Invest in 401k and Rebalance Your Portfolio

In light of stock market crashes of the past, there are several things we can do to protect ourselves financially in the future. We’ve discussed harvesting capital losses and avoiding wash sales, but those aren’t the only ways to keep your head above water the next time the stock market takes a plunge. By rebalancing your portfolio regularly, and investing in employer plans are two ways to keep your investments out of the red.

Rebalance Regularly

When you start investing in stocks, a lot of financial advisors will assess your risk tolerance due to factors such as your age, income, etc. and establish a way to allocate your assets accordingly. Most often, this will be the structure they recommend you follow—allocating your assets based on how capable you are of recovering from a loss should the possibility arise. Safer, less risky investments are ideal for people as they get closer to retirement, whereas younger people can pursue more aggressive, but risky, investment opportunities.

Using this strategy, the goal is to be able to buy low and sell high. These results would be favorable in the long-term, because it’d be a steady financial gain over time. The problem that may occur through this strategy is that selling high may result in taxable gains, which aren’t ideal. By regularly rebalancing your portfolio, you’re able to limit the amount of your earnings that end up being taxed.

Invest in a 401k and Other Plans

Many people have the opportunity to invest in retirement plans through their jobs, such as 401k plans. The contributions that you make to your 401k are untaxed, and you don’t have to pay tax on the money until you withdraw it years from now. Generally, the contributions you make to these plans are automatically deducted from your paycheck.

Most people recognize tax deferral as the highlight of retirement plans like 401ks, but there are other benefits as well. Stipulations called “periodic contributions” dictate that if you contribute a certain amount every month to a particular mutual fund, you will buy more shares when the prices are low, and fewer when the prices are high. This is called dollar cost averaging, and is a valuable strategy for lowering the cost you pay for per share, which increases future profits.

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