How (or is it necessary) to rebalance a 401k with only one index fund?
"There's nothing to rebalance, the index fund rebalances itself to continue matching the index. However, you need to understand that such an investment is not diversified and you only invest in a very specific market, and very specific stocks on that market. S&P 500 is large (500 different companies, most of the time), but still not as broadly diversified as your retirement investment portfolio should be. You should talk to a financial adviser (CFP for example), many companies provide access to these for 401k plan participants. But in any case, I'd suggest considering ""target date"" funds - funds that are investing based on your expected retirement year, and become more conservative as you get closer to that year." Rebalance is across asset-classes which are mutually independent [like stocks and bonds; they may be inversely correlated at times as when stocks go down, bonds go up] 80%-20% (stock-bond) split is good for a young investor [say in 30s, some suggest 110-age as a good stock allocation percentage]. Here rebalance is done when say the asset-allocation(AA) strays away more than say 3 to 5% (again just a rule of thumb). E.g. if due to a recent run-up in stocks, AA could become 85%-15%. Then you sell stocks to buy bonds to make the AA 80%-20% And since this method always sells the winner -- you automatically make gains [selling high and buying low] S&P 500 index gives decent diversification within stocks; you want a total-bond-fund to take care of the bond side of your AA.
Taxes  Based on the numbers you quoted (-$360) it doesn't appear that you would have a taxable event if you sell all the shares in the account.  If you only sell some of the shares, to fund the new account, you should specify which shares you want to sell. If you sell only the shares that you bought when share prices were high, then every share you sell could be considered a loss. This will increase your losses. These losses can be deducted from your taxes, though there are limits. Fees Make sure that you understand the fee structure. Some fund families look at the balance of all your accounts to determine your fee level, others treat each fund separately.  Procedure If you were able to get the 10K into the new account in the next few months I would advise not selling the shares. Because it will be 6 to 18 months before you are able to contribute the new funds then rebalancing by selling shares makes more sense. It gets you to your goal quicker.  All the funds you mentioned have low expense ratios, I wouldn't move funds just to chase a the lowest expense ratio. I would look at the steps necessary to get the mix you want in the next few weeks, and then what will be needed moving forward. If the 60/40 or 40/60 split makes you comfortable pick one of them. If you want to be able to control the balance via rebalancing or changing your contribution percentage, then go with two funds. Personally I'm not a huge fan of rebalancing within an asset class. I would vote for leaving the HD shares alone and buying other assets until you get to the portfolio you want. Frequent buying and selling incurs costs and possible tax consequences that can really hurt your returns. They can rebalance and often times at a random manager's discretion. ETF's are just funds, and funds all have their own conditions, read the prospectus, thats the only source of truth. "The goal of the single-fund with a retirement date is that they do the rebalancing for you.   They have some set of magic ratios (specific to each fund) that go something like this: Note: I completely made up those numbers and asset mix. When you invest in the ""Mutual-Fund Super Account 2025 fund"" you get the benefit that in 2015 (10 years until retirement) they automatically change your asset mix and when you hit 2025, they do it again.   You can replace the functionality by being on top of your rebalancing. That being said, I don't think you need to exactly match the fund choices they provide, just research asset allocation strategies and remember to adjust them as you get closer to retirement." The benefit of the 401K and IRAs are that reallocating and re balancing are easy. They don't want you to move the funds every day, but you are not locked in to your current allocations. The fact that you mentioned in a comment that you also have a Roth IRA means that you should look at all retirements as a whole.  Look at what options you have in the 401K and also what options you have with the IRA. Then determine the overall allocation between bonds, stocks, international, REIT, etc. Then use the mix of funds  in the IRA and 401K to meet that goal. Asking if the 401K should be small and mid cap only can't be answered without knowing not just your risk tolerances but the total money in the 401K and IRA.  Pick an allocation, map the available funds to that allocation. Rebalance every year. But review the allocation in a few years or after a life event such as: change of job, getting married, having kids, or buying a house. "In case other people arrive at this page wondering whether they should enable automatic reinvestment of dividends and capital gains for taxable (non-retirement) accounts (which is what I was searching for when I first arrived on this page): You might want to review https://www.bogleheads.org/wiki/Reinvesting_dividends_in_a_taxable_account and http://www.fivecentnickel.com/2011/01/26/why-you-shouldnt-automatically-reinvest-dividends/. The general idea is that--assuming you plan to regularly manually rebalance your portfolio to ensure that all of the ""pieces of the pie"" are the relative sizes that you want--there are approaches you can use to minimize taxes (and also fees, although at Vanguard I don't think that's a concern) if you choose a ""SpecID cost basis"" and manual reinvestment. Then you can go to ""Change your dividends and capital gains distribution elections"" at https://personal.vanguard.com/us/DivCapGainAccountSelection." "I assume by that you mean gradually buying the same mix of funds over time.  