Is this a good mutual fund strategy:

Once a year I adjust the asset allocation of all my mutual funds, equity and bond. I maintain a fixed percent of cash, equity, and bonds.

If any fund gets Morningstar rating of 3 stars or less, I sell it and buy a fund with 5 stars (4 stars if no 5 stars in that category).

What do you think?

  • 1
    Well, it's incomplete ... what mix are you maintaining, with what time horizon? And doing a complete sell of one fund and buy into another does force you to take all youR profits or losses at that time for tax purposes and establish a new baseline ... but rebalancing once a year to maintain your targer ratios between investment types is probably perfectly adequate with index funds. I'm less sure about actively managed funds.
    – keshlam
    Apr 30, 2015 at 4:34
  • Do you have money in retirement funds? or is all your money in taxable investment? Apr 30, 2015 at 10:50
  • You haven't mentioned how you consider fees with respect to your strategy, nor whether you invest in a taxable account or some other kind. Apr 30, 2015 at 13:40

2 Answers 2


If you are paying any percentage fees for buying a fund, the constant churn inherent in your strategy would be really bad. If the trading fees are low, it's OK.

But the real question is whether your focus on Morningstar ratings is useful. They indicate nothing more than relative past performance.

I guess it comes down to whether you believe that active funds management has value. Data indicates that almost no funds manager consistently beats the market, and the multitude of different funds mainly has the effect that there are always some that recently outperform it by pure luck so that investors have something to turn to when their existing investments get unlucky and underperforms.

Personally, I'd switch to low-cost index funds and save myself the hassle and expense of rebalancing based on ratings, and instead aim for a good diversification across different markets and industries.

  • Don't index funds also have ratings?
    – dg99
    May 1, 2015 at 23:33
  • @dg99: nothing prevents people from rating them, but it's somewhat pointless. May 2, 2015 at 22:51

More then anything else your strategy is good for one reason: You are doing something. Many people you know might have "paralysis by analysis" and do nothing. In other words owning a 3 star MF is better then buying a new Tahoe. So good job there.

Can you make it a bit better? Eh sure. Many more questions come into play. What is your age, what are your goals, and are you looking for tax savings?

For example in one's company 401K the choices are limited so you might be happy to have a 3 star MF.

Another example is bonds. I am kind of an old guy, 48, but have very little invested in bonds. If you are under 30, I would have zero.

Also I would be a bit cautious about using one rating source as the be all and end all of my investments. Is the fund been good over the long haul and having a bad year? You might want to also insert some of your own analysis.

It also depends on how much money we are talking about here. Micheal's advice is spot on if you have a smallish portfolio. Stick it all in an S&P 500 fund and concentrate on getting more in there.

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