Tune Up Your Portfolio by Rebalancing

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Have you ever thought about your 403(b) or 457 plan like a car? You have to put something into them to set them in motion and help you get where you need to go. But time can cause wear and tear. When the low oil indicator or check engine light come on in your car, you know it’s time to visit a mechanic for maintenance. But how do you know when it’s time to give your 403(b) or 457 plan a tune-up?

Market Shift, Allocation Drift

The ups and downs of the market can cause your original asset allocation (the mix of investments you chose based on your timeline, goals and risk tolerance) to stray off course. The weights assigned to each of your original asset classes can become more conservative or more aggressive than the percentages you signed up for. Rebalancing – bringing the weight of each asset class back to its original state – helps keep your portfolio aligned and in your comfort zone. Regular disciplined rebalancing can also help improve the performance of your portfolio as it often results in selling out of investments that have done well recently in favor of investments that have not done as well recently. Although this may sound somewhat counter-intuitive at first, it is the classic idea of “buying low and selling high.”

Two common rebalancing strategies are threshold and calendar.

With a threshold rebalancing strategy, rebalancing is done when a portfolio’s asset allocations change to a set degree, such as five or 10 percentage points in either direction. For example, if you started with 60% stocks but market shifts caused your allocation to change to 65% stocks, you could shift some money out of stocks and into other asset classes.

A calendar strategy means rebalancing happens according to a particular schedule, such as every six months or on a set date, such as a birthday. This strategy can take emotion out of decisions since the focus is on a schedule rather than the market.

Consider rebalancing “cruise control”

Many people prefer to leave car maintenance to an experienced mechanic. Likewise, you may want rebalancing your portfolio to be out of your hands.

1) You can work with a financial advisor, who can review your current allocation and suggest ways to adjust to meet your current needs.

2) If you’re in a variable annuity, find out if the representative who sold you the annuity is doing it for you.

3) You can choose a target-date fund, which automatically adjusts the asset allocation for you.

Rebalancing can help keep your plan on the right road and help you work toward your retirement savings goals.