Rebalancing Your Retirement Portfolio
Why it matters
- Rebalancing is an important step in any retirement investment strategy.
- Over time, it’s normal for your portfolio to drift away from your goals.
- Rebalancing helps you manage risk and improve returns.
Just as your car needs the occasional tune-up and your house the occasional deep cleaning, your retirement portfolio needs periodic rebalancing. With time, it’s normal for a portfolio’s asset allocation to drift from what you initially established.1 To keep your investment strategy on target to meet your financial goals, make a plan to rebalance.
What is retirement portfolio rebalancing?
Portfolio rebalancing is fairly straightforward. Simply put, you sell a few investments in order to buy a few others.1 Why? The idea is to ensure your portfolio’s asset mix is in line with your goals and the level of risk you’re comfortable with.2
Over time, a portfolio will naturally become unbalanced. As the market changes, the percentage of the asset classes you hold changes since the various assets will perform differently. For example, stocks usually outperform bonds over the long run.3 Let’s say that the target asset mix of your portfolio was 80% stocks and 20% bonds when you began investing. After a while, you might find that you have 90% stocks and 10% bonds. At that point, you’ll want to rebalance to get back to your target 80/20 mix.
Why should you rebalance your portfolio?
The main reasons you’ll want to periodically rebalance your portfolio are to manage risk and improve returns.1
When your asset allocation drifts out of alignment — like in the scenario described above — your portfolio can become riskier. The more stocks you hold, the more susceptible your portfolio is to the ups and downs of the market.
A younger person just starting to invest will want more stocks in their portfolio. They have more time to build wealth and so have a higher risk tolerance. But someone closer to retirement will likely need the opposite asset mix in their investment account.4 They’ll want to rebalance so they’re holding more stable assets like bonds and cash investments.
You can also improve your returns when you rebalance two or more asset classes that have similar long-term expected returns.1 For example, let’s say you’re able to sell an asset that’s performing well. You can then use that money to buy more of another asset that isn’t performing well now but offers similar returns historically. This creates the opportunity for you to sell high and buy low — a genius move for any investor.
When and how often should you rebalance?
There are a few schools of thought here, so follow the strategy that works best for you and your investing plan.3 To stick to your target asset allocation, you could rebalance:
- Following a set timeframe — annually, quarterly, on a specific date, etc.
- Whenever your asset allocation drifts a certain percentage away from what you’re comfortable with.
- Using a mix of these strategies: At a set time, but only if the allocation has moved outside your comfort zone.
To keep your risk at a comfortable level and help improve your returns, it’s a good idea to rebalance your retirement portfolio. When you do it is up to you — on a set schedule, when the balance drifts out of alignment to a certain degree, or using a combination of these strategies. Just like with your car, a little routine maintenance can help ensure your retirement investments are where you want them down the road.
Things to consider
- Your investment goals change over time, just like you do. This means your retirement portfolio will need to adjust along the way.
- Make a rebalancing plan that fits your investment goals and your lifestyle.
- You can rebalance according to a set schedule, when the portfolio drifts a certain percentage, or using a combination of these.
1 “How to Rebalance Your Investment Portfolio,” Forbes.com, September 2021
2 “How to Build an Investment Portfolio for Retirement,” Investopedia.com, September 2021
3 “How to Adjust and Renew Your Portfolio,” Investopedia.com, September 2022
4 “How to Achieve Optimal Asset Allocation,” Investopedia.com, February 2022
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