Be sure that you are aware of and abide by the wash sale rules that pertain to realizing and deducting tax losses.
8. Don’t think you are smarter than the market
It’s tough to sell winners and then invest that money back into portions of your portfolio that haven’t done as well. However, portfolio rebalancing is part of a disciplined investment process. It can be tempting to let your winners run, but too much of this can skew your allocation too far in the direction of stocks and increase your downside risk.
If you think you can outsmart the market, trust me you can’t. How devastating can the impact of being wrong be? Just ask those who bought into the mantra “…it’s different this time…” before the Dot Com bubble burst or just before the stock market debacle of the last recession.
Rebalance, you are not smarter then the stock market.
The Bottom Line
Portfolio rebalancing is a key strategy to control the risk of your investment portfolio. It is important that you review your portfolio for potential rebalancing at set intervals and that you have the discipline to follow through and execute if needed.
This article was republished with permission from The Chicago Financial Planner.