Stock markets keep fluctuating. Changing interest rates make an impact on bond performance. With changing economic conditions, the fairly drawn 60/40 split between bonds and stocks can easily get imbalanced. There’s no need to panic; that’s what rebalancing is meant for. Rebalancing your portfolio includes purchasing and selling assets to get a good allocation. You may have to maintain more by way of liquidity ahead of milestones and hence rebalancing is necessary.
When you rebalance your portfolio, the process isn’t always going to be cut-and-dry. Here’s a list of common mistakes that investors often make, you can hopefully avoid them:
Timing the market
This is a situation where a whole lot of investors attempt at timing the market over and over again. Investors are often convinced that with very little experience, they master the market and often make the investments at a wrong time. And when the cycle takes a turn, all they’re left with is huge losses. To put it up in a simple manner – avoid timing the market all the time.
Sticking to your investments
If you’ve had a consistent portfolio for a long time, it is likely that you would become attached to your investments. You make those Investments after putting in a lot of money and research when things are going well. That makes you want to stick around to the same set of investments even when they underperform. Thinking of your investments from a larger perspective will help you to get rid of a few investments that aren’t working in your favor.
Failing to take taxes into consideration
One of the biggest and most common mistake most of the investors make when rebalancing portfolio is not taking into consideration the tax ramifications. Any time that you sell investments that have been profitable to you in the past, you’re increasing the chance of how much you have to owe in capital gains. The tax costs can be really high in case if you plan to move out of debt funds. The best way to avoid an exorbitantly high tax-bill is to focus on under-performing assets. You may replace the ones that are not profitable with new investments.
Rebalancing to create a winning portfolio
Rebalancing your portfolio can be overwhelming, but it doesn’t have to be. When you know the most common mistakes to avoid, you’ll see yourself creating a well-balanced portfolio, leading to profitability. If you do not feel confident while doing it, always consult a financial advisor to guide you with what’s best suitable. The key is to have different types of investments in order to minimize risk, also known as diversifying your portfolio.
Rebalancing is an important step pertaining to your portfolio. You just need to ensure that it is in sync with your goals and the costs attached do not outweigh the returns. This is the key!
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