Rebalancing a retirement portfolio is a critical strategy to maintain the desired risk level and asset allocation over time. As the market fluctuates, certain assets may grow faster than others, causing the original allocation to drift. Regularly rebalancing helps ensure your investments align with your retirement goals and risk tolerance. Below are three practical examples illustrating when and how to rebalance a retirement portfolio.
In this example, we consider a retiree named Sarah, who has a retirement portfolio consisting of 60% stocks and 40% bonds. Sarah knows that over time her portfolio can drift away from this target allocation due to market fluctuations.
Sarah decides to rebalance her portfolio once a year, typically at the end of the year when the markets have settled. After reviewing her portfolio, she finds that her stock allocation has increased to 70%, while her bond allocation has decreased to 30%.
To rebalance, Sarah sells some of her stock holdings to bring her portfolio back to the original 60/40 allocation. She sells enough stock to buy bonds until she reaches the desired percentage. This process helps her to lock in gains from stocks while reducing her exposure to potential market downturns.
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John, a 55-year-old investor, employs a threshold-based strategy for his retirement portfolio, which consists of various assets, including domestic and international stocks, bonds, and real estate. John sets a rule that he will rebalance his portfolio whenever any asset class deviates by more than 5% from its target allocation.
At the start of the year, John’s target allocation is 50% stocks, 30% bonds, and 20% real estate. Mid-year, due to a stock market surge, his allocation rises to 60% stocks, 25% bonds, and 15% real estate. Since the stock allocation exceeded the 5% threshold, John decides to rebalance.
He sells 10% of his stock holdings and reallocates the proceeds to bonds and real estate to restore the original target allocation. This approach allows John to systematically manage risk and avoid overexposure to a single asset class.
Notes:
Emily, a 45-year-old professional, uses a life stage adjustment method for her retirement portfolio. As she approaches retirement age, she plans to gradually reduce her equity exposure to minimize risk. Currently, her portfolio is structured with 70% stocks and 30% bonds, reflecting her long-term growth strategy.
Every five years, Emily conducts a review of her asset allocation, planning to decrease her stock exposure by 10% and increase her bond allocation correspondingly. After her recent review, she decides to adjust her portfolio to 60% stocks and 40% bonds.
Emily sells 10% of her stock investments and reallocates those funds into bonds. This gradual change helps her avoid a sudden shift in risk as she approaches retirement, allowing her to maintain a balance between growth and preservation of capital.
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