Turn Lemons into Lemonade (Article)
Turn Lemons into Lemonade
Yikes! Recent down markets have left most wondering what to do with their investments, or worse, doubting their ability to retire someday.
You’ve heard the mantra from your advisor…. stay diversified, try not to look, and wait for the recovery. But there is one thing you can do to turn lemons into lemonade… rebalance. Over time your original asset allocation strategy becomes off balance on its own as each fund experiences different returns. When this happens, you may be exposed to more risk than you had intended. You can easily restore your initial asset allocation by rebalancing.
Rebalancing is simply returning the balance in each fund back to the original mix. Let’s say that you selected a mix of 10% in ten funds. If a few of those funds experience lousy returns, the balance in those funds will drift away from your initial allocation, with each fund making up perhaps, 7 or 8% of your account value. This means that recent slower performers, like stocks, make up a lesser percentage of your portfolio. This disrupts your overall ratio of stocks to bonds.
Now, don’t get us wrong; we love funds that outperform. But remember, any given fund doesn’t outperform all the time. By rebalancing, you realign your balances back to the initial mix, which sells some of the investments that have done a bit better while buying into other funds that have struggled. This may indeed sound counter-intuitive, but remember, the classic formula for investment success: buy low, sell high.
By rebalancing, you’re effectively buying more shares while they are on sale. This can help you earn more when share prices recover. It also restores your initial asset allocation back to the target you’ve set, based on your risk tolerance and time horizon.
Keep in mind that if your account is entirely invested in the pre-mixed target date funds, no rebalancing is needed. The fund managers take care of that for you.
To rebalance, access your workplace retirement account and select “rebalance” or “realign your account.” You may also set up an automatic rebalance option via the website that completes a rebalance at times preset by you.
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