Rebalancing means to review the different investments in your portfolio to see what percentage each asset class represents and whether or not that percentage is still appropriate for your goals. Rebalancing can help you avoid a portfolio that's too conservative for your timeline, goals and risk tolerance. And choosing more stock funds – which will be part of rebalancing for many people – can help you recover more quickly when the market turns around.
A How-to Guide
Follow these basic steps to rebalance your portfolio:
1. Determine your asset allocation targets. If you had targets that made sense before the market slump, they likely still fit now. If you've experienced a change in your personal or financial situation, though, you may want to re-evaluate them.
2. Find out where your allocations are now, and compare with your targets.
3. Decide on a plan for rebalancing. You can sell assets from classes that are outperforming the others, buy more of asset classes that are underperforming, or some combination of the two. In your 403(b) plan, you may choose to simply redirect future contributions to asset classes that are underrepresented until you reach your target allocations.* If your portfolio is not in a tax-sheltered account, be sure to consider the tax consequences of rebalancing.
4. Commit to rebalancing regularly. You may want to rebalance on a set schedule. If you choose this option, it may help to tie it to an annual trigger, such as receipt of your CalSTRS Retirement Progress Report (sent in December each year), your birthday or after you file your income taxes. Or you may decide to rebalance any time your allocations stray by a certain amount – say 5% – from their target.
* A systematic investment program cannot guarantee a profit or protect against loss in a declining market. You should consider your ability to continue investing during periods of low price levels.