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Is It Time to Rebalance Your Plan Investments?

Adjustments to your asset allocation should occur gradually over the years based on such factors as your projected retirement date and your comfort level with risk.

Rebalancing, or reallocating, your retirement plan investments on a periodic basis should be a standard part of the investment process. If you have not reviewed your plan holdings lately, you may be surprised at what you’ll find. Even if you have not made a single change to your plan’s investment mix, it’s possible that your current asset allocation has drifted from what it was when you first started participating in your employer-sponsored plan.1 That’s why it is a good idea to review your portfolio at least once a year to determine whether it makes sense to rebalance — or adjust — your holdings and to ensure that your portfolio holdings fit your current investment needs and circumstances.2

Portfolio Drift
To appreciate how performance differences can affect an investment portfolio over time, consider what happened to a hypothetical portfolio of 70% stocks, 20% bonds, and 10% cash left unbalanced for the 20 years ended December 31, 2013.3 The original 70% allocation to U.S. stocks would have grown to 84%, while allocations to bonds and cash would have shrunk to 12% and 4%, respectively, increasing the overall risk in the portfolio. Keep in mind that past performance is no guarantee of future results.4

Making Adjustments
Ideally, adjustments to your asset allocation should occur gradually over the years based on such factors as your projected retirement date, life events such as the birth of a child, and your comfort level with risk. As a general rule, the further away you are from retirement, the larger the role stocks may play in your portfolio.

For each review, calculate how much of your money is in stocks, bonds, and other asset classes. Then decide whether you are comfortable with those allocations. If not, rebalance to bring the allocations back to their intended targets.

Rebalancing your plan account holdings can be accomplished in one of two ways: changing your investment allocations on future contributions or changing your current mix of investments. Either way, you will want to reduce allocations to investments that exceed your target allocation and increase allocations to investments in the underweighted asset.

How often should you consider rebalancing? The usual answer is anytime your goals change; otherwise, at least once a year. However, during times of market volatility, it may be a good idea to keep close tabs on your holdings and make sure they do not drift far from your target allocation.

Written by: Carl Trevison and Stephen Bearce


1Asset allocation does not assure a profit or protect against a loss.

2Rebalancing strategies may involve tax consequences, especially for non-tax-deferred accounts.

3Investing in stocks involves risks, including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest, and, if held to maturity, offer a fixed rate of return and fixed principal value.

4Source: Wealth Management Systems Inc. Stocks are represented by the total returns of Standard & Poor’s Composite Index of 500 stocks, an unmanaged index that is generally considered representative of the U.S. stock market. Bonds are represented by the total returns of the Barclays Aggregate Bond index. Money markets are represented by the total returns of the Barclays 3-Month Treasury Bills index. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2014 Wealth Management Systems Inc. All rights reserved.

This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Carl M. Trevisan, a local member of FPA and Stephen M. Bearce.

McLaughlin Ryder Investments, Inc. and McLaughlin Ryder Advisory Services, LLC and their employees are not in the business of providing tax or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties. Tax-based statements, if any, may have been written in connection with the promotion or marketing of the transaction (s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

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