Rebalancing is an important part of managing a portfolio or retirement account. Don’t do it, and you could wind up with a portfolio of exchange traded funds (ETFs) that’s way out of whack.
Many investors set up their retirement accounts with a 60%-40% stock-to-bond allocation — 60% of your portfolio is in stock funds, 40% in bond funds. If you have something similar in your retirement account, and have ignored your holdings for a year or more, the value and your allocation may have shifted and the values may have changed. [How to Use ETFs in Retirement.]
Lisa Scherzer for SmartMoney reports that rebalancing means adjusting the allocations to the funds in your account back to their original targets with your ideal mix of stocks, bonds and cash. [An All-ETF 401(k) Plan.]
Other events indicating that your portfolio needs a rebalance include:
- Big Market Movements: Plan participants should make sure they’re not too heavily invested in one asset class that has recently outperformed or done poorly. However, using big market movements as a signal to rebalance comes with some risk as there is a tendency to try to time the market.
- Too Much Company Stock: Generally, company stock should not make up more than 20% of your overall portfolio.
- Life Event: Consider rebalancing if you’re married and your spouse gets another job and another retirement account. Also, consider one another’s portfolios, and view them as one investment unit rather than separate. Divorce is another instance when a rebalance is needed.
- If Plan Choices Change: Sometimes an employer will switch plan providers altogether, which would require new investment decisions. You might have to rebalance based on better or more limited choices, or even do some of the rebalancing outside of the 401(k).
- Getting Close to Retirement: Rebalancing becomes more critical as you approach retirement. When you’re about three to five years away from retirement, you want to assume a little less risk, and the further from retirement, you want to take on more risk for more reward.
To help you plan for retirement, we have a series of model portfolios to choose from. Ultra members can also create unlimited portfolios of their own. For any portfolio you choose, we have rebalancing alerts so you never forget to take this important step. Watch this video for more information.
For more stories about retirement, visit our retirement category.
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.