Let’s say that you have part of your assets invested in the stock market. And over a period, stocks do really well. Eventually, too much of your retirement account balance might be made up of stocks, which doesn’t align with your goals. Or your investing style.
Why is rebalancing important?
Because it can:
- Give you the opportunity to take a new look at all the investment options in your portfolio
- Force you to take profits from the investment options which have run up and put money in those that may have merit but haven’t gone up
- Smooth investment returns
In the example below, we’re assuming your retirement portfolio is made up of:
Let’s say five years later you haven’t rebalanced. And during that time, the stock market has outperformed the bond market. So, now your portfolio is made up of:
This puts you at a potentially greater risk of loss than you originally wanted. Rebalancing on a regular basis puts you back in line with your 60/40 split.