If that's the case, there is no rational reason to do this.   Dollar-cost averaging is an artifact of the way most people fund their 401(k).  I would not consider it a viable ""strategy"".  (Neither does Wikipedia)  Let's say you have $100,000 that you add $10,000 at a time.  When you add money, one of three things can happen: Since you can't predict the future, there's no mathematical justification for buying in segments.  There's just as much chance that your funds will be worth more or less, so on average it should make little to no difference.   In fact, given the time value of money there is a slight  advantage to investing it all now so you can capture any future returns.  You can always rebalance later to capture gains on some funds and purchase funds that are down to (hopefully) catch them on a rebound." As a general rule, diversification means carrying sufficient amounts in cash equivalents, stocks, bonds, and real estate.   An emergency fund should have six months income (conservative) or expenses (less conservative) in some kind of cash equivalent (like a savings account).  As you approach retirement, that number should increase.  At retirement, it should be something like five years of expenses.  At that time, it is no longer an emergency fund, it's your everyday expenses.  You can use a pension or social security to offset your effective monthly expenses for the purpose of that fund.  You should five years net expenses after income in cash equivalents after retirement.   The normal diversification ratio for stocks, bonds, and real estate is something like 60% stocks, 20% bonds, and 20% real estate.  You can count the equity in your house as part of the real estate share.  For most people, the house will be sufficient diversification into real estate.   That said, you should not buy a second home as an investment.  Buy the second home if you can afford it and if it makes you happy.  Then consider if you want to keep your first home as an investment or just sell it now.   Look at your overall ownership to determine if you are overweighted into real estate.  Your primary house is not an investment, but it is an ownership.  If 90% of your net worth is real estate, then you are probably underinvested in securities like stocks and bonds.  50% should probably be an upper bound, and 20% real estate would be more diversified.   If your 401k has an employer match, you should almost certainly put enough in it to get the full match.   I prefer a ratio of 70-75% stocks to 25-30% bonds at all ages.  This matches the overall market diversification.  Rebalance to stay in that range regularly, possibly by investing in the underweight security.  Adding real estate to that, my preference would be for real estate to be roughly a quarter of the value of securities.  So around 60% stocks, 20% bonds, and 20% real estate.  A 50% share for real estate is more aggressive but can work.   Along with a house or rental properties, another option for increasing the real estate share is a Real Estate Investment Trust (REIT).  These are essentially a mutual fund for real estate.  This takes you out of the business of actively managing properties.   If you really want to manage rentals, make sure that you list all the expenses.  These include:   Also be careful that you are able to handle it if things change.  Perhaps today there is a tremendous shortage of rental properties and the vacancy rate is close to zero.  What happens in a few years when new construction provides more slack?   Some kinds of maintenance can't be done with tenants.  Also, some kinds of maintenance will scare away new tenants.  So just as you are paying out a large amount of money, you also aren't getting rent.  You need to be able to handle the loss of income and the large expense at the same time.   Don't forget the sales value of your current house.  Perhaps you bought when houses were cheaper.  Maybe you'd be better off taking the current equity that you have in that house and putting it into your new house's mortgage.  Yes, the old mortgage payment may be lower than the rent you could get, but the rent over the next thirty years might be less than what you could get for the house if you sold it.  Are you better off with minimal equity in two houses or good equity with one house?   I would feel better about this purchase if you were saying that you were doing this in addition to your 401k.  Doing this instead of your 401k seems sketchy to me.  What will you do if there is another housing crash?  With a little bad luck, you could end up underwater on two mortgages and unable to make payments.  Or perhaps not underwater on the current house, but not getting much back on a sale either.   All that said, maybe it's a good deal.  You have more information about it than we do.  Just...be careful. "When you hear advice to buy index funds, that usually comes with two additional pieces of investment discipline advice that are important: These two elements are important to give you relative predictability in your outcome 20 years from now.  