Lawrence Castillo, LUTCF, CFF

L&C Retirement Income Planners

Lawrence Castillo, LUTCF, CFF picture

The main reason for rebalancing a retirement portfolio should be risk management. Other rationales for rebalancing can come with costs, but no guaranteed tangible benefits.” Robert Cannon

Retirement and income specialists often recommend periodic portfolio rebalances for those at or near retirement age. The reason for doing a rebalance within a few years of retirement is (or should be) the protection of wealth by shifting money to more risk-averse products such as annuities and life insurance.

As you get older, you will likely discover that your risk tolerance has changed, often dramatically, and you can no longer stomach the idea of market losses. You may also realize that you will need more predictable income streams to supplement Social Security and other investments.

Whatever the case may be, five to ten years before retirement is an excellent time to sit down with your advisory team and look for potential planning gaps.

What is portfolio rebalancing anyway?

Rebalancing an investment portfolio is essentially a reset of current allocation to its’ original mix before changes in its’ various components occurred due to market corrections. Rebalancing is also about making a portfolio consistent with a person’s present risk tolerance and goals.

Unfortunately, if you reset your portfolio to its’ “default settings” every time there is a market downturn, you could potentially wind up with a value of ZERO.

Suppose your advisor is urging you to rebalance because they think it will create more diversification, enhance returns, or allow you to buy cheap stocks and sell appreciated items. In that case, you may want to seek a second opinion. If you are within a few years of retirement, tweak your portfolio because your risk tolerance has changed, not because you want to “plump it up.” You could wind up exposing your money to greater risk by trying to fix what’s not truly broken.

Rebalancing strategies come in a variety of forms, including the lofty-sounding “constant proportion portfolio insurance” (CPPI), constant mix, dynamic asset allocation, and the popular “target-date glide paths.” If these terms are confusing, it’s not your fault. Financial service people are well-known for using jargon and acronyms that leave even savvy retirees shaking their heads.

Suppose your advisor is throwing terminology around the way politicians throw money at problems. In that case, you need to ask them to fully explain their proposals, along with every pro and con and arcane term. It would be best if you didn’t have to get an MBA to understand how your wealth is managed.

Bottom line: Portfolio rebalancing can help certain pre-retirees and retirees gain success in protecting and growing their wealth. However, each rebalance may expose your money to greater risk, more fees, and other unanticipated costs that can offset potential gains.

While rebalancing may occur at fixed times or when asset allocations have deviated from your original target, you should also think about rebalancing when there is a significant market downturn.

Performing a rebalance will have costs each time. These expenses include taxes, transaction fees, and advisor fees. It’s a good idea to discuss a contingency plan for a rebalance with your advisors before there is a market downturn.

In addition, you should make portfolio health “check-ups” a regular part of your plan to protect and grow your wealth safely, sanely, and strategically. If you’d like to know more about how a portfolio “tune-up” could help you achieve better results now and in retirement, or have other questions about growing and protecting your wealth, reach out to me any time.

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