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Retirement Rebalancing Rationale

Retirement Rebalancing Rationale

September 12, 2023

Retirement Rebalancing Rationale: How Often Should You Rebalance Your Portfolio?

Rebalancing a standard portfolio can be a nightmare. Asset classes, like bond funds and stock market indices, move increasingly out outside of historical expectation – that is, both asset classes tend to correlate with one another in recent years rather than move in opposition, rendering legacy diversification defunct1 . Throw things like Bitcoin ETFs into the mix and trying to best balance your cash allocations is a multi-week process of research before you’re ready to pull the trigger.

But if your carefully crafted 60/40 portfolio in a taxable brokerage account is out of whack, you could suffer tax implications on realized gains if you sell off stock to boost your bonds, or throw some money at something more speculative.

Luckily, your retirement accounts can avoid this dilemma – both the 401(k), 401(b), and both IRA types can be rebalanced (meaning active selling and buying equities in the account) without tax implications.

Why Rebalance?

Regardless of your life stage or distance from retirement, you should have an investing goal and risk profile assigned to your account. Closer to retirement usually means fewer stocks and more-fixed income assets, while younger investors keep a more aggressive and risk-on portfolio.

If there is significant market fluctuation, or if you haven’t rebalanced for a long time, you might see your capital allocations misalign with your goals and risk. You’d hate to be close to retirement, and a running bull market brings your stock allocations to >75% of your portfolio without a rebalance. If that happened, you could be in danger of having to work a few extra years if the economy quickly fell back to Earth, as we’ve seen recently.

So, How Often Should I Rebalance?

There’s no hard rule, so it’s essential to understand your goals and risk profile while also watching the account and economy.

I know, it’s a lot. But we feel managing your retirement is one of the most critical financial jobs, and it doesn’t take much time to stay on top of your future.

If you do want a general guideline, it’s best to set aside time once or twice a year to:

1. Review your investing goals and risk profile.

2. Check the account status: what was your original allocation proportion, your current goals, and how does the portfolio’s breakdown compare?

  • You should also know the threshold tolerance for misallocation- i.e., you’re OK with a 5% difference between the assigned proportion, but anything beyond is a red line. This will also drive rebalancing frequency.

3. Rebalance as needed. This means selling and buying across equity asset types to reset the required allocation proportion.

Pretty simple, with one catch – when the market is incredibly volatile, greater inter-month or quarter swings could quickly throw off your balance, and a swing in the other direction could knock out unrealized gains.

A Helping Hand

Active portfolio management isn’t for everyone. Maybe you’d prefer to let the money work for you with minimal involvement. In that case, there are a few options.

Target-date funds are assigned a date, and you select a fund based on your retirement. As that date nears, the fund managers rebalance the holdings, so the risk profile automatically adjusts.

Hiring a financial professional is a great way to ensure you maintain a well-diversified, balanced fund. Financial professionals are duty-bound to understand your needs and honor those needs when managing your portfolio. Better yet, they usually have access to assets beyond basic publicly traded stocks and bonds that may help diversify your portfolio if you, alongside your selected professional, decide that they fit your goals and investment strategy.