Asset Allocation With Funds
Read Full Story
Whether you're a young, middle-aged or older investor, you're likely to benefit from integrating asset allocation into your investing strategy.
Asset allocation is the process of spreading your investments among categories with different risks and returns that characterize the risk-return trade-off of investing.
According to many financial advisers, most of your investment returns come from how well you make your asset allocation choices.
The three major asset classes of asset allocation are cash, stocks and bonds. How much you choose to invest in each category depends on your risk tolerance, investment horizon and financial goals.
Mutual funds are a convenient way to make some or all of your allocations. If you are a 35-year-old investor who allocates 70% of your portfolio to stocks, 20% to bonds and 10% to cash, you can easily reach these allocations by buying shares of mutual funds. The next several topics examine some of the major types of mutual funds that can be used to allocate your assets and construct a diversified portfolio.
Like all investors who use an asset allocation strategy, you will occasionally need to rebalance your portfolio. You may need to rebalance once or twice a year. Rebalancing may simply involve fine-tuning your percentage allocations to maintain your target weightings. (The investor identified above has target weightings of 70, 20 and 10 percent.)
Since rebalancing requires moving funds across categories such as from stocks to bonds or vice versa, you're unlikely to run afoul of the wash-sale rule. However, if you're seeking to replace a poorly performing fund with a similar fund, you will want to keep an eye out for the rule.
If you sell a fund for a capital loss, the wash-sale rule requires you to wait at least 31 days to buy back a substantially similar mutual fund provided you plan to use the loss to offset other capital gains. (Investors can offset all of their capital gains with capital losses, as well as up to $3,000 of ordinary income each year. Remaining unused capital losses must be carried forward.)
If the replacement has a similar investment objective to the fund you've just sold, chances are good that you're investing in a substantially similar security. As a result, you may want to wait for 31 days to buy the fund. If you're not sure, check with your financial or tax adviser. You can find a mutual fund's investment objective in its prospectus