With so many cheap companies out there, it's tempting to sell everything and start all over again. In fact, it may be positively liberating.
A lot of investors have taken a look at their portfolios during the past year and realised that they've made huge mistakes that cost them a lot of money. Whether you've hired a financial advisor to guide you on what changes to consider or you're tackling the problem on your own, you may find that you need to make some big moves to get your investments back into shape.
Yet before you simply dump everything you own and start all over again, think twice. A rash decision could have a huge impact on your portfolio -- and you may end up making a bad situation even worse.
Digging In The Dirt
When you're just getting started with your investing, putting together a new portfolio from scratch simplifies things a lot. All you have to do is pick which investments interest you and decide how much to invest in each of them. You don't have to worry about what to do with stocks you already own. There couldn't be a cleaner way to begin your investing experience.
But let's face it: Most people don't just have a wad of cash sitting out there waiting to get invested. It's far more likely that you have a bunch of investments in your portfolio already -- and you probably aren't happy with a lot of them, especially if you're thinking about making big changes.
Compared with the clean job of investing cold hard cash, figuring out what to do with existing investments and how to move your money around forces you to get your hands dirty.
But none of these complications is an excuse to avoid the job. Just be aware of some potential problems.
The Tax Bite
Even if you're convinced that all the shares in your portfolio are losers, you still may be sitting on capital gains if you've held them for a long time. As an example, if you bought shares of these companies five years ago, you'd have a potential capital gain if you decided to sell:
If you own other shares with losses, you can solve the problem by selling them along with some of your winners to cancel out gains and losses. Don't forget you have an annual capital gains exempt amount of £9,600, meaning it may make sense to stretch out your shares sales over several tax years.
Bad Timing
Another argument favouring more gradual adjustments to your portfolio is that timing doesn't play such an important role. For instance, if you decide to cut your equity exposure from 80% to 50% all at once, then where your shares happen to trade on that one day makes a huge difference to your future wealth.
If you pick the wrong day to sell out -- or miss the best day to buy in -- then you could end up costing yourself thousands over time.
But if you decide to space out the switch over six to 12 months, then you're less vulnerable to short-term market movements. Obviously, if markets fall over that time, then you would've been better off selling everything at the beginning. But the gradual approach reduces the luck factor -- both positive and negative -- in favour of a longer-term average.
Be Smart
If you've decided you need to make major changes to your portfolio, congratulations -- you've made one of the toughest decisions an investor ever has to make. If you take care to avoid pitfalls, you'll likely find yourself back on the road to wealth sooner than you think.
More on the economy and the markets:
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> This article was first published on Fool.com. It has been updated.
> Bruce Jackson does not have a beneficial interest in any of the companies mentioned in this article.
