Rotating the Tires. Changing the Oil. Getting an Inspection.
A little routine maintenance on your car goes a long way toward keeping you safe on the road. Similarly, you should make checkups and adjustments to your investments to keep your retirement plans on course.
How you diversify your money among the three major asset classes — stocks, bonds, and cash and stable value options — can play an essential part in your long-term investment strategy. That's why it's a good idea to rebalance your portfolio regularly to make sure your asset mix stays within your risk comfort zone.
Time for a Tune-up?
Market fluctuations over the past several years may have affected different parts of your portfolio to varying degrees. Rebalancing, or periodically adjusting your portfolio to restore a target asset allocation mix, can help account for the market's ups and downs, and keep your strategy on track.
Let's say you've decided upon an asset allocation strategy that reflects the amount of investment risk you're willing to assume. As we know, ups and downs in the stock and bond markets are bound to occur. If stocks significantly outperform bonds, for example, your asset allocation may be overweight in stocks and underweight in bonds. As a result, your asset allocation may not accurately reflect your risk tolerance.
Every 5,000 Miles
It's generally recommended that you consider rebalancing at least annually. Many investors consider rebalancing in January. As a general rule, many financial advisors recommend rebalancing when your weight in stock, bond, or cash and stable value options varies by five percentage points from your target asset allocation. Others recommend rebalancing when your weight varies by 10 percentage points, but even that may be too great a variance for many investors.
Rebalancing is easy. Simply transfer money among investment options to restore your target allocation. Any new contributions should follow the target asset allocation mix. Make sure your new investments stay in proportion to one another according to your strategy. Rebalancing does not ensure a profit and does not protect against investment losses. It's a method to help manage risk.
Rebalancing at Work
In this hypothetical example, stock investment options grew faster than bond and cash and stable value options over the course of a year.
Initial asset allocation is restored by reallocating money from stock investment options to cash and stable value options.
Schedule Your Next Checkup
Contact your financial advisor or retirement plan representative to discuss rebalancing your retirement portfolio.