Rebalancing your retirement investments: 5 steps

If you've been leaving your 401(k) account on autopilot for a while, it's probably time for a tune up.

Periodic rebalancing is necessary because over time assets grow at different rates, which can steer your portfolio off course from your investment objectives -- unless you make adjustments.

You might decide you want 60 percent of your assets allocated to stocks and 40 percent to bonds, for instance. But over the years if stocks do really well, you might end up with 80 percent of your assets in stocks and only 20 percent in bonds, which would expose you to more risk than you intended. Conversely, if stocks crashed you could end up with the opposite problem, with, say, 40 percent in stocks and 60 percent bonds. At that point, your portfolio wouldn't be as poised for growth as you want.

That's why rebalancing is so important. It's a checkup of your portfolio along with any necessary adjustments to bring it back in line with your goals.

Taking care of investments: do you rebalance?

Yet fewer than a third of Americans with self-directed retirement accounts, such as 401(k) plans and IRAs, reported rebalancing their portfolios at least once a year, and almost half said they rarely or never do, according to the December 2009 national survey commissioned by the Financial Industry Regulatory Authority's (FINRA) Investor Education Foundation.

Rebalancing your portfolio could be an especially smart move this year following the stock market's fall in 2008 and recovery at the end of 2009, the authority said.

After some assets have grown much faster than others, it might pay to reallocate some of those into investments that have grown slower but are due for picking up the pace as the high-performers slow down. If you never rebalance your portfolio, you could end up missing the mark when it comes to your investing goals.

How often should you look at rebalancing? FINRA says you might want to consider checking your portfolio once a year. Remember, though, that shifting money may incur fees, and making changes when the market's not doing well locks in those losses.

Reallocating investments

There are three main ways to rebalance a portfolio:

• Direct money to the asset that's fallen behind.

• Add new investments, and focus your contributions there.

• Sell some of your high-performing holdings and reinvest in the asset class that hasn't been doing as well. It's tough to sell anything that's doing well, but this move lets you sell high and buy low and puts you in the position to gain once those lagging investments pick up again.

You also will need to rebalance your portfolio as you get closer to retirement. In the early and middle years of saving your focus should be on building wealth. In later years and after you retire, your focus should be on protecting it. The way you allocate your money should reflect the gradual transition from growth to preservation.

To manage that transition, you might want to consider a lifecycle fund, an increasingly popular option that gradually changes the allocation over the years from seeking growth to providing income and preserving principal, typically by reducing how much the fund allocates to stocks and increasing investments in bonds.

Want to learn more? Take advantage of resources offered by your employer or 401(k) plan administrator to help you plan. Those might include educational materials, seminars about retirement planning and saving, and access to investment advice online or through a financial professional.

6 ways to take control of your investments and financial future

You may be powerless over the high unemployment rate or low interest rates on savings accounts, but even in a stubbornly tough economy there is a great deal you can control when it comes to your financial life.

Here are six ways to exert control in times like these:

1. Investments turned sour? Evaluate what went wrong.

If you're like many Americans and have suffered a loss in the last few years, take a step back and view the situation objectively to evaluate what happened, advises money expert Saly Glassman in her new book, "It's About More Than the Money: Investment Wisdom for Building a Better Life" (FT Press: 2010) Glassman, ranked the nation's No. 1 woman financial advisor by Barron's, says blaming everyone else leaves you powerless. Maybe it wasn't all your fault, but there may be some things you did that contributed to the loss. Perhaps you had unrealistic expectations, or were overextended. Once you have a good reading on the situation, you can plan how to avoid those same mistakes.

2. Figure out how much you need for retirement

A troubling number of people have no idea how much money they'll need in retirement. A survey conducted in May for Allianz Life Insurance Co. of North America, asked people whether they'd be more likely to guess how much they'd have or need in retirement or how many gum balls were in a jar at the local county fair. Only 53 percent felt more certain about their ability to estimate retirement needs.

Most experts say you need 70 percent to 90 percent of your pre-retirement income to maintain your standard of living. Contact the Social Security Administration and request a Personal Earnings and Benefit Estimate Statement to project how much Social Security income you'll get. Add in other sources of income, such as pensions. Then calculate how much of a nest egg you'll need to make up the difference between Social Security and pension income and the amount you'll need to live each year for the rest of your life.

