risk allocation is not out of balance too much, you can just temporarily purchase the underperformers until you reach your desired balance again and then return to normal. If the jump is too high, it may make sense to rebalance by selling. Such big jumps should be a sign that it's worth selling anyway.

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  • I do all my rebalancing in my non-taxable accounts. This is done holistically across all taxable and non-taxable investments. That way there are no tax repercussions. My 401k easily has the bulk of my investments which makes it very easy to do all the rebalancing there. I don't touch my taxable investments for rebalancing purposes.

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  • I think it's actually nice that you don't touch your taxable investments. it's actually best to keep it as is and not use them. That way, you will be more disciplined in handling your money. It will actually benefit you in the long run, honestly.

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