6 simple (and effective) ways to rebalance your mutual fund portfolio

Ways to Rebalance your mutual fund portfolio– Rebalancing a portfolio of mutual funds is one of the most important things you can do as an investor. In fact, if you haven’t done so in the last year, it might even be more important than making any new investments. 

So whether you’re just starting out with mutual fund investing or looking to make some changes to your portfolio, here are 10 ways to make sure you’re not over or underweight in any specific asset class and that you’re following these 6 simple (and effective) ways to rebalance your mutual fund portfolio.

Mutual funds are a popular option for investing because they offer diversity, professional management and low fees. 

But like any investment, there’s always the chance that things will go south. For that reason, it’s important to periodically review your investments and make any necessary adjustments. One of the best ways to do this is by rebalancing your portfolio. 

The basic idea is to use periodic sell-offs to get back closer to your original investment goal. Let’s say you had originally invested $5,000 in five different stocks at $1,000 each:

What would happen if one of those stocks – Company A – was bought out by another company? You’d lose an entire $1,000 worth of shares. What if two other companies were doing well? 

You might have increased the number of shares you own in those companies without selling anything

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In both cases, rebalancing helps you maintain a diversified portfolio with lower risk than if you didn’t adjust at all. Rebalancing can be done in many different ways

6 simple (and effective) ways to rebalance your mutual fund portfolio

1. Take an honest look at your investing goals

Investing is a long-term game. While you may be investing for retirement, it’s still important to make sure that you’re not putting all of your eggs in one basket. If the market were to crash, that could spell disaster for you. 

To keep things balanced and diversified, it’s a good idea to check up on your investments every six months or so and make sure they’re aligned with your goals. 

The first step is to have an honest discussion with yourself about what your current financial situation looks like and what your future plans are. 

Then, once you’ve made those decisions, pick a day—ideally, at least three weeks away—to sit down and go through all of your accounts, including checking statements and bank accounts. 

Make note of any new contributions or contributions you’ve missed since the last time you checked up on them. Finally, take another look at your asset allocation: Do any areas seem disproportionate?

6 simple (and effective) ways to rebalance your mutual fund portfolio

2. Invest in a few companies you know well

Invest in a few companies you know well. It’s easier to assess the value of these investments, and they are more likely to outperform the market.

Invest in companies that you have a deep understanding of and an even deeper conviction about. 

Put together a list of 10 stocks or funds that you would be comfortable owning for at least five years. Allocate a percentage of your portfolio to each company, with the heaviest weightings going towards those with which you have the most knowledge and conviction. 

If any one investment makes up more than 20% of your holdings, take some profits off the table; if anything is trading at more than 25% below its fair value, sell it right away.

3. Use Low-Cost Funds

If you’re looking for an easy way to rebalance your mutual funds and avoid incurring any significant transaction costs, we recommend investing in low-cost index funds

Index funds have the best track record of any type of investment over time, which means it’s likely they’ll outperform other types of investment options available today. 

Plus, because index funds are passively managed by a computer algorithm and not a human, they are less expensive on average than actively managed funds.

When you invest in an index fund, you’re buying shares in every company that’s part of that index. This gives you exposure to hundreds or thousands of companies instead of just one or two.

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4. Diversify, Diversify, Diversify!

Diversifying your investments is important for a number of reasons. First, it spreads risk and reduces volatility by providing exposure to different stocks, bonds, and other types of assets. 

Second, it helps you avoid putting all of your eggs in one basket and losing everything should one type of investment go sour. Third, it allows you to invest in whatever asset class you want or need while still maintaining a diverse portfolio. 

Finally, diversity means that if one type of investment has a good year the rest will too. 

Rebalancing is just another way to diversify because it shifts money from those types of investments that have done well into those types which haven’t performed as well over time.

5. Avoid Performance Chasing

Don’t try to time the markets. Understand what you own and why you own it and have an appropriate allocation for the stage of life that you’re in. If a particular asset class is outperforming others, that doesn’t mean it will outperform in the future. 

You may be buying high or selling low by trading frequently. It’s better to take a longer-term approach with incremental contributions, which can help smooth out any peaks and valleys in performance.

6 simple (and effective) ways to rebalance your mutual fund portfolio

Regularly examine your holdings as part of a larger financial plan and rebalance periodically. For example, once per year or every few years could work depending on how volatile the market is where you live.

Rebalancing gives your portfolio a fresh start. Make sure to do this periodically because, over time, allocations change naturally as new money comes in and existing investments are sold off without being replaced.

6. Rebalance Your Portfolio Periodically

Rebalancing can be a difficult and confusing process if you’re not sure where to start. It’s important, however, because it ensures that you have the right mix of stocks and bonds for your individual risk level. 

Below are 10 easy-to-follow steps that will help you rebalance with ease.

1. Check which asset classes are out of balance: You can find this in your investment statement or on an online service like Morningstar or Yahoo Finance. 

For example, if the percentage of bonds is higher than the percentage of stocks, that means there is less equity in the portfolio and more stability. 

The opposite is true if there is a higher percentage of stocks than bonds; the investor has a higher risk tolerance and should seek a higher return on their investments. If the percentages are about equal, then all is well and no change needs to be made.

2. Sell any securities that need to go up: If your percentage of stocks has decreased below 40%, then it may be time to sell some high-performing assets like stocks or ETFs before they get too expensive. 

The same goes for bond holdings when they get too low;

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