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Rebalancing Your Portfolio

Once you've selected an investment mix in your retirement plan that you're comfortable with, regular rebalancing helps keep your targeted asset allocation in place. Rebalancing is a way to ensure your retirement account is given the important care and attention it needs to help you achieve your retirement goals.

What is rebalancing?

Sometimes, due to market growth or decline of certain asset categories in your portfolio, your asset allocation can slide out of alignment. Rebalancing is when you adjust your investments so they return to your original asset allocation strategy and remain in line with your risk tolerance.

Why rebalance?

If the stock market happens to rise more than the bond market, the stock allocation in your portfolio increases, this could put your portfolio into a higher risk category than you intended. By rebalancing, you can adjust your allocation to align with the asset allocation strategy that you're comfortable with.

Sometimes, people only realize they've taken on too much risk when the stock market goes down. While it might be nice to see your stock assets continue to grow in your portfolio, eventually market volatility occurs — would you be comfortable if the market took a downturn, and your portfolio had a higher allocation of stock? 

When should you rebalance?

Some experts recommend rebalancing your account at least once a year. However, growth-oriented portfolios (portfolios with higher allocations of stock funds) may need to be rebalanced more frequently than income-oriented portfolios (portfolios with smaller allocations of stock funds). Either way, what’s important is that you review your asset allocation on a regular basis to make sure your portfolio remains in line with your risk tolerance and targeted asset allocation plan.

What if you're invested in funds that are automatically rebalanced?

It's important to keep in mind that some investments have rebalancing as a built-in feature. For example, an asset allocation fund or target date fund automatically rebalances to realign their asset allocation. However, if you invest in other funds in addition to your asset allocation or target date fund, you may want to consider rebalancing the rest of your investments on a regular basis.

Rebalancing in action

Rebalancing isn't about timing the market. Instead, it's about monitoring your investments and making adjustments, if necessary, to keep your portfolio in line with your asset allocation plan. Take a look at the example below to see how rebalancing keeps your investments in line with your desired asset allocation.

Fund type

Original asset allocation (with $10,000 account balance)

Current asset allocation (1 year later with $12,000 account balance)

Asset allocation after rebalancing (with $12,000 account balance)

Bond funds

40% ($4,000)

32% bonds ($3,840)

40% bonds ($4,800)

Stock funds

60% ($6,000)

68% stocks ($8,160)

60% stocks ($7,200)