Rebalancing your mutual fund portfolio: why and how to do it

 Rebalancing your mutual fund portfolio is important because it helps to maintain the desired asset allocation and risk level of your investment portfolio. As market conditions change and the value of your investments fluctuates, the proportions of different assets in your portfolio may become skewed. Rebalancing helps to bring the portfolio back to its original allocation and can also help to take advantage of market opportunities.

To rebalance a mutual fund portfolio, you can either sell some of the funds that have grown in value and use the proceeds to purchase more of the funds that have not performed as well, or you can use new contributions to purchase more of the underperforming funds. It's recommended to do it on a regular basis, annually or semi-annually, to stay on track with your investment goals. Some mutual funds and robo-advisors have automatic rebalancing options that can help you maintain your desired asset allocation.

Additionally, it's important to consider the cost of rebalancing, such as transaction fees and taxes. If the cost of rebalancing is too high, it may not be worth it. Therefore, it's important to weigh the potential benefits against the potential costs.

When rebalancing, it's also important to review your investment goals and risk tolerance to ensure that your current asset allocation is still appropriate. If your goals or risk tolerance have changed, you may need to adjust your asset allocation accordingly.

It's also important to note that when you rebalancing, you may be selling investments that are performing well and buying investments that are not performing well. This may seem counterintuitive, but it is a key aspect of maintaining a well-diversified portfolio. By rebalancing, you are buying low and selling high, which is a sound investment strategy.

In summary, rebalancing your mutual fund portfolio helps to maintain your desired asset allocation and risk level, and can also help you take advantage of market opportunities. It is important to do it on a regular basis and consider the cost, but it is a key aspect of maintaining a well-diversified portfolio and achieving your investment goals.