Being mindful of the cost of something is a great habit. It prompts us to determine if whatever we’re buying is worth the cost. But if we get hung up on it, it can stop us from purchasing something that we need.
For example, you know you need a pair of shoes. You find a nice pair that gives you a good bang for your buck. But then you look behind you and see a similar pair of shoes- poorly made, less comfortable, and destined not to last very long. But they’re so much cheaper! Suddenly, you find yourself buying a pair of shoes you’ll have to replace after a few months instead of a pair that could have lasted years.
We can fall into a similar mistake with investing. Imagine you have a good portfolio, properly diversified, and suddenly, one fund has a fantastic run up. You know that it’s time to rebalance back to your original portfolio. But then you see the tax bill on the resulting capital gains.
The tax bill starts to eclipse the fact that you have great gains that you could lock in by rebalancing. Before you know it, you’ve procrastinated too long, the price of your over-concentrated investment starts to drop and you’ve lost more money than the tax would have cost you.
Just like the higher price shouldn’t deter you from buying the better-quality shoes, the cost of good investment decisions shouldn’t stop you from making those decisions
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