Summarize the following:
When you get your year-end statements in January, take a look at the performance of your mutual funds and rearrange your investments by buying and selling shares. This allows you to retain your original balance. For example, suppose you have $100,000 which you have spread evenly across four different funds. However, at the end of the year, one fund has out-performed the rest so that it is now 30 percent of your portfolio rather than 25 percent. To rebalance your portfolio, you would want to take 5 percent of your shares in that fund and transfer them to the other funds in your portfolio. If your funds are held in a tax-deferred account such as a 401k, transferring assets between funds typically is your best option. However, with taxable accounts it's generally better to simply add new contributions to the lower-performing funds to rebalance. This way you can avoid paying taxes on the assets you sell and transfer. Performance weighting is a rebalancing strategy that involves selling shares from a high-performing fund and buying shares in your lowest-performing fund. While it seems counterintuitive, it follows the principal that funds tend to bounce back. You can think of this as adhering to the general stock investment strategy of buying low and selling high. You typically can buy more shares in a lower-performing fund, so you'll realize a greater return when it bounces back. Rebalancing your portfolio in this way will put you further ahead in the long-term than other strategies. When investing in mutual funds, discipline and self-control are important for healthy long-term returns. If you are impatient and trade frequently, chasing high-performance funds and large gains, you end up costing yourself a lot of money. Ultimately, anyone can be a successful investor, and mutual funds are a great investment vehicle for beginning investors. However, you must have a plan to invest and the discipline to stick to that plan. Avoid making decisions based on emotions or out of desperation. If you are questioning your motives for making an investment decision, talk to an advisor who can be objective. Typically, mutual funds will bounce back from a downturn, so it's not necessarily a good strategy to dump a mutual fund just because it performs poorly in the short-term. However, If a fund has taken an overall downward trend for awhile, it may be time to let it go. You also should watch out for funds that change managers, especially if this happens suddenly. Different managers may have different strategies that could significantly affect performance. Be on the lookout for changes that mean the fund at present has changed character so much that it's no longer the same fund in which you originally invested. Replace it with a fund that more closely matches your original goal for that fund within your portfolio.
Rebalance your portfolio every year. Practice performance weighting. Take a disciplined approach. Replace under-performing funds.