In this old blog post of mine I linked to Warren Buffett talking about this, also  mentioned it in a comment on another answer: http://blog.ometer.com/2008/03/27/index-funds/ It's perfectly plausible to do poorly over 20 years if you buy 100% stocks at once, without dollar-cost averaging or rebalancing. It's very very very plausible to do poorly over 10 years, such as the last 10 in fact. Can you really say you know your financial situation in 20-30 years, and for sure won't need that money? Because predictability is important, I like buying a balanced fund and not ""pure stocks"": http://blog.ometer.com/2010/11/10/take-risks-in-life-for-savings-choose-a-balanced-fund/ (feel a little bad linking to my blog, but retyping all that into this answer seems dumb!) Here's another tip. You can go one step past dollar cost averaging and try value averaging: http://www.amazon.com/Value-Averaging-Strategy-Investment-Classics/dp/0470049774 However, chances are you aren't even going to be good about rebalancing if it's done ""by hand,"" so personally I would not do value averaging unless you can find either a fund or a financial advisor to do it for you automatically. (Finance Buff blog makes a case for a financial advisor, in case you like that more than my balanced fund suggestion: http://thefinancebuff.com/the-average-investor-should-use-an-investment-advisor-how-to-find-one.html) Like rebalancing, value averaging makes you buy more when you're depressed about the market and less when it's exciting. It's hard.  (Dollar cost averaging is easily done by setting up automatic investment, of course, so you don't have to do it manually in the way you would with value averaging.) If you read the usual canonical books on index funds and efficient markets it's easy to remember the takeaway that nobody knows whether the market will go up or down, and yes you won't successfully time the market. But what you can do successfully is use an investment discipline with risk control: assume that the market will fluctuate, that both up and down are likely and possible, and optimize for predictability in light of that. Most importantly, optimize to take your emotions and behavior out of the picture. Some disciplines for example are: there are dozens out there, many of them snake oil, I think these I mentioned are valid. Anyway, you need some form of risk control, and putting all your money in stocks at once doesn't give you a lot of risk control. There's no real need to get creative. A balanced fund that uses index funds for equity and bond portions is a great choice." (a) 5 funds for $15K is not too many or too few ? A bit high as I'd wonder if you've thought of how you'll rebalance the funds over time so you aren't investing too much in a particular market segment. I'd also question if you know what kinds of fees you may have with those funds as some of Vanguard's index funds had fees if the balance is under $10K that may change how much you'll be paying. From Vanguard's site: We charge a $20 annual account service fee for each Vanguard fund with   a balance of less than $10,000 in an account. This fee doesn’t apply   if you sign up for account access on Vanguard.com and choose   electronic delivery of statements, confirmations, and Vanguard fund   reports and prospectuses. This fee also doesn’t apply to members of   Flagship®, Voyager Select®, and Voyager Services®. So, if you don't do the delivery this would be an extra $100/year that I wonder if you factored that into things here. (b) Have I diversified my portfolio too much or not enough ? Perhaps I   am missing something that would be recommended for the portfolio of   this kind with this goal. Both, in my opinion. Too much in the sense that you are looking at Morningstar's style box to pick a fund for this box and that which I'd consider consolidating on one hand yet at the same time I notice that you are sticking purely to US stocks and ignoring international funds. I do think taxes may be something you haven't considered too much as stocks will outgrow most of those funds and trigger capital gains that you don't mention at all. (c) If not my choice of my portfolio, where would you invest $15K   under similar circumstances and similar goals. What is the goal here? You state that this is your first cash investment but don't state if this is for retirement, a vacation in 10 years, a house in 7 years or a bunch of other possibilities which is something to consider. If I consider this as retirement investments, I'd like pick 1 or 2 funds known for being tax-efficient that would be where I'd start. So, if a fund goes down 30%, that's OK? Do you have a rebalancing strategy of any kind? Do you realize what taxes you may have even if the fund doesn't necessarily have gains itself? In not stating a goal, I wonder how well do you have a strategy worked out for how you'll sell off these funds down the road at some point as something to ponder. "From http://blog.ometer.com/2008/03/27/index-funds/ , Lots of sensible advisers will tell you to buy index funds, but   importantly, the advice is not simply ""buy index funds.""   There are at least two other critical details: 1) asset allocation   across multiple well-chosen indexes, maintained through regular   rebalancing, and 2) dollar cost averaging (or,   much-more-complex-but-probably-slightly-better, value averaging). The   advice is not to take your single lump sum and buy and hold a   cap-weighted index forever. The advice is an investment   discipline which involves action over time, and an initial   choice among indexes. An index-fund-based   strategy is not completely passive, it involves some active risk   control through rebalancing and averaging. If you'd held a balanced portfolio over the last ten years and rebalanced, and even better if you'd dollar cost averaged, you'd have done fine. Your reaction to the last 10 years incidentally is why I don't believe an almost-all-stocks allocation makes sense for most people even if they're pretty young. More detail in this answer: How would bonds fare if interest rates rose? I think some index fund advocacy and books do people a disservice by focusing too much on the extra cost of active management and why index funds are a good deal.  