The theme this week on the One Minute Retirement Tip podcast is: how to rebalance your investment portfolio. 

Hopefully yesterday I convinced you to look seriously at rebalancing your investment portfolio right now. Assuming you’re persuaded, what’s next? There are multiple ways to approach re-balancing, so today I just want to share with you my preferred method, which is all about your target stock allocation. In other words, what % of your portfolio should be in stocks right now compared to your actual % in stocks?

Don’t know your target allocation? If you send me an email to [email protected], I’ll send you my age-based asset allocation cheat sheet that will help you figure out what % in stocks is ideal for your age. 

So let’s say your ideal allocation is 65% in stocks, but you haven’t rebalanced in a couple years and now your 75% in stocks. That’s 10% higher than what you should be. So you would need to figure out how much of your stock portfolio you should sell to get back to your 65% target, then determine what to sell to make that happen, and just do it. 

Having a target stock and bond mix and then taking action when your portfolio deviates more than 5-10% from that allocation gives you the discipline to buy low and sell high. Buying low and selling high evades most investors because they only focus on the investments themselves, not setting their target stock mix, which means they don’t take action to rebalance when they should. A portfolio that drifts too far from it’s target allocation is a riskier portfolio, and the longer you “let it ride” the more risk you take on - which isn’t a good thing if you’re getting close to retirement. 

Re-balancing your portfolio on a regular basis - typically anywhere from 1-4 times a year can enhance your long-term returns. A Vanguard Advisor Alpha study found that rebalancing enhanced returns by as much as .26% annually. It sounds like a small amount, but over 20 year retirement on a $1 million portfolio earning 6%, that’s a difference of $161,000. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance