Retirement Plan- Guidelines for Rebalancing your Portfolio

Determining your desired asset allocation is a key step toward getting your portfolio on-track. From there, it's a question of maintaining your mix through rebalancing. When one asset class is performing well, its proportion of your overall portfolio swells. Rebalancing to your target allotments requires you to sell part of that asset class, to bring it back down to your intended weighting. At the same time, you'll want to increase your stake in a lagging asset class, to boost it back to your target allocation

Review your current allocation in relation to your desired allocation, or target asset mix. Determine the percentages of stocks, bonds, and cash that you hold and identify any imbalances greater than 10%. Review the amount needed to reduce any asset class gaps greater than 10% to less than 5%. For example, let's say you're striving for 20% of your holdings to be in stocks. But your current allocation has drifted to 35%. This would mean that one of your other asset classes would be underweighted. In this example, you would want to bring your stock holdings to a maximum of 25%.

If you are further from retirement, a portfolio with a higher allocation of stocks or equities may be appropriate. Such a portfolio mix will seek to grow your savings. As you near retirement, however, you may want to gradually shift toward more conservative investments. A conservative mix focuses more on the preservation of your assets.

Overweighting in Stocks

An overweighting in stocks poses the most risk, as stocks have the greatest potential for fluctuating performances depending on the economy and company-specific occurrences, among other factors. If you are over-weighted in stocks, to decrease your market risk, you may want to consider investing new money in bonds or bond funds until you get your mix more in line with your target. If you need to sell some of your stock position, consider stock style and over-concentrations. An over concentration is any single stock that accounts for 5% or more of your portfolio; though a diversified fund such as a large-cap blend fund can make up a much larger portion of your portfolio because it typically owns many individual securities. For any such decisions, keep in mind the need to weigh the investment risks with the potential tax considerations, such as whether you'll incur capital gains for sell decisions.

Overweighting in Bonds

Overweighting in bonds poses the risk that your portfolio won't be able to achieve the type of capital appreciation that will help you reach your financial goals. Moreover, investment grade bonds are highly sensitive to inflation. As with your equity position, consider directing new purchases away from bonds and toward other areas of the portfolio that need additional funding. In cases where a sale is required, bear in mind that there may be tax consequences. In the case of individual bonds, a sale prior to the bond's maturity creates the risk of failing to garner the full principal amount.

One of the main reasons for asset allocation and rebalancing is to capture gains as they occur across asset classes and to be less vulnerable to any area that may unexpectedly fall from favor. The chart below shows the annual returns for asset classes (and stock style types) from 2002 – 2008, illustrating that leadership rotates.

Guidance & Retirement > Retirement Resource Center > Invest >
Invest How to Invest Why Rebalance?
	Determining your desired asset allocation is a key step toward getting your portfolio on-track. From there, it's a question of maintaining your mix through rebalancing. When one asset class is performing well, its proportion of your overall portfolio swells. Rebalancing to your target allotments requires you to sell part of that asset class, to bring it back down to your intended weighting. At the same time, you'll want to increase your stake in a lagging asset class, to boost it back to your target allocation Review your current allocation in relation to your desired allocation, or target asset mix. Determine the percentages of stocks, bonds, and cash that you hold and identify any imbalances greater than 10%. Review the amount needed to reduce any asset class gaps greater than 10% to less than 5%. For example, let's say you're striving for 20% of your holdings to be in stocks. But your current allocation has drifted to 35%. This would mean that one of your other asset classes would be underweighted. In this example, you would want to bring your stock holdings to a maximum of 25%. If you are further from retirement, a portfolio with a higher allocation of stocks or equities may be appropriate. Such a portfolio mix will seek to grow your savings. As you near retirement, however, you may want to gradually shift toward more conservative investments. A conservative mix focuses more on the preservation of your assets. Overweighting in Stocks An overweighting in stocks poses the most risk, as stocks have the greatest potential for fluctuating performances depending on the economy and company-specific occurrences, among other factors. If you are over-weighted in stocks, to decrease your market risk, you may want to consider investing new money in bonds or bond funds until you get your mix more in line with your target. If you need to sell some of your stock position, consider stock style and over-concentrations. An over concentration is any single stock that accounts for 5% or more of your portfolio; though a diversified fund such as a large-cap blend fund can make up a much larger portion of your portfolio because it typically owns many individual securities. For any such decisions, keep in mind the need to weigh the investment risks with the potential tax considerations, such as whether you'll incur capital gains for sell decisions. Overweighting in Bonds Overweighting in bonds poses the risk that your portfolio won't be able to achieve the type of capital appreciation that will help you reach your financial goals. Moreover, investment grade bonds are highly sensitive to inflation. As with your equity position, consider directing new purchases away from bonds and toward other areas of the portfolio that need additional funding. In cases where a sale is required, bear in mind that there may be tax consequences. In the case of individual bonds, a sale prior to the bond's maturity creates the risk of failing to garner the full principal amount. One of the main reasons for asset allocation and rebalancing is to capture gains as they occur across asset classes and to be less vulnerable to any area that may unexpectedly fall from favor. The chart below shows the annual returns for asset classes (and stock style types) from 2002 – 2008, illustrating that leadership rotates.	Guidelines for rebalancing your portfolio to achieve your desired asset allocation Considerations of potential tax implications Use Portfolio Review to get a comprehensive analysis of your portfolio, including stock and bond styles and concentrations. See how Fidelity can help make managing your retirement easier with services like automatic investments or withdrawals and consolidated accounts and account monitoring. Explore how charitable giving might enable you to offset tax liability created by rebalancing your portfolio and why gifting appreciated assets makes sense. Get Fidelity's help with rebalancing questions: call 1-800-FIDELITY. Alternative Approach for Savers If you're currently saving for retirement, another option is to temporarily direct your ongoing contributions into the underweighted asset classes. For taxable accounts, this method has the advantage of allowing you to adjust your asset allocation without incurring capital gains or other liabilities that may occur when you sell holdings. If you have significant assets in taxable accounts, and are not currently saving for retirement, be sure to consider tax implications, as well as potential fees, when making any decisions to sell a holding.
	Top

Invest

Overweighting in Stocks

Overweighting in Bonds

Alternative Approach for Savers