Transaction Costs in Portfolio Rebalancing

As a portfolio manager for a high-net-worth individual, you are tasked with rebalancing the client’s equity portfolio, which consists of several large-cap and mid-cap stocks. The portfolio has experienced significant shifts in asset values due to recent market movements, requiring reallocation of assets back to the strategic asset allocation targets. However, you need to consider transaction costs associated with rebalancing, including brokerage fees, bid-ask spreads, and market impact.

Throughout the process, you must evaluate the optimal timing for executing trades as the client has a preference for tax efficiency. Discuss the types of transaction costs that can arise during the rebalancing process and how these costs can impact the overall effectiveness of the rebalancing strategy. Additionally, describe techniques that can be utilized to minimize these transaction costs while still achieving the desired portfolio adjustments.