If you haven’t checked your overall mix of stocks and bonds, chances are you currently have more riding on stocks than you intended. That’s because stocks have been on a crazy-strong rally, and bonds have been plodding along, as designed.
For example, let’s say that your goal is to have 60% invested in stocks and 40% in a core U.S. bond fund. If you started with 60/40 a year ago, in late September that mix had shifted to 68% stocks and 32% bonds.
If you haven’t touched a thing for five years, a 60/40 mix is now around 75% stocks and 25% bonds.
A portfolio that 10 years ago started with a 60/40 mix would now be 85% invested in stocks and 15% in bonds, as during that stretch U.S. stocks gained more than 375% and core bonds gained 34%.
Time to correct portfolio drift
Without debating which stock market gauge is best, there is little debate that U.S. stocks aren’t exactly cheap right now. There’s no telling when a correction (loss of 10% to 20%) or bear market (loss of 20%+) might strike, but a retreat wouldn’t exactly be surprising given the recent tear. Since the March 2020 low in the COVID bear market, U.S. stocks have more than doubled.
That makes it extra timely to consider checking your investment portfolios to make sure they have the appropriate mix of stocks and bonds.
Moreover, take a step back and think through if your long-term asset allocation strategy still makes sense. Maybe you settled on a 70/30 or 80/20 mix when you were 35. But now you’re 55 or 60. Do you still want to own as much in stocks? Maybe the 80/20 mix is ratcheted to 70/30. Or the 70/30 to 60/40.
To be clear, there’s no single right answer. If you have a pension, and all your living costs can be covered by that and your Social Security benefits, you might want to keep a hefty chunk in stocks as part of legacy planning. That can make sense given you aren’t depending on your stock portfolio to cover basic living costs.
The easy (but overlooked) art of rebalancing
If you find your current mix of stocks and bonds is a bit out of whack, you have a few options for getting things back to your preferred asset allocation mix of stocks and bonds.
If your money is invested in a workplace retirement fund or an individual retirement account (IRA) you can easily — with a few clicks in your online account — move money out of your stock fund(s) and into bonds. Exchanging shares within a retirement account does not trigger any tax bill.
Side note for 401(k) investors: Check if your plan offers a free service that automatically does this rebalancing for you, based on your target mix. Plenty do.
If your investments are in a regular taxable account, you need to consider the taxes you will owe with rebalancing. When you move money from one fund or exchange-traded fund to another, that is considered a sale, even if you immediately reinvest the money in another fund. Gains on that sale are subject to tax.
Keep in mind, if you have both retirement and taxable accounts, there’s no need to have each individual portfolio hit your target allocation. All that matters is your overall mix for your retirement planning. If you still like the stock investments in your taxable account, you could leave that untouched, and do your rebalancing inside your 401(k) or IRA, where there’s no tax cost to move money from one fund to another.