So, you’re investing for retirement, either through an IRA or your employer’s 401(k). Contributions are automatically deducted from your paycheck each month, and you may feel like you’ve done your part, right? Not quite! One of the most important things you can do to ensure your retirement savings grow as planned is rebalancing your accounts. Let’s dive into what that means, why it’s essential, and how you can keep your investments on track.
Why Rebalancing Your Account Matters
At its core, rebalancing means ensuring your portfolio stays aligned with your original investment goals. When you first set up your retirement plan, you likely split your savings between different types of investments—maybe 70% in stocks and 30% in bonds. Over time, as the market fluctuates, the value of those investments will shift, which means the balance you started with could be thrown off.
Let’s say your stocks start to perform really well. Your 70% allocation might quickly grow to 80%, while your bonds could shrink to just 20%. Even though your stocks are doing great, this new balance could make your investment strategy riskier than what you originally intended. Rebalancing your account helps restore that balance by shifting your money back to your intended allocation.
How to Rebalance Your Investments
The simplest way to keep your portfolio in check is to monitor your investments regularly. Checking in at least once a year is a good starting point, but if you’re feeling proactive, you can even do it quarterly. Here’s how it works:
- Sign in to your account and take a look at how your investments are performing.
- Compare the current allocations to your ideal setup. For example, if you set up a 70% stock/30% bond allocation, but now your stocks have grown to 80%, it’s time to rebalance.
- Shift the funds as needed to restore the balance. In our example, you’d move some money from stocks to bonds to get back to your 70%/30% goal.
It might sound like a lot of work, but it’s an essential step to keep your retirement savings on track.
What About Target Date Funds?
If you’ve chosen a target date fund for your retirement savings, you’re in luck! These funds are designed to do the heavy lifting for you. Target date funds automatically adjust your portfolio based on your retirement timeline, so they rebalance themselves over time, gradually becoming more conservative as your retirement date approaches.
That means if all your savings are in a target date fund, you don’t have to worry about rebalancing. The fund will take care of it for you. However, if you have other investments outside of your target date fund, you’ll still want to check on those to ensure they’re in line with your original plan.
How to Cope with Market Volatility
The stock market has its ups and downs, and investing for retirement means you’ll need to ride out those fluctuations. It can be nerve-wracking to see your investments go up and down, but staying the course is key. As long as your portfolio is still in balance and you’re not taking on more risk than you’re comfortable with, there’s no need to panic.
Remember, retirement is a long-term goal. You’ve got decades to weather the market’s twists and turns. In the meantime, you can adjust your future contributions to help rebalance your portfolio. Instead of moving money around that’s already in your account, consider shifting where your future contributions are invested. This helps you maintain the right balance without having to sell off assets and potentially realize losses.
Don’t Go It Alone—Get Help from a Certified Financial Planner™
Rebalancing your account doesn’t have to be overwhelming. If it feels like too much to handle, don’t worry! A CERTIFIED FINANCIAL PLANNER™ (CFP®) can help you make sense of it all. Schedule an annual check-in with your CFP® professional, and they can review your investments, rebalance your portfolio as necessary, and offer expert advice to keep your retirement on track.