July, 2014
Is It Time to Rebalance Your Plan Investments?
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.
1 - Asset allocation does not assure a profit or protect against a loss.
2 - Rebalancing strategies may involve tax consequences, especially for non-tax-deferred accounts.
3 - Investing 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.
4 - Source: 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.
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© 2014 Wealth Management Systems Inc. All rights reserved.
July 2014 This column is produced by the Financial Planning Association, the membership organization for the financial planning community. It has been modified and is provided by Thomas A. Fisher, a local member of the FPA.
The material presented is believed to be from reliable sources and we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your own adviser prior to implementation in order to determine whether the strategies mentioned are appropriate for your specific situation.