How to Rebalance Your Portfolio in Retirement

Key Points

• Balancing your portfolio spreads your risks across asset classes.

• Checking your portfolio at regular intervals allows you to make tweaks as needed.

• A professional advisor can provide fresh eyes to ensure your portfolio is appropriately balanced.

• The $23,760 Social Security bonus most retirees completely overlook ›

When was the last time you realized that your life was out of balance, and you had to do something about it? It might have been a case of taking on too many assignments at work or spending so much time doing for others that you stopped taking care of yourself. Like life, balance is critical to the well-being of your financial portfolio.

Without balance, you could find your portfolio invested too aggressively, or not aggressively enough to meet your needs. Whether you regularly balanced your portfolio while you were working or not, it's critical in retirement to ensure that your investments remain aligned with your goals.

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What is rebalancing?

Simply put, rebalancing means adjusting your portfolio so your asset allocation gives your investments room to grow while also taking steps to minimize the risk that you could lose it all.

Let's say you're especially keen on one particular asset class. While that asset class is known for its growth, it's risky and somewhat volatile. If that specific asset type falls on hard times, you could have a quickly shrinking portfolio.

The goal of balancing your portfolio is to spread your investments among asset types so that if one falls hard, the others help keep your portfolio afloat. Imagine you're in your 30s and your desired target allocations look like this:

• 60% stocks
• 30% bonds
• 10% cash or cash-equivalent like Treasury bonds

However, as you conduct a quarterly review of your portfolio, you notice that your stocks have fallen to 50% and your bonds are up to 40%. You certainly have nothing against bonds, but at your age, you're hoping for a little more return on your investment (ROI). You sell a portion of the bonds and use the money to get stocks back up to 60%. That's balancing.

Why it's important to seek portfolio balance in retirement

As you prepare for retirement, you want to take steps to figure out how much money you'd need to retire. Once you retire, the question becomes how much money you'll need to cover expenses throughout the remainder of your life.

While you can set your investments and forget them or allow someone else to do your investing on your behalf, taking time to ensure you remain on track is your responsibility. There's no right or wrong time to rebalance, but here's how many people schedule time to revisit their portfolios:

• Time-based: You rebalance on a set schedule, like once a year or once a quarter.
• Threshold-based: You balance when an asset class drifts more than a pre-set percentage. For example, if real estate (through direct and indirect ownership) is your favorite asset class, you might decide it's time to rebalance when that asset class drifts more than 5% away from your target.

Rebalancing your portfolio in three steps

1. Document

Make a list of your investments and their current market values. Next, calculate what percentage each asset (or asset class) makes up of your overall portfolio. While you can track it manually, many investment platforms provide tools to help simplify this task.

2. Look for changes

Compare your current allocations to your target allocations. A simple comparison will help you spot which assets have drifted outside your comfort zone. This drift may be due to either overperforming or underperforming.

3. Make adjustments

If an asset has drifted, it's time to get your target allocations back in line. You might need to sell a portion of an overperforming asset and direct the proceeds toward underweight asset classes. The nice thing about taking time to rebalance your portfolio is the opportunity it gives you to rethink your investment strategy and make real-time adjustments that spread your risks.

If you prefer a hands-off approach

Automatic rebalancing eliminates the need to check and adjust your portfolio manually. While you should still monitor your portfolio closely, many investment platforms offer automatic adjustments to ensure your portfolio remains aligned. The adjustments are made periodically by algorithms using the parameters you set.

Not only does automatic portfolio rebalancing save time, but it also helps eliminate emotional decision-making, which can lead to costly mistakes.

There's no denying the importance of a balanced portfolio as you prepare for retirement, but it's equally important after you've said goodbye to the 9-to-5 grind. After all, balancing is a good way to ensure you have the money you need to enjoy those all-important golden years.

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