Rebalancing Your Mutual Fund

Rebalancing your mutual funds is an essential step in the investment process. Investing in a mutual fund provides you with a great way to diversify your portfolio. However, if left unchecked your portfolio could get out of balance. Here are the basics of rebalancing mutual funds and why it's important.

What Is Rebalancing?

Rebalancing is the act of making sure everything is in proportion in your portfolio. When we start investing, one of the first things we do is balance our portfolio. You choose how much of your investment dollars goes towards each type of investment. For example, you might decide the one put 10% of your investment dollars into bond funds, 50% in equity funds, and 40% in treasury funds. Then you leave your portfolio alone and go about your business for the year. At the end of the year, you come back and notice that your portfolio is not proportioned the way you set it up.

This happens because one investment will outperform the other. For example, if the equity funds did very well, they might make up 70% of your portfolio now. If you want to stick to your original plan, you will have to rebalance your portfolio by buying and selling the appropriate amount of shares for each fund. This will correct the portfolio and take it back to the original investment mix that you set up.

Why Rebalance?

As an investor, you might be wondering why you need to rebalance your portfolio. It is common to think that it investment does so well one year, it will do the same the next year. However, this is rarely the case. We have all heard the statement that past performance is no indication of future results. Therefore, the investment that did so well for us last year may not necessarily be great this year. If we believe that our original investment mix was correct, then we need to get back to that point again. Rebalancing your portfolio makes this possible.

How to Rebalance

  • Take notes- During the first part of rebalancing process, you want to take note of where you were when you started. Notice how much of the portfolio is made up of each investment. Start a spreadsheet on your computer and note the exact percentages of each investment.
  • Review- Choose a future date to review your mutual fund mix and decide if it is allocated the way you want. Take the amount of money that is invested in each type of investment and divide that number by the total dollar amount of the portfolio overall. This will give you the percentage of each investment in the portfolio. Decide if the percentages that you have are what you want. If not, you will need to make the necessary changes in order to get it back to the way you want it.
  • Change- Once you have determined the mix that you want, you need to actually rebalance the portfolio. Buy and sell the appropriate amount of shares of each mutual fund to get back to the mix that you desire.


Rebalancing is a concept that deals with the asset allocation of an investment portfolio. With asset allocation, an investor tries to stick to a certain percentage of each asset class in her portfolio. The value of her investments will change on a daily basis. Periodically, the investor has to buy some securities and sell others in order to get the portfolio back to the ratio that she desires. This is done so that the investor can stick to predetermined investment objectives as well as keep the portfolio within a specific range of volatility and risk. This can be done as frequently as an investor feels comfortable with.