Habits for a Healthier Mutual Fund Portfolio

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At the end of every year, investors should consider some valuable strategies to make their mutual fund portfolios ready for a new year. A wise investor will also be mindful of these strategies throughout the year. Therefore these are not just last-minute strategies for every December.

You really only need to rebalance your portfolio once per year and the end of the year (December) is a great time to do it. Like any given year, it is likely that some of your investments performed better than others. You can sell the winners and buy the losers by rebalancing. You’ll also ensure that your portfolio will be properly allocated for the coming year, when financial markets are likely to be different than the previous year.

If you have a regular brokerage account, where you may have capital gains and/or capital losses, you will be wise to see how you can take advantage of tax loss harvesting. For example, if you have capital losses, you may be able to use them to reduce or eliminate (offset) capital gains. You may also be able to reduce ordinary income, if you do not have any capital gains to offset.

This is not as much a strategy as it is a philosophy. In a sense, every investment move you make is a form of market timing because every purchase and ever sale of mutual fund shares involves a particular time and choice regarding the respective investment trade and investment type. However, you want to be careful of pure market timing where you attempt to predict which direction the economy and financial markets, and hence a particular investment type, will move next. A strong sense of self-awareness, which includes the knowledge that the worst enemy of the investor is the investor, is crucial to investment success. In other words, there is a difference between timing the market and smart, sound and strategic investment decisions. A bit of humility can really take you far as a mutual fund investor.

Again, wise investors know that market timing is not a smart investment strategy but understanding the market and economic environment can help guide decisions for where to invest in the new year. Your investment objectives are the primary guide in forming investment strategies and in making your subsequent investment decisions but there are other factors, including the economic and political environment to consider.

None of the year-end strategies or philosophies will be useful for you if you do not know how to build the best portfolio of mutual funds. You may want to consider an aggressive portfolio or a moderate portfolio or a conservative portfolio of mutual funds. Just be sure it suits your risk tolerance and investment objectives.

If you are still using actively-managed funds, you may want to look back over the year to see if they still meet your investing needs. Of course one year alone will not give you the whole investment picture, but the end of a year is a good time to be sure you are using the best mutual funds for your needs. Index funds have lower expenses and are passively managed, which reduces the risk that a fund manager, no matter how skilled they may be at investment management, will make human mistakes, such as poor stock or bond selection based upon emotion or ego.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.