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Rebalancing

Chances are you're monitoring your investments at least quarterly. Sometimes you'll notice that your asset allocation slips away from your investment targets. When it drifts too far, it may be time to rebalance. This is key to keeping your original risk and return goals on track. Here's why.

Let's say you're a balanced investor with half your savings in stocks and half in bonds. The stock market is booming. What will your portfolio look like at the end of the year?

Suddenly, two-thirds of your money is invested in stocks. That's okay as long as the market keeps going up, but it will be painful when it goes down — more painful than if you rebalance your account to your original 50-50 target.

Rebalancing helps protect gains you have earned in an over-performing asset class. It also helps reposition your investments to buy low in an under-performing investment category.

Target Allocation

This is an illustration only. But over time, accounts will drift away from their original targets. A generally accepted guideline is to let your allocations range plus or minus 5 to 10 percent of target.

Unless your goals have changed, you will want to rebalance to maintain your strategy. There are two ways to rebalance your account:

  • You can change the allocation of existing balances. This accomplishes your rebalancing all at once.
  • Or, if you aren't that far from your targets but want to keep balances in line, you can change how your future contributions are allocated. For the example above, the investor might weight deferrals so that 70 percent of their money goes to bonds and 30 percent to stocks until the account again reflects their target asset allocation.

Worksheet  Changing Your Strategy