Pre-retirees and retirees are often told — especially this time of year — to rebalance their portfolios.
Rebalancing is, of course, the process of selling this and buying that so that your assets are allocated according to your investment plan, such as 60% stocks and 40% bonds.
Oftentimes, especially in years such as 2014, allocations get out of whack. In fact, an investor who started 2014 with a traditional 60% stock/40% bond portfolio would have had a 62% stock/38% bond portfolio by year’s end. And that sort of asset allocation might warrant, according to some experts, a rebalancing.
“Rebalancing periodically is a good way to maintain a well-diversified, risk-appropriate portfolio, particularly when markets are volatile,” says Christopher Jones, chief investment officer of Financial Engines, a financial adviser based in Sunnyvale, Calif.
Others agree. “Rebalancing is a good idea, particularly if you haven’t done so in a while,” says Jerry Miccolis, a principal and chief investment officer with Giralda Advisors in Madison, N.J., and author of Asset Allocation for Dummies.
Why so? “Left unattended, your asset allocation can get seriously out of whack,” says Miccolis. “If you haven’t rebalanced back to your target weights by asset class in over a year, you are likely overweight in U.S. equities, given their sustained bull run since early 2009, and therefore your portfolio is likely more risky than you had planned.”
But rebalancing is easier on paper than in reality. In essence, it means selling your winners and buying your losers. And that’s not so easy to do. “When the market is performing well, there can be a temptation to ‘ride winners,’ but doing so means you could be taking on more risk than you had originally planned,” says Jones.