What is Switching?
Switching in investing is all about making adjustments to your portfolio. This could involve moving your money between different mutual funds, perhaps to better align with your risk tolerance or goals. You might also switch brokers entirely, seeking a platform with lower fees or more investment options. Finally, switching can involve selling off existing holdings like stocks or bonds to acquire new ones that fit your current strategy better. Remember, these switches can sometimes incur fees, so factor those in before making any changes.
How Switching Works
Switching investments allows you to adapt your portfolio to changing needs. Investment companies often let you move your money between their funds, sometimes without fees. However, there might be price differences between the funds you switch between, resulting in capital gains or requiring additional investment to cover the difference. Be sure to keep good records for tax purposes.
Switching can also involve moving your entire brokerage account to a new platform. This might be done to save on fees, get access to better research tools, or utilize robo-advisor features. Luckily, most brokers allow in-kind transfers, where you move your existing investments directly without selling them first, typically avoiding additional costs.
Drawbacks of Switching
Liquidating a position (selling your current investment) to move into a non-transferable option can be expensive. You'll pay commission fees for both the sale and the new purchase. While the potential for higher returns might justify these costs, be aware of the impact on your wallet.
Transferring your entire brokerage account can also be a hassle. Expect paperwork, holding periods where you can't access your funds, and temporary illiquidity during the switch. Switching to new funds within the same brokerage might seem simpler, but it can lead to extra tax reporting work. So, before you switch, be sure to factor in the time and potential costs involved.
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