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4th Quarter 2017

Investing Spotlight: FAQs About Rebalancing Your Portfolio

Every year, and particularly this year considering the runup in the stock market, is a good time to review your investments and make sure they’re still aligned with your goals. A key question: Do you need to rebalance your portfolio? When you first selected the investments for your retirement savings accounts, you may have carefully decided how much money to invest in stock funds and how much in bond funds, and you may have diversified within stocks and bonds, too (spreading your stock investments across large company, small company, and international stock funds, for example). But if some funds performed better than others or if stocks performed better than bonds, then your portfolio may have veered away from that careful allocation, becoming more or less risky than you originally planned. You may need to rebalance your portfolio to re-establish your original allocation. These answers to frequently asked questions about rebalancing may help with your decision making.

Why is it important to rebalance your portfolio if the market is doing well? If stock funds do better than bond funds, your portfolio could end up taking more risk in the market than you originally planned — for example, at exactly the time you may be closer to retiring. If your portfolio was originally invested in 50 percent stock funds and 50 percent bond funds, for example, a surging stock market could leave you with 60 percent or more in stock funds. If the stock market then has a rough year, you could end up losing more money than you originally expected. On the flip side, if bond funds perform well but stock funds falter, you may have too much bond exposure and be more exposed to interest rate risk. See the Importance of Rebalancing chart below for examples of how allocations have shifted over the past 20 years.

Importance of Rebalancing Chart

How often should I rebalance my portfolio? It’s generally a good idea to check your portfolio’s performance periodically throughout the year. But you should consider a rebalance about once a year. More frequent rebalancing may just marginally impact your account and requires more of your time. Also, you may want to only rebalance your investments if they have strayed by more than a certain amount, such as 5 percentage points, from your original allocations. Again, more frequent rebalancing may just move your account with the random movements of the market. Pick a time that you can remember and review your investments annually, such as every January or in your birthday month.

How do I rebalance my portfolio? To get your portfolio back on track, you may need to take the psychologically difficult move of selling investments that have performed well and buying more that have lagged behind. To overcome any reluctance, remind yourself that you’re selling high and buying low — a key to successful investing. To do this for your ICMA-RC account, log in to Account Access at www.icmarc.org/login and click on “Manage Funds.” Then click on “Multiple Fund Transfer” and select the percentage that you’d like each fund to represent.

Where can I get help with rebalancing? If you’d rather not have to worry about rebalancing on your own, there are several ways professionals can make the moves for you. You can invest in a target-date or target-risk fund, where professionals rebalance the underlying funds regularly. Or, if available to your plan, you can sign up for our Managed Accounts service that helps you determine how much to save for retirement and how to invest the money, and rebalances your portfolio quarterly.

How can I learn more about rebalancing? For more information about the importance of rebalancing, and other issues about retirement savings, see Rebalance Your Investments to Manage Risk. To learn more about investing, see www.icmarc.org/invest.

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