Retirees, Rebalance Your Portfolio Even as This Bull Market Keeps Running
If you don't rebalance, your stock allocation may grow far beyond your comfort zone, setting you up for unpleasant surprises in a market downturn.


Rebalancing a portfolio is like going to the gym. You know you should, but it’s so easy to put the task off until tomorrow, or next week, or next year.
That’s especially true when stocks, now in the ninth year of a bull market, seem to march ever higher. Shifting money from winning stocks to low-yielding bonds may sound tougher than tackling that treadmill.
Older investors may have particular trouble rebalancing—that is, routinely tweaking their portfolios to keep stock, bond and cash allocations close to their long-term targets—a recent study suggests. Researchers at Morningstar, The American College and Texas Tech University analyzed 401(k) plan participants’ responses to a risk-tolerance questionnaire. Compared with younger investors, 51- to 65-year-olds gave responses that were heavily influenced by recent stock-market performance. After a stock surge, they were more willing to take risks, and after a stock slump, they were less willing—which could lead investors to sell low and buy high. Clearly, “this is the exact opposite of what you should be doing if you’re rebalancing a portfolio,” says Michael Finke, chief academic officer at The American College and co-author of the study.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
If you don’t rebalance, your stock allocation may grow far beyond your comfort zone, setting you up for unpleasant surprises in a market downturn. Rebalancing also has its drawbacks, including transaction costs and potential tax consequences. But with a disciplined rebalancing strategy, you can minimize costs while taming portfolio risks.
Why are older investors more likely than their younger peers to have a bigger risk appetite after stocks have climbed? They may simply be paying more attention to the market, Finke says. When you’re entering retirement, he says, “you have to rely on that nest egg and can get particularly emotionally involved with your portfolio.”
Create a Routine
You can rein in that emotion by sticking with a set strategy. You could rebalance by the calendar—say, every quarter or every year. Or you could pick a threshold, rebalancing only when an allocation drifts more than 5 or 10 percentage points away from your target.
In terms of maximizing returns, it doesn’t much matter which strategy you choose—they all produce roughly the same returns, when adjusted for the level of risk in the portfolio, according to research by Vanguard. But to strike a balance between controlling risks and minimizing costs, Vanguard found it makes sense to monitor your portfolio annually or semiannually and rebalance when an allocation has drifted more than 5 percentage points from your target.
To further trim costs, rebalance with portfolio cash flows. Whenever you receive dividends or interest, take required minimum distributions, or make new contributions to your accounts, direct incoming cash toward your underweighted asset classes while pulling withdrawals from overweighted ones. That way, you reduce the need to sell securities, which reins in trading costs and taxes.
If you do need to make rebalancing trades, try to concentrate them in your tax-advantaged accounts, where you won’t trigger capital-gains taxes, says Colleen Jaconetti, senior investment analyst with Vanguard. And if you have to sell holdings in a taxable account, focus on those that will generate the least gains.
If your taxable trades are likely to generate a big tax bill, consider rebalancing just to your comfort-zone threshold rather than your long-term target. For example, you could trim a 59% stock weighting back to 55% if your long-term target is 50%. That way, you stay within your comfort zone and avoid incurring excessive costs, Jaconetti says.
For those who could use a helping hand, plenty of advisers and investment vehicles will do the rebalancing work for you. Target-date mutual funds, for example, automatically rebalance and become more conservative over time. To be rid of the rebalancing chore, however, you’d have to keep your entire portfolio in such vehicles.

-
Six Ways to Prepare for Widowhood and Protect the Surviving Spouse
No none wants to have to plan for losing their spouse, but having plans in place and knowing what to do when the time comes can alleviate at least some of the stress.
By Tyler Hill, Investment Adviser Representative Published
-
Creating a Blended Family? Three Key Steps to Consider
Blended families can make your finances and estate extra complicated, but you can head off some of those issues with careful planning.
By Adam Frank Published
-
Stock Market Today: Stocks Give Back GDP Gains After Beige Book
The latest GDP report showed the U.S. economy grew at a rapid-fire rate in the third quarter, but the Fed's Beige Book sparked concerns.
By Karee Venema Published
-
Stock Market Today: Stocks Struggle for Direction After Mixed Fed Messages
E-commerce platform PDD Holdings jumped after earnings, while rival Shein reportedly filed confidential IPO paperwork.
By Karee Venema Published
-
Stock Market Today: Stocks Close Lower on Cyber Monday
The main indexes were choppy to start the week, though several e-commerce stocks jumped on encouraging online holiday shopping numbers.
By Karee Venema Published
-
Stock Market Today: Stocks Keep Their Weekly Win Streak Alive
The main indexes closed mixed Friday, though all three nabbed a fourth straight weekly gain.
By Karee Venema Published
-
Stock Market Today: Stocks Resume Their Winning Ways
The major benchmarks rebounded from a rare down session to post broad-based gains Wednesday.
By Dan Burrows Published
-
Stock Market Today: Stocks Close Lower After Fed Minutes, Retail Earnings
Burlington was a big winner on the earnings front, while Kohl's slumped after its results.
By Karee Venema Published
-
Stock Market Today: Microsoft Gains Boost Stock Market
The blue chip stock popped on news the software giant has snagged OpenAI's ousted CEO to help lead an advanced AI research team.
By Karee Venema Published
-
Stock Market Today: Stocks Extend Weekly Win Streak Ahead of Thanksgiving
Although the main indexes were quiet to end the week, Gap stock soared after the retailer reported earnings.
By Karee Venema Published