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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.







    

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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