Checking Up: Strategies for Rebalancing

Allocating your assets and diversifying your mix of investments1 are two of the most important things you can do to make the most of your retirement account. For more information on asset allocation and diversification, be sure to read Asset Allocation & Diversification: Choosing Your Retirement Plan Investments.

But proper planning doesn’t end with asset allocation and diversification, because your account should be rebalanced on a regular basis.

What is rebalancing?

Because the prices of investments are constantly going up and down, even a well-diversified portfolio can drift away from an individual’s desired investment mix. For example, if your stock investments go up in price while your bond investments decline, the actual percentage of your account balance that is invested in stock funds may be higher than your original allocation—while at the same time, your allocation to bond investments may be lower. If left unchecked, this can hinder your account’s long-term performance.

Many investors don’t realize that adjusting their asset allocation back to its original mix—an investment concept known as “rebalancing”—can help them manage portfolio risk.

Why rebalance—and how often?

Rebalancing your account enables you to put your desired asset allocation back on track. This can help to ensure that your account remains invested in a way that’s consistent with your long-term goals and investment objectives. But keep in mind that financial professionals generally do not advise that you change your investment allocation in reaction to short-term developments in the financial markets.

Periodic Rebalancing
It’s important to rebalance your account on a regular basis—what we refer to as "periodic rebalancing."

When you periodically rebalance your account, you review your current investment allocation percentages on a regular basis—once a quarter or twice a year, for example—and you make the appropriate changes to realign your investments with your desired investment allocation.

Automatic Rebalancing
Some retirement plans offer a feature called “automatic rebalancing.” If this feature is available to you, your plan account will automatically be rebalanced, based on the schedule outlined in your plan documents.2

When it comes to retirement planning, it’s important to reassess your account periodically to help ensure that your investment allocation remains consistent with your overall goals and objectives. Rebalancing is a great way for you to keep yourself on the path to a more secure retirement.

1 Keep in mind that application of asset allocation and diversification concepts does not assure a profit or protect against loss in a declining market. It is possible to lose money by investing in securities.

2 For those plans that offer automatic rebalancing, you may have to enroll in order to take advantage of this feature. Check with your plan administrator to learn more.

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Ed. 09/2011