[jively]

Since you are able to invest $5K more each month, you are in a great position where you can keep your portfolio allocated without having to sell funds and generate capital gains.

When it is time to invest your new $5K contribution, you should take a look at what % each of your funds is in your total portfolio. The funds that have done the best will be "overweighted." For example, if emerging markets are doing particularly well, instead of 8% of your portfolio, it might now be 10%. The funds that have done the worst (by declining or by increasing the smallest amount) will be "underweighted." For example, if large cap value stocks are doing poorly, instead of 16% of your portfolio, it might be 14%.

When you are ready to invest more, you should add to the funds that are the most underweighted. By doing this, you will more the portfolio closer to the original target allocation.

Keeping the allocation the same, over a long term horizon, makes sure that your portfolio aggressiveness is the same as what you originally intended. It also allows you to "buy low" as you buy more of the asset classes that are performing poorly.

After some time, your portfolio may be significantly out of balance. For example, if stocks go up a lot over a few years, instead of an 80% stock portfolio, you may now have 90% stocks and only 10% in fixed income. Even though you are adding $5,000 per month to fixed income funds, you can't bring the allocation back to the target. In this case, you should consider a "rebalance," and actually sell some of the overweighted funds. You definitely want to wait at least one year and one day so that any sales are considered long-term capital gains.

Just as before, see which funds are overweighted and which are underweighted. You then want to exchange shares from the overweighed funds into the underweighted ones so that it is back to the original allocation. You might to move your fund balances to a spreadsheet to help with the calculation.

By making a rebalance, you are able to "sell high" and "buy low." You generally will not need to do this very freqently, maybe once every year or two. By doing this infrequently, your low-turnover portfolio will have only a small amount of capital gains.

There you have it. You can have a low-cost portfolio of index mutual funds that are globally diversified, and tilted to small and value stocks. This portfolio should do very well over a long period of time, with low turnover.

-Tom