Deciding on an investment mix. How you diversify — that is, how much you decide to put into each type of investment — is called asset allocation. For example, if you decide to invest in stocks, how much of your retirement savings should you put into stocks: 10 percent … 30 percent … 75 percent? How much into bonds and cash? Your decision will depend on many factors: how much time you have until retirement age, your life expectancy, the size of your current retirement savings, other sources of retirement income, how much risk you are willing to take, and how healthy your current financial picture is, among others.
Your asset allocation also may change over time. When you are younger, you might invest more heavily in stocks than bonds and cash. As you get older and enter retirement, you may reduce your exposure to stocks and hold more in bonds and cash. You also might change your asset allocation because your goals, risk tolerance, or financial circumstances have changed.
Rebalancing your portfolio. Once you've decided on your investment mix and invested your money, over time some of your investments will go up and others will go down. If this continues, you may eventually have a different investment mix than you intended. Reassessing your mix, or rebalancing, as it is commonly called, brings your portfolio back to your original plan.
Rebalancing also helps you to make logical, not emotional, investment decisions. For instance, instead of selling investments in a sector that is declining, you would sell an investment that has made gains and, with that money, purchase more in the declining investment sector. This way, you rebalance your portfolio mix, lessen your risk of loss, and increase your chance for greater returns in the long run.
Here's how rebalancing works: Let's say your original investment called for 10 percent in U. S. small company stocks. Because of a stock market decline, they now represent 6 percent of your portfolio. You would sell assets that had increased and purchase enough U. S. small company stocks so they again represent 10 percent of your
portfolio.
How do you know when to rebalance? There are two methods of rebalancing: calendar and conditional. Calendar rebalancing means that once a quarter or once a year you will reduce the investments that have gone up and will add to investments that have gone down. Conditional rebalancing is done whenever an asset class goes up or down more than some percentage, such as 25 percent. This method lets the markets tell you when it is time to rebalance.
Source: www.dol.gov, Photo courtesy of http://realproperty.files.wordpress.com
Your asset allocation also may change over time. When you are younger, you might invest more heavily in stocks than bonds and cash. As you get older and enter retirement, you may reduce your exposure to stocks and hold more in bonds and cash. You also might change your asset allocation because your goals, risk tolerance, or financial circumstances have changed.
Rebalancing your portfolio. Once you've decided on your investment mix and invested your money, over time some of your investments will go up and others will go down. If this continues, you may eventually have a different investment mix than you intended. Reassessing your mix, or rebalancing, as it is commonly called, brings your portfolio back to your original plan.
Rebalancing also helps you to make logical, not emotional, investment decisions. For instance, instead of selling investments in a sector that is declining, you would sell an investment that has made gains and, with that money, purchase more in the declining investment sector. This way, you rebalance your portfolio mix, lessen your risk of loss, and increase your chance for greater returns in the long run.
Here's how rebalancing works: Let's say your original investment called for 10 percent in U. S. small company stocks. Because of a stock market decline, they now represent 6 percent of your portfolio. You would sell assets that had increased and purchase enough U. S. small company stocks so they again represent 10 percent of your
portfolio.
How do you know when to rebalance? There are two methods of rebalancing: calendar and conditional. Calendar rebalancing means that once a quarter or once a year you will reduce the investments that have gone up and will add to investments that have gone down. Conditional rebalancing is done whenever an asset class goes up or down more than some percentage, such as 25 percent. This method lets the markets tell you when it is time to rebalance.
Source: www.dol.gov, Photo courtesy of http://realproperty.files.wordpress.com
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