That point is true, but for most investors, asset allocation, rebalancing, and ""autopilotness"" of their setup are more important to outcome than the expense ratio." Yours two funds are redundant.  Both are designed to have a mix of bonds and stocks and allow you to put all your money in them.  Pick the one that has the lowest fees and stick with that (I didn't look at the funds you didn't select...they didn't look great either).  Although all your funds have high fees, some are higher than others, so don't ignore fees. When you have decided on your portfolio weights, prioritize your money thus: Contribute enough to your 401(k) to get the full match from your employer Put everything else toward paying off that credit card until you have 0 balance.  It's ok to use the card, but let it be little enough that you pay your statement balance off each month so you pay no interest. Then set aside some savings and invest any retirement money into a Roth IRA.  At your income level your taxes are low so Roth is better than traditional IRA or 401(k).  If you max out your Roth, put any other retirement savings in your 401(k). I still don't see the point of this software; rebalancing frequently is a waste of money (through fees).  If you invest in index funds, you don't have to rebalance at all--effectively, the fund is doing it for you, and since they can generally trade more efficiently than individual investors can, that's a win.  The Coverdell ESA is a great example.  There's a maximum contribution amount, just as there are for almost any tax-exempt account.  A decent financial adviser could help you plan how much to contribute to which accounts, at what time, and when you can/should start to withdraw from them. "Having worked for a financial company for years, my advice is to stay away from all the ""Freedom Funds"" offered.  They're a new way for Fidelity to justify charging a higher management fee on those particular funds.  That extra 1% or so a year is great for making the company money; it will kill your rate of return over the next 25+ years you're putting money into your retirement account.  All these funds do is change the percentage of your funds in stocks vs. more fixed investments (bonds, etc.) so you have a higher percentage in stocks while you're young and slowly move the percentage more towards fixed as you get older.  If you take a few hours every 5 years to re-balance your portfolio and just slowly shift more money towards fixed investments, you'll achieve the same thing WITHOUT the extra annual fee. So how much difference are we talking here?  Let's do a quick example.  Based on your salary of $70k and a 4% match by your company, you'll have $5,600 a year to put in your 401(k) (your 4% plus matched 4%).  I'll also assume an 8% annual return for both funds.  Here is what that 1% extra service charge will cost you: Fund with a 1% service charge: Annual Fee Paid Year 1 - $60.00 Annual Fee Paid Year 25 (assuming 8% growth in assets) - $301.00 Total Fees Year 1 through 25:  $3,782 Fund with a 2% service charge: Annual Fee Paid Year 1 - $121.00 Annual Fee Paid Year 25 (assuming 8% growth in assets) - $472.00 Total Fees Year 1 through 25:  $6,489 That's a total of $2,707 in extra fees over 25 years on just the investment you make this year!  Next year if you invest the same amount in your 401k that will be another $2,707 paid over 25 years to the management company.  This pattern repeats EACH year you pay the higher management fee.  Trust me, if you invest that money in stock instead of paying it as fees, you'll have a whole lot more money saved when it's time to retire. My advice, pick a percentage you're comfortable with in stocks at your age, maybe 85 - 90%, and pick the stock funds with the lowest management fees (the remaining 10 - 15% should go into a fixed fund).  Make sure you pick at least some of your stock money, I do 20 - 25%, and select a diverse (lots of different countries) international fund. For any retirement money you plan to save above the 4% getting matched by your company, set up a Roth IRA.  That will give you the freedom to invest in any stocks or funds you want.  Find some low-cost index funds (such as VTI for stocks, and BND for bonds) and put your money in those.  Invest the same amount every month, automatically, and your cost average will work itself out through up markets and down. Good luck!" "when the index is altered to include new players/exclude old ones, the fund also adjusts The largest and (I would say) most important index funds are whole-market funds, like ""all-world-ex-US"", or VT ""Total World Stock"", or ""All Japan"".  (And similarly for bonds, REITS, etc.)  So companies don't leave or enter these indexes very often, and when they do (by an initial offering or bankruptcy) it is often at a pretty small value. Some older indices like the DJIA are a bit more arbitrary but these are generally not things that index funds would try to match. More narrow sector or country indices can have more of this effect, and I believe some investors have made a living from index arbitrage.  However well run index funds don't need to just blindly play along with this. You need to remember that an index fund doesn't need to hold precisely every company in the index, they just need to sample such that they will perform very similarly to the index.  The 500th-largest company in the S&P 500 is not likely to have all that much of an effect on the overall performance of the index, and it's likely to be fairly correlated to other companies in similar sectors, which are also covered by the index.  So if there is a bit of churn around the bottom of the index, it doesn't necessarily mean the fund needs to be buying and selling on each transition.  If I recall correctly it's been shown that holding about 250 stocks gives you a very good match with the entire US stock market."