Rebalancing Your Investments – Honoring Your Desired Risk Tolerance
When we conduct live employee 401(k) education meetings, we show a graph of the five risk-based model portfolios in our offering that dates from 1995 to the present. This graph helps show participants longer term market movement and the relative performance of each portfolio based on the mix of stock and bond funds in each. It is a super impactful visual that often helps individuals determine their own personal risk tolerance and the right mix of stocks and bonds for them.
During a volatile market, your portfolio’s risk profile can change dramatically so it is important to think about a proactive rebalancing strategy to keep your asset mix at the desired levels. For example, if you desire your assets to be 70% in stocks and 30% in bonds, it is possible that your mix skewed more toward bonds recently because of the big decline in stock prices. Without rebalancing you might be at 55% in stocks and 45% in bonds instead of your 70%/30% goal.
How can you fix it? Here are some helpful tips:
Sell winners and buy losers – Sell off some of the assets that have outperformed and buy more of your assets that have underperformed to get you back to the right mix.
Increase your contribution amount – you likely have been spending less recently due to COVID-19 stay-at-home orders. Increase your contribution amount and place the additional money in the underperforming asset class.
Set up a regular rebalancing schedule – Most recordkeeping platforms allow you to automatically set up a rebalancing schedule (monthly, quarterly, annually) so you can set it and forget it. You do need to activate this feature and we can show you how to do it.