Diversification and Rebalancing: A Retirement Saver’s Best Friend
Diversification is the proverbial don’t put all your eggs in one basket. So within an asset class like bonds, a diversified investor owns treasury bonds, corporate bonds, high-yield bonds, and international bonds, benefiting from the fluctuations from year to year in returns.
Rebalancing Your Portfolio
Because the stock market is significantly overvalued at this time, now is a good time to consider rebalancing your portfolio. By rebalancing instead of selling what has gone down or buying what has gone up, investors remain diversified but go back to their original allocation.
So while diversification is about the eggs, asset allocation is about the basket. What percentage of your basket is going to be in stocks and bonds? For example, if six years ago you were comfortable with an asset allocation of 60% in stocks and 40% bonds, now, after the doubling of the stock market, that portfolio might be 75% stocks and 25% bonds. Rebalancing simply puts your asset allocation and its risk level back to the original 60/40.
Retirement accounts are ideal for re-balancing, because they enable you to buy and sell within the account with no tax consequence, and usually no fee or commission. Investors approaching retirement who fail to rebalance might unwittingly end up closer to retirement with a riskier portfolio. That is why, when such investors rebalance, they might want to update their targeted allocations.
For example, an investor with a portfolio that was 60/40 five years ago and now 75/25 could rebalance to 35% stocks and 65% bonds. We will have to wait and see what the rest of the year brings. As the adage goes, past performance is not indicative of future results. However, with a presidential election like none we have had before, combined with a Federal Reserve bent on raising the Fed Funds Rate, things should get interesting. *Diversification, rebalancing, and asset allocation strategies do not assure a profit or protect against loss.
Get a Free Retirement Portfolio Consultation:
Investment Advisor Representative
39 Braddock Park #5
Boston, MA 02116
126 Horseneck Road
S. Dartmouth, MA 02748