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One of the keys to managing your money is to periodically rebalance your investment portfolio. Rebalancing allows you to maintain your target asset mix and to lock in your gains. Here’s why this simple strategy is so important – especially when you’re retired -- and how to put it into practice.
Review your portfolio at least once a year and consider rebalancing if your investment mix has strayed from your target mix by 5% or more. That means selling investments that have performed best and are overweighted, and buying investments that have become underweighted.
Granted, it may be counterintuitive to sell your winning asset classes and buy the losers. But here’s why it’s essential to do: In addition to maintaining your target investment mix, rebalancing your portfolio forces you to buy low and sell high relative to past levels, as well as to lock in your gains.
For example, during the 1990s bull market if your stock investments became overweighted you could have rebalanced your portfolio by buying bonds. The result: You would have locked in some of your stock gains while building up your bond investments to return to your target mix. Similarly, during market downturns if your stock investments become underweighted, you could rebalance your portfolio by buying stocks at relatively lower prices.
You can rebalance your portfolio by directing new savings to investments that have become underweighted. Or you can move existing investments around in a tax-sheltered account, such as an IRA, employer-sponsored retirement plan, or annuity. If you reallocate investments in taxable accounts, first consider the tax implications and seek assistance from a tax advisor, if necessary.
As you get older you have less time to ride out a bear market. So in addition to periodically rebalancing your portfolio, gradually decrease the stock percentage and increase the fixed income portion.
The exact amount to maintain in stock investments depends on the amount of money you have, how much you’re withdrawing to live on, your estimated life expectancy, and your overall financial situation.
Article is for educational purposes only and is not intended to provide specific tax or legal advice. For answers to tax questions, please see your tax professional. For legal questions, consult an attorney.
Representatives are registered, securities are sold, and investment advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, 2000 Heritage Way, Waverly, Iowa 50677, toll-free (800) 369-2862. Nondeposit investment and insurance products are not federally insured, involve investment risk, may lose value and are not obligations of or guaranteed by the financial institution. CBSI is under contract with the financial institution, through the financial services program, to make securities available to members. CUNA Brokerage Services, Inc., is a registered broker/dealer in all fifty states of the United States of America. The Representative may also be a credit union employee that accepts deposits on behalf of the financial institution.
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