5 Rebalancing Mistakes in an Investment Portfolio

5 Rebalancing Mistakes in an Investment Portfolio

In the event the investor wandered off from his original asset allocation, rebalancing can help him find his way back.

Rebalancing involves the buying and selling of assets to return the desired weightings of an asset allocation.

There are a number of reasons to reallocate. It could be due to the performance of a particular asset classes, or a certain category of stocks or bonds.

In addition, if an investor wants to reduce his investment risk, rebalancing can protect the portfolio from market volatility.

Read more: Volatility Trading: What is it?    

However, the process is not always cut and dried. Therefore, it is important to take note of these rebalancing mistakes that could put an investment strategy at risk.

  1. Relying on robots/artificial intelligence (AI)Robot Advisers

Robot advisers are a big thing these days and are a good basis for asset allocation and asset reallocation. They are a high-end machine that analyzes tons of data about the investor to determine the right risk and return for him.

Know more about: Several Types of Investment Risks

Based on that, they then create a general layout for where to allocate or reallocate the investments. What they may not consider though, are the personal goals and needs derived from the investor’s specific situation.

Robots may have the ability to offer investment advice that a human adviser can, but for a lower cost. Still, human discretion must be applied, regardless of what the algorithm says.

  1. Inflexibility with long-term financial plan

Once a long-term investment plan is set, the idea is then to follow it. However, investors must bear in mind that their plan was also created based on certain assumptions.

Therefore, if their situation becomes uncertain, then it might be time to make adjustments on their investment portfolio as well as with the assumptions of their financial plan. Doing this emphasizes safety over large returns, as the planned strategy looks less appealing.

Rebalancing is a decision that can vary with the situation. It can allow a bigger change from the goals at one point, or a smaller one at other times.

  1. Being driven by personal preferences

What an investor likes or dislikes should not hinder portfolio rebalancing. Although having preferences are normal, it just defeats the purpose of rebalancing.

Rebalancing has to be as objective as possible. An investor should not get too attached with stocks or funds that he holds.

Investors should take another look at what they hold and could hold, so they will not sell a victor that is still showing potential or buy an asset that will just keep on falling.

  1. Paying no attention to the tax impact

Capital gains taxOne of the biggest and costliest mistakes investors make when rebalancing their portfolios is overlooking tax impacts.

Every time investors sell a profitable investment, they generate the capital gains tax. Hence, use methods for reducing taxes that can be caused by sales.

For example, sell off assets that have suffered losses and then replace them with others. However, if a stock is replaced 30 days before or after selling one similar to it, that will then go against the wash-sale rule.

If it turns out like that, the investor will be unable to use the loss to offset any of his gains until he sells the shares identical to it later on.

Moreover, tax-favored accounts could be rebalanced more frequently despite taxes. Even though taxes will not build up, trading costs, such as commissions still can.

  1. Making careless decisions

Portfolio rebalancing is serious work. That is why, deciding to reallocate a portfolio has to be thought through. Rebalancing might end up unsuccessful if the investor does not clearly understand the situation.

A good number of brokerages and fund companies post reports online, showing a client’s asset allocation. Using freestanding software can help as well.

Also, investors should also make it a point to involve their advisor when reallocating. Advisors can present a broader perspective, while they handle several clients.


Rebalancing is not an overly complex process. Still, investors must be strategic to maximize the benefits it provides. Considering these mistakes can help reduce risk and get the most out of investment returns.

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