There are periods when you probably experience a decrease or increase in the value of some of your investment holdings, resulting in a shift in your optimal asset allocation.
Out of Proportion
When you started investing for your retirement, you decided which types of investments to include in your portfolio and how much to invest in each; however, an asset allocation isn’t static. Over time, performance differences can knock your original mix off balance. When this happens, you may be exposed to more or less investment risk than you had intended. You can restore your asset allocation by rebalancing.
Back on Track
Rebalancing is very straightforward. Suppose your initial allocation called for 60% of your account to be invested in stock investments. After a couple of years of strong stock market returns, stock investments might now make up 70% of your account’s total value. To return to your original allocation, you’d transfer money from stock investments into investments holding the other types of assets that are now “underweighted.” Another option would be to direct your new contributions into the underweighted asset types until your original asset allocation is restored.*
You should review your retirement investments at least once a year and rebalance your account as necessary. You’ll feel more comfortable on the road to retirement knowing that your plan assets are well aligned according to your plan.
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*This sample allocation is an illustration only. If applying any asset allocation model to your individual situation, you should consider all of your assets, income, and investments (for example, your home equity, IRA investments, savings accounts, and retirement accounts). Rebalancing does not guarantee gains nor prevent losses.