After a roller coaster of a year, retirement accounts may need a little fine tuning and consultation.
Retirement Tip of the Week: If you haven’t checked the allocation of your investments recently, do so now to make sure that the makeup of your portfolio will keep you on track for your goals. If your portfolio breakdown is off, it’s time to rebalance.
It’s natural for asset allocations, which is how a portfolio is invested among various types of investments, to shift during market volatility — suddenly, what was once a 60/40 portfolio divided between stocks and bonds could be 50/50 or 70/30. Asset allocation is an important factor in getting a person to their goals, and the wrong mix could set savers back.
Rebalancing is important any year, especially after a year like 2022, when investors have faced unnerving news around volatility, inflation and interest.
But keep in mind that these portfolios are meant to be long-term, and should have been invested in a way that will weather the ups and downs of the market for long-term goals, said Matthew Gelfand, a certified financial planner and executive director of Tricolor Capital Advisors.
“Rebalancing should occur when asset classes wander outside their allocation ranges,” he said. For example, a portfolio that was invested 65% in stocks and 35% in bonds and has a 3% tolerance would mean that portfolio could still function well if stocks were to become anywhere between 62% and 68% of the portfolio. Outside of those ranges, the portfolio would be rebalanced. (The tolerance limit can be more than that — you should consider consulting with a financial planner or a professional at the firm managing your retirement account.)
Investors with target-date funds have portfolios that are automatically rebalanced, since those investments are tied to an estimated retirement year (such as 2055, or 2060) and therefore tick more conservatively as the years go on. Clients of financial planners may also have someone who is already checking accounts and periodically rebalancing portfolios. Employer-sponsored retirement plans, like a 401(k), might also have features that include automatically rebalancing, such as on an annual or quarterly basis.
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Still, it never hurts to check. And it’s good practice to schedule that portfolio check-up yourself. The new year is a great time to do it, said William Parrott, a certified financial planner and chief executive officer at Parrott Wealth Management. “January is an excellent time to rebalance investment accounts because all the dividends and capital gains have been credited to the account,” he said. Other experts say that checkup could even be performed semi-annually, or quarterly.
There’s a stark difference between rebalancing and active investing, so if you’re changing your portfolio too much, you’re “speculating, not investing,” said Larry Luxenberg, a certified financial planner and principal at Lexington Avenue Capital Management.
Retirement plans are often a “set it and forget it” type of account. “The main thing is to put together a good portfolio and then leave it alone to do its work,” Luxembourg said. “Only a major disruption in the markets or big changes in personal circumstances should prompt more frequent changes.”