How to rebalance your portfolio

A risk of this long-running bull market: You may have more money in stocks than you should.

  • By Tom Petruno,
  • Kiplinger
  • Asset Allocation Funds
  • 401(k)
  • Asset Classes
  • Investing Strategies
  • Investing in Stocks
  • Asset Allocation Funds
  • Stocks
  • 401(k)
  • Asset Classes
  • Investing Strategies
  • Investing in Stocks
  • Asset Allocation Funds
  • Stocks
  • 401(k)
  • Asset Classes
  • Investing Strategies
  • Investing in Stocks
  • Asset Allocation Funds
  • Stocks
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

The long bull market has left many investors with a nice problem: a lot of unrealized profits in stocks. Over the past three years alone, through August, Standard & Poor's 500-stock index (.SPX) gained an average of 16.1% a year, compared with 9.5% annually over the past 15 years. The hot streak means the portion of your assets in stocks, compared with other investments, may exceed your risk tolerance. The solution is to rebalance your portfolio by selling an amount of stock necessary to bring your stock portion down to a comfortable level.

Many financial pros advise rebalancing once a year. Start by totaling up all of your stocks, bonds, cash and other securities. Include assets in retirement accounts and in taxable accounts. If you own mutual funds that hold a mix of stocks and bonds (such as target-date funds), check the most recent fund report to see the breakdown of assets. Once all assets are accounted for, calculate the percentages in each asset type. (You can also use online services such as those offered by financial advisory firms Personal Capital and Betterment for this.)

Run the numbers

Say your calculations show you with 70% in stocks, and you want to bring that down to 60%. You'll have to decide how best to pare the equity portion. If your assets are mostly in mutual funds held in a retirement account, such as a 401(k), it's relatively simple to shift a portion of your stock holdings into either bond investments or cash accounts, or both. The great advantage of rebalancing in a retirement account is that you won't trigger a tax hit. If the stock investments you want to trim are in taxable accounts, you may owe Uncle Sam a piece of your capital gains. Remember, though, that mutual funds must pay out realized gains yearly, so in a taxable account you've been taxed all along. That may mean your tax hit from rebalancing won't be huge.

Rebalancing is also useful among different types of stocks. For example, most foreign stock markets have been weak performers over the past nine years compared with U.S. shares. If you think foreign issues may be relative bargains now, shifting some money from U.S. to foreign stocks makes sense. The goal of rebalancing is to lower your risk of severe loss by keeping your nest egg well diversified. "We know we're supposed to buy low and sell high," says Liz Ann Sonders, chief investment strategist at Charles Schwab. "Rebalancing doesn't require you to time the market. You're just trimming strength and buying into weakness."

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print
© 2018 The Kiplinger Washington Editors, Inc.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.

You May Also Like...

Smart-home hub holiday shopping guide

As voice-based digital assistants grow in popularity, 3 top brands rank the highest. Here's a checklist to help you jumpstart your comparison shopping.

Senior homeowners revive reverse jumbo mortgages

Although such real estate loans had a bad reputation in the past, many of the product issues have been addressed. Now the option may be a good fit for older Americans who want to supplement incomes without taking on more debt.

How to protect personal data at your doctor's office

Since many health care providers are vulnerable to data breaches, patients should be more discerning about how much sensitive information they share.