Rebalancing Your Portfolio

With the market downturn, does it make sense to rebalance my portfolio?

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The decline in the markets may be prompting some to ask whether we are comfortable with how much of our money is invested in equities, which are shares of individual corporations that you can purchase separately or through mutual funds. The answer to how much of your money should be in equities depends on many things, including your age, your career situation and how comfortable you are handling the periodic ups and downs in the market and variable annuities.

In assembling a portfolio, most investors should aim for a mix that includes equities, fixed-income investments (which can be bonds or other investments that pay interest), real estate and cash. All four of these are types of "asset classes." No one can eliminate or control what the market does, but every investor can control how much he owns of each asset class, which will help determine how volatile the overall portfolio can be.

In building a diversified portfolio, you should choose which assets you will include and what percentage of your money will go to each asset. However, you should check back regularly and determine whether your allocation has shifted and needs to be rebalanced. This can be done by either selling an asset that now makes up more of your portfolio than you originally planned, or buying an asset that has fallen in value and now makes up less of your portfolio than you prefer.


Example of how a "bull market" can affect your portfolio:

During a "bull market," or one in which the prices of stocks rise faster than historical averages, the following happens.

If your original asset allocation was made up of:

  • 60 percent stocks
  • 30 percent bonds
  • 5 percent real estate
  • 5 percent cash

After the increase in the value of the stocks in the portfolio, your portfolio has shifted to:

  • 67 percent in stocks
  • 23 percent in bonds
  • 6 percent in real estate
  • 4 percent in cash.

As a result, your portfolio has a greater percentage invested in stocks, which makes it riskier and less diversified than you originally planned.


How a "bear market"—or declining prices—could affect your portfolio: 

Problems can also occur during a "bear market," which is a period of declining stock prices.

If your original asset allocation consisted of:

  • 60 percent stocks
  • 30 percent bonds
  • 5 percent real estate
  • 5 percent cash

After the price of stocks decline, your portfolio makeup is now:

  • 51 percent stocks
  • 37 percent bonds
  • 6 percent real estate
  • 6 percent cash.

You now own more bonds than you originally planned and have less money in stocks.


Why rebalance?

A key benefit of rebalancing is that it prompts you to buy assets when their prices are low, making it easier to "buy low, sell high" than trying to predict which way the market is going in the future.

Though it may feel uncomfortable to buy stocks after their price has fallen, doing so means you can reap greater gains if prices rebound in the future. Remember that significant stock market declines have generally been followed by recoveries. If your time horizon is several years out and you can sleep at night with market volatility, it might be a good time to consider rebalancing if the percentage of equities in portfolio is lower than what you planned. Usually rebalancing once a year will suffice, unless you experience a significant life event such as the birth of a child or the loss of a job, or your tolerance for risk changes.

“Staying on the sidelines” during market volatility, while it may seem appealing at first, can place you at a disadvantage when the market settles down and begins to grow again. Consider this key lesson from the bear market. If you sold at the bottom in October 2008, you lost 30% or more of your retirement portfolio. Many investors who stayed the course have already regained most of what they lost.


We can help build or rebalance a portfolio to suit you.  

We offer many helpful tools on tiaa-cref.org, like our Planning Tools and Calculators page, which includes an asset allocation calculator and a retirement goal evaluator.

If you need more information or assistance, our advisors can walk you through building a portfolio allocation that suits you, or rebalance an existing account. If you are uncomfortable with the market risk exposure in your current portfolio, we can help you understand what changes to your portfolio would mean as they relate to your overall retirement plan or goals. You can schedule an appointment or call us at  888 842-0318.

View our prospectuses here.

Past performance cannot guarantee future results.

Neither rebalancing nor asset allocation can eliminate the risk of investment losses or guarantee that an investor's goal will be met.

TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products.

 

© 2014 and prior years, Teachers Insurance and Annuity Association - College Retirement Equities Fund (TIAA-CREF), New York, NY 10017