3. Play catchup with retirement investments

Government tax provisions let you save an extra $5,500 in a 401(k), on top of the $16,500 you're already allowed to contribute if you're 50 or older. For a traditional IRA or Roth, you can pitch in another $1,000 on top of the $5,000 limit, and for a SIMPLE IRA, you can add in another $2,500 in addition to the $11,500 limit if you're at least 50.

4. Redo your budget to set aside more for savings accounts

It's a good idea to review your budget periodically. Perhaps your pay has been cut, or you'd like to beef up your emergency savings fund. If so, see where you can cut back and set up an automatic savings plan by having money diverted from a checking to a savings account every month.

5. Pay down credit card debt

New rules under the CARD Act, signed into law in May 2009, provide protection against interest rate hikes on existing balances and and other unfair practices by issuers. Still, credit card interest is wildly expensive, especially if you carry a big balance from month to month. Create a plan to pay off your cards and keep credit card debt from dragging you down.

6. Shop around for best interest rates

Yes, interest rates on CDs, money market accounts and savings accounts are abysmal when compared to rates offered during the years before the recession hit. So do what you can to get the best rates possible today. Shop online to compare rates in addition to checking with your local banks.

These aren't the only ways to take control of your financial life. Look for others to improve your bottom line, both now and for the future.

Investments that are too good to be true

Claims of high-yield investment programs touted on websites and social media like Twitter and Facebook understandably get your attention, particularly in light of stock market volatility and today's low interest rates on CDs, money market accounts and savings accounts.

After all, who wouldn't want to earn a 20 or 30 percent return in as little as a day?

Sound unbelievable? It is, but a surprising number of people fall for the sales pitch.

Federal authorities recently charged Nicholas A. Smirnov of the Philippines with 10 fraud-related counts for allegedly running an international Ponzi scheme through a website called Pathway to Prosperity, which promised investors annual returns of 500 percent and more but made very few investments. The scheme resulted in losses of $70 million by 40,000 people in 120 countries, including the United States, according to the U.S. Department of Justice.

The Financial Industry Regulatory Authority Inc. recently released an investor alert warning consumers against these schemes.

Beware of unregistered investments

High-yield investment programs are unregistered investments created and touted by people who aren't licensed to sell securities. They promise high returns through vague trading strategies, FINRA says, and many are Ponzi schemes.

The number of new federal investigations into these programs ballooned 105 percent in fiscal year 2009 over fiscal year 2008, the Federal Bureau of Investigation recently reported.

Operators use websites and social media to promote the programs and create a buzz. Some sites create forums for trading tips or even caution investors against high-yield investment programs to appear as if theirs was not in the same category.

"But the reality is virtually every HYIP we have seen bears hallmarks of fraud," FINRA said in its alert.

FINRA describes HYIP sites as a "bizarre substratum of the Internet" where sites rank the latest programs, blog and chat about how to win at HYIPs and rely on online payment systems, some of which have been tied to crimes like identity theft.

Protecting your investments

Here are tips from FINRA about how to spot scams and protect yourself:

• High, unsustainable yields and unclear investing strategy

These programs promise incredible returns but give little clue as to the operation will get them for you. Be skeptical, and remember rankings and testimonials can be faked.

• Little information about the program operator

Don't invest in anything that doesn't spell out who invests the money, where the program is headquartered and who and where you call to get information. Off-shore operations raise a red flag, too. Sites outside the United States are usually not licensed to sell securities anywhere, especially here. Verify who you're dealing with and make sure they're licensed to do business with you, FINRA advises.

• Use of e-currency sites

Although there is no federal regulation of e-currency sites, many states require them to register with a banking regulator. An unlicensed e-currency site is a bad sign.

• Incentives to recruit others

Beware of programs that offer big rewards for getting others to come on board.

Finally, if you've already invested in a high-yield investment program, don't send more money, try to get in and out before the house of cards falls or refer other investors to make bonuses.

Low bank rates, and the general sluggishness of the economy are frustrating for savers, but you're better off investing in a certificate of deposit or money market account than throwing your money away on scoundrels. Get the best interest rates you can by comparing CDs, money market and savings accounts online.

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Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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