When you first start investing in your 401(k), you choose an investment mix that aligns with your retirement goals and your comfort with risk. As markets move, though, that allocation gradually shifts. Bringing your investments back to your intended mix is called rebalancing, and it keeps your portfolio’s risk level consistent with your long-term objectives. It sounds complicated, but it’s a straightforward idea that plays an important role in building retirement savings.
What is rebalancing?
Rebalancing is the process of adjusting your portfolio so it returns to your desired asset allocation. Because different investments earn different returns, some portions of your portfolio grow faster than others — which over time can make your account more aggressive or more conservative than you originally intended. Rebalancing means selling a portion of what has grown beyond your target and buying more of what now makes up too small a share.
Why is rebalancing important?
Your original allocation was likely chosen based on your age, retirement timeline, and risk tolerance. If your portfolio drifts far from it, you might be taking on more — or less — risk than you’re comfortable with. Regular rebalancing can help:
- Maintain your intended risk level
- Keep your portfolio in line with your long-term goals
- Preserve diversification within your retirement savings
- Reduce the temptation to make emotional decisions during market swings
Rebalancing encourages a disciplined, long-term approach and helps you avoid chasing whatever has recently beaten the market.
Suppose you invest with a portfolio of 80% stocks and 20% bonds. After several years of strong stock performance, it grows to 90% stocks and 10% bonds. Rebalancing moves a portion back from stocks to bonds, restoring the original 80/20 split. That reduces your exposure to what has recently performed well, but it maintains the level of risk you originally selected.
How often should you rebalance?
There’s no single schedule that works for everyone, but many financial professionals suggest reviewing your portfolio once or twice a year. Common moments investors choose to rebalance:
- When the portfolio has drifted away from its target allocation
- After significant market movements
- On a regular schedule — annually, semiannually, and so on
The goal isn’t to rebalance constantly, but to periodically make sure your investments still reflect your long-term strategy.
Do you have to rebalance yourself?
Not always. Many retirement plans offer investment options that maintain an appropriate allocation for you — target-date funds, for example, rebalance automatically while gradually becoming more conservative as you near retirement. If you build your own portfolio from multiple funds, reviewing and adjusting the allocation is generally your responsibility.
When should you review your allocation?
Beyond regular reviews, it’s worth revisiting your strategy after major life or financial changes. Consider a review if you:
- Are getting closer to retirement
- Experience a significant change in income
- Receive an inheritance or other large windfall
- Change your retirement goals
- Notice your comfort with investment risk has shifted
Your investment strategy should evolve as your financial situation and retirement timeline change.
The bottom line
Rebalancing is an important part of maintaining a healthy retirement portfolio. As markets fluctuate, your mix can drift away from your original strategy, adding or removing risk you didn’t intend to take. If you’re unsure whether your portfolio needs rebalancing — or whether your current allocation still reflects your goals — review your account with your plan provider or a financial professional.
This article is for general educational purposes only and is not tax, legal, or investment advice. Consider your own situation and consult a qualified professional before making decisions about your retirement account.