When you invest in mutual funds, you are investing to achieve a single goal via various vehicles. So when you rebalance, the shift must occur across all of these funds at the same time.
Step 1: Primarily, have an asset allocation plan by considering your income, the expected time of retirement, and so on.
Create an asset allocation framework, but if you are unsure speak to an expert — ClearTax can be of help here. Step 2: Assess your current asset allocation by identifying where and how your current investments are placed in stocks, cash, bonds, or any other form of investment.
After this, make a comparative analysis of asset allocation target and its present state and make adjustments accordingly. Step 3: Chart out a rebalancing plan is your asset allocation target does not align with your current portfolio. This step can be tricky where you have to decide on the securities to retain and in what numbers. Speak to our experts at ClearTax to get clarity. Step 4: Be mindful of the tax implications, especially on capital gains.
Avoid the short term taxes on capital gains by holding on to your equities for over a year. If you need to scale back, aim to sell the securities in the tax-exempt accounts first. In this way, you can limit the taxes you pay in capital gains. Step 5: Review your portfolio at least once a year or maybe once in six months to assess your position but rebalance it only when you feel that the allocations are significantly out of the track to reaching the target.
When you first start investing, you create a portfolio with a certain risk profile in mind. This will consider your investment timeframe, goals, and financial position. Following a period of stocks performing well, your stock allocation could have risen, changing the weighting of your portfolio. In this case, rebalancing your portfolio would involve selling stock and buying bonds to achieve the original target allocation. You should also consider the level of risk and diversification.
Assets performing well in a certain sector, for instance, could mean you need to rebalance. Rebalancing may also occur after significant market movements, such as the volatility caused by Covid As you should invest with a long-term timeframe, you may find your goals and aspirations change.
As a result, you may need to update your risk profile, and reflect this in your portfolio. Rebalancing may already be factored into your financial plan. A common time for investors to rebalance their portfolio is as they near retirement. Therefore, as you approach retirement, you may choose to gradually take less risk with investments. There's no right or wrong method, but unless your portfolio's value is extremely volatile, rebalancing once or twice a year should be more than sufficient.
When market values plunge, instinct tells us to sell our holdings before conditions get worse. And, when market values only seem to rise and "everyone" is making money, that's when we want to put our money into the market. This is human nature, but it is also the exact opposite of buying low and selling high.
Being essentially forced to sell high and buy low is one of the most significant benefits of maintaining a balanced portfolio over time.
Restoring balance to your portfolio could involve selling some of your bond investments and buying stocks while they're cheap. Establishing a balanced portfolio and taking steps to keep it that way can help you to avoid relying too much on emotions when making important investment decisions.
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