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| Rebalancing v. Reallocation: What's the Difference? |
| Although they sound like the same thing, there's a big difference between rebalancing and reallocation. With rebalancing, you are adjusting your retirement portfolio at the investment level by selling overweight positions and buying underweight positions (in other words, selling off some of the funds that have done extremely well and using the cash to buy more of the funds in your portfolio that haven't done so well). The objective is to nudge your portfolio back to your initial allocation targets (how you are dividing up your contributions among stocks, bonds, and cash). With a reallocation, you are changing those underlying allocation targets. |
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| Generally, you should reallocate for two reasons only. One is a change to your time horizons to retirement. For instance, as you get closer to retirement, you should make your portfolio more conservative by reducing your allocations to stocks. This will help protect your hard-earned nest eggs. |
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| The second reason to reallocate is a change your risk tolerance level. That might occur, for instance, if you realize that based on your age you may not want to take on as much risk. Or it might occur if you've inherited a large sum of money that makes you less reliant on your retirement account to fund your retirement. As such, you may decide to assume more investment risk in that account. |
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| With a reallocation, though, you always should keep in mind that investing for retirement is a long-term strategy. You should never reallocate to try to time the market or capitalize on the latest hot stock. As proven by the market events of 2008, no one can effectively time the market in order to predict when to get in or out at the best time. Tactical investing rarely pays off and can actually make it much harder for you to achieve your long-term retirement objectives. |
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