Is your portfolio continually balanced with your asset allocation as the stock market changes? Are you more or less aggressive than your risk tolerance states?
Joshua P. Mersberger, CFP®, CRPC
Jun. 11th, 2018
When our advisor team meets with new prospects, one of the most common areas that we address is an asset allocation that is not the same as a clients’ risk tolerance. Simply put, prospects often are more or less aggressive than they should be based upon their appetite for risk. This can then lead to returns and performance that are not what people are expecting. The good news is that there is an easy way to remedy this, called automatic rebalancing.
Automatic rebalancing is simply rebalancing your portfolio back to its’ target allocation once or twice a year.
To do this, you simply sell your investment “winners” and the proceeds into your investment “losers”. While this may seem counter-intuitive, it should lead to selling high and buying low which is the goal of every investor. Also, numerous studies have shown that automatic rebalancing can improve portfolio performance over time. This also prevents your portfolio from becoming over or under-allocated to the stock market over time.
Even better, most 401k plans offer this as a free feature and you simply must opt-in to enroll in automatic rebalancing. We encourage everyone to utilize this great tool as it is an easy way to keep yourself on track for retirement!
An easy example of rebalancing is if you originally set up your portfolio to be invested 50% in stocks and 50% in bonds and the market had a good year, your portfolio may have appreciated to 60% stocks and 40% bonds. A rebalance would sell some of the stocks and reallocate the proceeds to bonds, bringing the account back to its’ target allocation of 50% stocks and 50% bonds.
Please contact our office if you have any questions regarding this topic.
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