Rebalancing your retirement account is like professionally grooming your brows. It takes minimal time, but keeps your portfolio looking good for months to come.
And in this case, you can find financial balance without moving from your poolside lounge chair (margarita optional).
Portfolios consist of different asset classes: stocks (equities), bonds (fixed income), cash, and sometimes things like real estate. The variety in your account is call your “asset allocation.”
Your asset allocation is important because each class comes with risks and benefits, and spreading your money out minimizes the risk tied to any one particular class.
But markets change all the time, and your portfolio can actually change so much that your original allocation becomes completely thrown off. Let’s say you own one mutual fund for each of the asset classes we just mentioned, and you’ve got 25% of your money in each fund.
If the stock market has an amazing year, your stock mutual fund could suddenly make up 50% of your entire portfolio. Growth is great, but a diversified portfolio is better for long-term security.
The solution? If you’re making regular contributions to your portfolio, stop investing in the stock fund and contribute more toward your weaker holdings. Once you’ve found your balance again, simply resume your original contributions.
Many retirement plans offer automatic rebalancing. Go online or consult your plan administrator to see if you can set up annual or semi-annual automatic reviews and readjustments.