Rebalance Your Portfolio to Keep It Consistent with Your Goals
by Shane Flait, ©2010

Retirement is a new stage of life. It calls for different income, expenses, risk considerations, and needs.  Along with determining your pension and social security incomes, you’ll need to allocate your investments to best achieve your needs for the short, medium and long term.

You do this by allocations a particular distribution among growth type funds, income type funds, and cash equivalents or as often portrayed - between stock, bonds and cash. This article reminds you to rebalance as time goes on to keep your goals on track.

Upon entering retirement your investment portfolio may be allocated, percentage-wise, as 40-40-20 (stocks – bonds - cash) among these investment types. Stocks tend to preserve portfolios longer, so they should be significant in early years of retirement.

But things will change as you move on through retirement. The market, your health and life status and other incidents will surely change your economic circumstance. As an example, once you’ve made your allocation, the market takes over. No one knows what will happen for sure, but perhaps your growth funds (stocks) will rise fast while income funds (bonds) lag. But whatever happens, your allocation most likely will shift.

And as you move on through retirement, your health may take a turn for the worse so you’re unable to make the trips you once could. Your medical needs become more immediate, and your vacation or trip budget becomes unnecessary.

Or you may lose a spouse. This may leave you with new and less expensive living options among a host of other alternatives.  

So, when should you rebalance your portfolio and to what benefit?

Since you chose an allocation for reasons of projected need in the short, middle, and long term along with the associated risk, and unless your reasons have changed, you should rebalance. Once per year may be adequate.

So, as an example, if your stocks really increased a lot so you breakdown is now 50-30-20, then sell stock and buy bonds to bring it back to 40-40-20.

The benefits of rebalancing allows you to:

• maintain your strategy and risk levels you determined as best
• take profits when they occur – perhaps your stock fund grew out of proportion.

·      buy at relatively lower levels - perhaps the market has deflated your stock fund.

Balancing prevents you from trying to squeeze the last bit of profit out of a growing market and allows you to take advantage of downturns to buy ‘low’ for later selling ‘high’. It keeps you on a conservative track.

But as you proceed through your retirement into middle and late retirement, and also experience other life-changing circumstances, you should re-strategize your allocation. As time goes on, you may naturally want to shift to more assured income producing funds when your horizon for market growth and recovery become shortened with age. In that case – based on your changed circumstance and goals –you may reallocate your portfolio to 20-60-20 (stocks – bonds - cash).

Keeping your portfolio consistent with your goals both protects you and informs you.

 Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com