Every so often, it makes sense to take a look at your retirement portfolio, and make a few changes. Rebalancing your portfolio helps you keep your asset allocation on track, and can help you cull some of the irredeemable losers from the mix.
1. Review Your Goals
The very first thing you need to do is review your goals. Remind yourself what your portfolio is supposed to accomplish. Consider your current and future risk tolerance, and determine how you can meet your goals while staying within your comfort zone. Before you begin the rebalancing process, you need to have a clear idea of what you are trying to accomplish. The point of rebalancing is to keep you on track to meet your goals.
2. Rebalance Regularly
Create some sort of schedule for rebalancing. You don’t want to be at the mercy of the markets; instead, rebalance on a schedule. Rebalance every quarter, or twice a year, or even just once a year. Decide what’s comfortable for you, and then rebalance as part of a reasoned investment plan, and not as a knee-jerk reaction to the short-term factors driving today’s market.
You can also take the approach that you should rebalance when your asset allocation gets a little bit out of whack. if your asset allocation drifts by 10%, it might be time to rebalance, even if you aren’t quite on schedule.
3. Use Fundamental Analysis
When you have a long-term retirement portfolio, you need to focus on the big picture, and not short-term price action. Look at the fundamentals underlying an investment. Perhaps it’s time to sell and buy something else that better fits your needs. Use fundamental analysis to look at the underpinnings of your investments, and make decisions based on long-term potential. If the fundamentals have changed with something, it might be time to cut your losses and move on, creating a stronger portfolio for the future.
4. Evaluate Fees
Don’t just look at your investments. Also, consider your fees. The fees you pay can cut into your real returns, and reduce the long-term effectiveness of your retirement portfolio. Take a look at the funds you include in your portfolio, and compare your options. You might be able to get a similar fund for much less. Also, consider the other fees you might be paying, from transaction fees to asset management fees. If you can find suitable assets for less, make the switch. Your portfolio will grow faster, and you’ll see better real returns.
5. Look at All of Your Accounts
Your retirement planning shouldn’t be limited to one or two accounts. Make sure you are getting the big picture across all of your investing accounts. And remember that your retirement planning is part of your wider financial plan. Make sure that everything is integrated properly so that your retirement portfolio fits in with your overall money goals, and with what you are doing right now. In some cases, it might make sense to consolidate your accounts, like combining multiple IRA accounts into one, or rolling over your 401(k).
Rebalancing your retirement portfolio is an essential part of making sure that you stay on track. Unfortunately there is not exact set method to rebalance your portfolio. It is far from a science. Take the time to judiciously rebalance, and you will be more likely to see long-term retirement success.