This is a very simple thing to do, every financial planner suggests a “periodic” rebalancing of your portfolio yet so many people don’t do it because it sounds complex.

Let’s take my theoretic portfolio from a few days ago:

40% US Stocks
20% Foreign Stocks
10% US bonds
10% Foreign bonds
10% Real Estate
7% CDs
3% Bank savings account

If this had been rebalanced on December 31st to the above, today it might look something like this:

37% US Stocks
18% Foreign Stocks
11% US bonds
11% Foreign bonds
12% Real Estate
7% CDs
4% Bank savings account

In other words, the balanced portfolio we had at the end of last year has gotten skewed. Now we don’t want to rebalance it already, rather we want to make sure we rebalance it at least once a year. Most 401K funds have an option for rebalancing and you can just “set it and forget it.”

Now WHY do you want to do that? The best reason is that when the markets go a particular way for an extended period of time, like the great growth we had leading up to the crash in 2009, our portfolios get really out of balance. That is when I learned my lesson. My small retirement fund I had was 60% stocks in 2008, when I had only put 25% into the stock fund. In other words, the stocks had grown vastly faster than anything else. But I never rebalanced.

Then came the crash of 2009, my stocks became worth about 28% of my portfolio. I had lost 50% of the value in the stocks. All because I didn’t rebalance. If I had rebalanced, my stocks would have probably been worth about 30% of my portfolio when the market crashed. My overall portfolio wouldn’t have been as high at the crash as it was, but I would have been in much better shape.

So what rebalancing does is it keeps our funds at or around what we consider our risk tolerance level. Letting them just run without this adjustment can give us the illusion that we have the money we need for retirement, and then one thing like 2009 and bam it changes everything.

Rebalancing also takes our “profits” in the growing area and puts them into a lower performing fund. That fund, when the stock market cools off, will then likely have gains. So we take dollars from one, put it into the other, and then vice versa.

How do you do it? There is most likely a simple menu choice for manage my funds, where one of the choices is rebalancing. Most offer quarterly, semi-annual, and annual rebalancing. I do mine quarterly, but many financial people say do it annually. So pick what you like. You’ll never hit the market perfectly, the goal here is to just do it so massive changes in your portfolio, like mine, don’t end up hurting your overall retirement picture.

You will likely have to pick the percentages you want for the rebalance, so take your time, get it to what you want, save it and it’ll be good to go.