Let’s assume you’ve built, maybe with the help of an investment professional, a mutual fund portfolio reflecting how much risk you’re willing to take for some measure of reward. Professionals recommend that you review your portfolio’s mix regularly, with quarterly reviews the optimum.
Here’s why: If you’ve done your homework or used an investment advisor’s services, your portfolio is based on an asset allocation formula that reflects your assumed risk. Generally, stocks are riskier than bonds. For example, an asset allocation formula could be 60 percent stocks and 40 percent bonds. Stock market fluctuations, say huge gains in an aggressive growth stock fund, will change your asset allocation formula.
If, or rather, when, your portfolio’s growth portion takes a “hit,” you’ll have less protection from your bond holdings. Rebalancing your portfolio regularly will avoid unintentionally taking on too much, or too little, risk. Think of it as a “reality check” on whether your portfolio is in sync with your investment strategy.
Investors should be aware that investment returns and principal values of mutual funds will fluctuate due to market conditions. Therefore, when shares are redeemed, they may be worth more or less than their original cost.