Prime Time: Tune up your retirement plan
When was the last time you rebalanced your retirement portfolio? The longer you wait, the riskier your holdings become—since stocks, by nature, tend to outperform other securities over time. If you started out in 1994 with a retirement portfolio of 60 percent equities and 40 percent bonds, and did nothing for the next six years, you would have had 80 percent of your money in stocks and 20 percent in bonds by the end of 1999—just in time for the meltdown in the stock market.
Some tips for rebalancing:
Remember the basics. Rebalancing helps improve returns because it forces you to buy low and sell high; you sell assets that have done well and may be ripe for decline, and buy ones that have done poorly and may be poised to rise.
Check your 401(k). It may offer automatic rebalancing. More than a quarter of all such plans do. An additional 44 percent of plans say they are considering such automated tools in the near future.
Try "date based" rebalancing. You simply pick a date on the calendar and rebalance your portfolio every year on that date. If you think you should have 70 percent of your money in stocks and 30 percent in bonds, check your portfolio on, say, December 31 every year. If your allocation has shifted to 80 percent stocks, 20 percent bonds, it's time to rebalance.
Consider "range based" rebalancing. Mark Wilson, vice president of the Tarbox Group, an investment advisory firm in Newport Beach, Calif., says this is a more sophisticated rebalancing method that lets your winners run. Say you think 60 percent of your money should be in stocks. You can then choose to rebalance your equity portfolio only if the allocation moves 10 percentage points above or below that level. If your stocks fell to below 50 percent, you would buy more equities. But once your stock allocation grew to more than 70 percent, you'd sell.
Use new money to rebalance. "In a taxable account, the easiest way to rebalance is to direct new money into the underfunded asset" instead of selling the overweighted asset, says Dee Lee, founder of Harvard Financial Educators. This way, you avoid having to realize taxable capital gains by selling your winners.
Consider using tax-advantaged accounts to rebalance. Think of all your accounts—brokerage, 401(k)'s, and IRAs—as a single portfolio. Then, if you find that you have too much money in, say, stocks, use the 401(k) or IRA to sell the equities, since these are tax-sheltered accounts.
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