Rebalancing Your Portfolio In Retirement

After you have retired you may want to change your investment mix. Your needs as a retiree will be different and since you have invested your money over a period time some of your investments will have go up and others will have gone down. If this continues, you may eventually have a different investment mix than you intended. Reassessing your mix, or rebalancing as it is commonly called, brings your portfolio to fit your personal retirement plan. Rebalancing also helps you to make logical, not emotional, investment decisions. For instance, instead of selling investments in a sector that is declining, you would sell an investment that has made gains and, with that money, purchase more in the declining investment sector. This way, you rebalance your portfolio mix, lessen your risk of loss, and increase you chance for greater returns in the long run.

Here's how rebalancing works: let's say your original investment called for 10 percent in U. S. small company stocks. Because of a stock market decline, they now represent 6 percent of your portfolio. This is not something you want in your retirement years. You would sell assets that had increased and purchase enough U. S. small company stocks so they again represent 10 percent of your portfolio.

How do you know when to rebalance? There are two methods of rebalancing: calendar and conditional. Calendar rebalancing means that once a quarter or once a year you will reduce the investments that have gone up and will add to investments that have gone down. Conditional rebalancing is done whenever an asset class goes up or down more than some percentage, such as 25 percent. This method lets the markets tell you when it is time to rebalance.