With everything you have to do, tending to your plan investments may take a back seat. But at least once a year, you should check your portfolio’s asset allocation. It may be time to rebalance your investments if your allocation percentages have shifted significantly.
Why Is Rebalancing Important?
It’s all about risk and potential reward. How you split your investment dollars among the major asset classes — stocks, bonds, and cash — determines your portfolio’s risk level and can have a big impact on your long-term returns. Generally, taking more risk increases the potential for earning higher long-term returns. Your asset allocation should reflect your investment goals, risk tolerance, and investment time frame.
Change Happens
In recent years, the stock market has experienced significant volatility. After a large drop, the last two years have been positive for stocks. If your portfolio includes stock investments and you haven’t rebalanced it, chances are good that your asset allocation has changed. Rebalancing can bring your portfolio back in line with the targets you have set and prevent you from inadvertently taking more (or less) risk than you originally intended.
Restoring Balance
Rebalan
cing your retirement portfolio is not difficult. One strategy is to have new contributions invested in the asset classes that have become too small until you achieve your desired asset allocation. Another strategy is to sell investments in the asset classes that have become overweighted and buy investments in the asset classes that are currently underweighted.
Moving your money out of asset classes that have performed well recently may not seem logical. But keep in mind that the investment markets are not static. Asset classes that are performing well could suffer declines in the future, and asset classes that are currently underperforming may rebound.
Maintaining a balanced, well-diversified* portfolio can help you achieve your retirement goals. So be sure to check your asset allocation and rebalance your portfolio when needed.
* Diversification does not ensure a profit or protect against loss in a declining market.