One thing index investing misses
Index investing has become more popular with Vanguard Index Funds leading the way and many other fund companies following their lead. While it is a healthy move away from active management it falls short of efficient investing. It takes more risk than is necessary for the expected returns and ignores many key elements that support long-term success. Disciplined quarterly rebalancing is just one of the elements of prudent investing it overlooks.
Four reasons quarterly portfolio rebalancing should be part of your investing strategy:
1) Rebalancing helps maintain optimal asset allocation – Asset allocation refers to how much money you have invested in different types of assets (e.g., stocks vs bonds). By regularly rebalancing your portfolio, you ensure any changes in the markets don’t cause an imbalance between these asset classes; this helps keep risk levels at a consistent level while also maximizing potential returns over time.
2) It encourages disciplined buying and selling – Rebalancing forces investors to buy more when prices are low and sell when they're high—which can lead to higher returns than if no action was taken at all. This kind of disciplined approach can help investors stay on track with their long-term goals by taking advantage of both upswings as well as downturns in the market without letting emotions get involved or making rash decisions based on short-term conditions alone.
3) You won't miss out on opportunities - Markets tend not to move predictably or consistently; instead they often experience sudden shifts due to news events or economic developments that may present new investment opportunities for savvy investors who act quickly enough before everyone else catches wind too late! Quarterly rebalances allow an investor's portfolios remain agile so they don't miss out on these potentially lucrative moves before everyone else piles into them driving up prices beyond what would otherwise be available earlier had one been able react sooner rather than later. Said another way it designs an investment portfolio to take advantage of any market conditions.
4) Reduces taxes associated with trading - When done correctly, regular quarterlies may reduce capital gains tax liability because profits from sales will occur throughout the year instead being concentrated into one larger sum resulting from fewer trades made annually which could trigger greater taxes owed due its size relative other smaller transactions spread across multiple quarters throughout year thus reducing overall taxable amounts owed each period accordingly .
