Given this backdrop, now might be a good time to check your portfolio’s asset allocation—that is, how your money is divided among stocks, bonds, and short-term reserves (cash). Thanks to the 9-year climb of the U.S. stock market, there’s a chance you own a greater percentage of stocks than you originally intended.
Are you okay with your portfolio’s current risk level?
Owning a higher percentage of stocks might be a good thing—especially if the market resumes its ascent. But if the market heads in the other direction, it puts your portfolio at risk. Because no one knows which way the market will go, Vanguard suggests choosing a mix of stock and bond investments that you’d feel comfortable with over the long run and rebalancing back to that mix when market movements veer you off course.
Here’s an example of how the markets can change your risk level: An investor who owned a 60/40 mix of stocks and bonds in early 2003 would have drifted to a 75/25 mix 4 years later, just as the stock market was headed for a hard fall. History may or may not repeat itself. But you can keep your risk level constant by rebalancing your portfolio.
Guidelines for rebalancing
Vanguard recommends that you consider rebalancing once a year or after your allocation shifts by 5 percentage points or more. If you haven’t rebalanced before, here’s how to get started:
- Determine your target asset allocation. Not sure what investment mix is right for you? Consider taking our investor questionnaire. You’ll answer 11 questions about your objectives, time horizon, and comfort with risk. The tool will then provide a suggested mix of stocks and bonds.
- Evaluate your current asset allocation. Simply log on to your accounts and go to the Asset mix tab to see an illustrated breakdown of your accounts. If your current mix differs from your target mix by 5 percentage points or more, you may want to rebalance.
- Avoid unnecessary taxes. If you buy and sell investments in taxable accounts, you’ll face tax consequences. So you may want to take a slower approach to rebalancing. Reduce the proportion of stocks in your accounts by directing future investments to your underallocated investments.
- Look to your retirement accounts. In tax-advantaged retirement accounts, such as IRAs and 401(k)s, you don’t have to worry about tax consequences when selling funds. It may make sense to buy and sell funds in these accounts to help you restore your portfolio’s balance more quickly.
Put it on autopilot
It takes discipline to keep your portfolio balanced. After all, it often means moving away from stocks after they’ve provided high returns. If you’re having a hard time putting a rebalancing plan into practice, consider these 2 options:
- Invest in a balanced fund. You can choose from different types of balanced funds depending on your needs. LifeStrategy® Funds provide a mix of stocks and bonds, which are professionally managed to maintain a steady asset allocation. Target date funds are designed to help you invest for retirement or another goal. These funds shift from stocks to bonds as you get closer to your retirement date.
- Contact an advisor. Vanguard Personal Advisor Services® can rebalance your portfolio for you. Our advisors compare your current asset mix with your target mix every 3 months to help you stay on track to meet your long-term goals.
Buying low and selling high
After stocks have a great year, it can feel wrong to consider trading stocks for bonds. Instead, investors tend to get carried away, often investing more money in funds as prices climb.
But the oft-repeated advice is to “buy low and sell high.” That’s why rebalancing works—it encourages you to cut back a bit on a rising investment and buy a bit more of the lagging category.
All investing is subject to risk, including the possible loss of the money you invest.
Diversification does not ensure a profit or protect against a loss.
Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date.
Mutual funds, like all investments, are subject to risks. Each LifeStrategy Fund invests in 4 broadly diversified Vanguard funds and is subject to the risks associated with those underlying funds.
Bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments. Investments in bonds are subject to interest rate, credit, and inflation risk.
Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.
We recommend that you consult a tax or financial advisor about your individual situation.