How do I Manage a Portfolio of Mutual Funds?

You grow your own vegetables. You trim your own unibrow. You even clean your own house. It should follow that you mind your own mutual fund portfolio. It's not a logical leap for many people, given the general skittishness that often surrounds investing. Assuming you've created a diversified slate of mutual fund holdings in the first place -- with or without the assistance of a professional -- there is no reason why you can't monitor its development and make tweaks as conditions necessitate.

Step 1

Invest regularly. This is probably the most frequent management decision you'll make has you hold court over your mutual funds. And the best part about it is that you can put it on auto-pilot. To keep growing your nest egg and take advantage of market downturns -- when share prices go low -- automatically transfer money from your checking or savings account to your mutual fund accounts each month. Most firms allow automatic monthly investments of as low as $50 to $100.

Step 2

Pay attention to taxes. As you mutual funds pay out capital gains and dividend distributions, they'll let you know via email, snail mail or both. You'll also receive year-end tax forms detailing all taxable distributions. Of course, you need to report these to the IRS. Also keep an eye on these distributions. If they are creating too much of a tax burden, consider scaling back your stake in the fund that is causing the problem.

Step 3

Evaluate performance. You don't necessarily have to do away with dogs. For example, if you have a mutual fund in a sector experiencing a downturn, buying more shares might be the right move in anticipation of a resurgence. If, however, the mutual fund manager is simply picking bad stocks in an otherwise well-performing area of the economy, you might want to take your losses and bail. Of course, this is a case-by-case decision. If you're not sure what to do, this might be the time where you relinquish some control and seek professional assistance.

Step 4

Watch fees and expenses. You or your financial advisor should have done this when you got into the funds. If this didn't happened or something happened at one of your funds since you made the purchase, these charges can become an issue. Your mutual fund companies will indicate on your statements how much of your nest egg they are pulling back in expenses. If you sold shares, your confirmation and statement should clearly state any deductions for sales loads and redemption fees. If you're uncomfortable with the fees, consider one of the many mutual funds that charge lower expense ratios and no sales loads or redemption fees. Mutual fund screeners, such as the one at Morningstar's website, can help you narrow the playing field.

Step 5

Rebalance. As you near retirement or simply get closer to the time when you need to access some or all of your mutual fund money, take things in a more conservative direction. You don't want to suffer the losses associated with a bear market right when you need to get to your dough. Consider scaling back the part of your portfolio that is in aggressive mutual funds in favor of safer funds, such as balanced or income stocks funds, bonds funds or even cash in the months or couple years before you sell out. You'll naturally take a look at rebalancing every five years or so and adjust your stock fund versus bond fund versus cash asset allocation as you grow more gray hairs.

Tips

  • When your mutual fund companies send you an account statement or transaction confirmation via snail mail, tear off the coupon at the bottom of the correspondence. Treat it like a bill. Write a check for $50 or $100 or whatever you can spare to add more funds to your mutual fund portfolio.
  • If you hold some or all of your mutual funds in an IRA or other tax-deferred account, taxes are less of a concern. The IRS does not require you to pay taxes annually on distributions.

About the Author

As a writer since 2002, Rocco Pendola has published numerous academic and popular articles in addition to working as a freelance grant writer and researcher. His work has appeared on SFGate and Planetizen and in the journals "Environment & Behavior" and "Health and Place." Pendola has a Bachelor of Arts in urban studies from San Francisco State University.