Rebalancing involves determining how much of this position you need to reduce and allocate to other classes. Once you have determined which securities you need to reduce and by how much, decide which underweighted securities you will buy with the proceeds from selling the overweighted securities.
To choose your securities, use the approaches discussed in Step 2. When rebalancing and readjusting your portfolio, take a moment to consider the tax implications of selling assets at this particular time. Perhaps your investment in growth stocks has appreciated strongly over the past year, but if you were to sell all of your equity positions to rebalance your portfolio, you may incur significant capital gains taxes. In this case, it might be more beneficial to simply not contribute any new funds to that asset class in the future while continuing to contribute to other asset classes.
This will reduce your growth stocks' weighting in your portfolio over time without incurring capital gains taxes. At the same time, always consider the outlook of your securities.
If you suspect that those same overweighted growth stocks are ominously ready to fall, you may want to sell in spite of the tax implications. Analyst opinions and research reports can be useful tools to help gauge the outlook for your holdings.
And tax-loss selling is a strategy you can apply to reduce tax implications. Throughout the entire portfolio construction process, it is vital that you remember to maintain your diversification above all else. It is not enough simply to own securities from each asset class; you must also diversify within each class. Ensure that your holdings within a given asset class are spread across an array of subclasses and industry sectors. As we mentioned, investors can achieve excellent diversification by using mutual funds and ETFs.
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Investment portfolios and risk tolerance. How to build an investment portfolio. Decide how much help you want. Choose an account that works toward your goals. Choose your investments based on your risk tolerance. Mutual funds. Determine the best asset allocation for you. Rebalance your investment portfolio as needed. On a similar note Dive even deeper in Investing. Explore Investing. Get more smart money moves — straight to your inbox. Sign up.
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Moderate Investor Mutual Fund Portfolio. Insure Life Insurance. Health Insurance. Motor Insurance. Other Risk Covers. Personal Finance News. Mutual Funds. Narendra Nathan. Rate Story. Font Size Abc Small. Abc Medium. Abc Large. ThinkStock Photos The basic objective of diversification is to reduce risk. It restricts the damage to your financial well-being in case one asset class or instrument goes for a tailspin.
If you had a goal maturing that year and were depending largely on stock investments, it would have been a disaster. However, if you had spread your investments across equity, debt , cash and gold , the portfolio would have given an average return of 0. Not all investing stories have happy endings though.
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