Portfolio Off-Kilter? Could Be Time To Rebalance It

Portfolio Off-Kilter? Could Be Time To Rebalance It

Regular maintenance — whether it’s updating who’s going to inherit what, checking that you’re not paying too much for car insurance or making sure your investments, particularly your retirements savings, are still working for you.

As the markets ebb and flow, the mix of investments that you originally put into place will probably change shape over time. And if you let your portfolio roam free for too long, your long-term plan can be thrown off kilter. Your retirement savings could become too heavily invested in stocks, potentially magnifying your losses when the market takes its next dive. Or your savings could become too conservative, and that’s a problem, too.

You can solve all of this, though, by regularly rebalancing, the industry’s term for putting your investments back in the proportions you originally set. But unless you hand off the reins of your portfolio to a financial planner, you need to make the time to do this yourself (ditto for investors who periodically hire a professional and want to carry out the advice themselves).

So, in theory, the task should be as simple and as automated as possible. Otherwise, you probably won’t find the time to do it. And really, most of the time, you just need to do a little maintenance.

Going through the exercise should be as easy as it is at TIAA-CREF, the financial services organization. When I recently set up a new 403(b) there for a family member — 403(b)s are essentially another flavor of 401(k) plans — I was pleasantly surprised by one of the options presented: Would you like to rebalance your portfolio back to your original allocations on your birthday?

That’s genius, I thought, and so incredibly simple. Why doesn’t my 401(k) plan offer this? Why doesn’t everyone’s plan offer this? And what online brokerages offer similar types of automated services?

As it turns out, automatic rebalancing is a standard option in many, but not all, 401(k) plans. But it should be. There’s little downside as long as you’ve already set up the proper investment mix. It shouldn’t cost you anything, there are no tax implications and you’re simply keeping your risk level intact. Aon Hewitt, a giant retirement plan administrator, said that more than half the companies in its database that offer 401(k) plans — covering more than 12 million workers — offered employees the ability to rebalance last year. That’s a large increase from a decade earlier, when less than 15 percent offered the feature.

Surprisingly, only a few of the larger online brokerage firms, including TD Ameritrade and Fidelity, offer anything remotely similar. Part of the reason, some providers said, is that the situation becomes more complicated when investors hold a mix of taxable and nontaxable accounts, since there can be tax implications and trading costs.

Of course, there are plenty of investments, namely target-date funds, that will automatically rebalance for you. These funds include a mix of investments that gradually becomes more conservative over time. As long as you fully understand what you’re buying and you’re not overpaying, they are good options for many investors, particularly those with smaller balances. Unfortunately, the entire category came under fire after the big market dive because many funds were too aggressively invested and managed to lose more than the broader stock market.

But if you’re trying to do this on your own, the question becomes this: How often should I rebalance and which providers make this as easy as possible?

There are a couple of schools of thought. Some experts recommend rebalancing based on an indicator, like when a piece of your portfolio moves a certain percentage outside your desired range, while others say it’s perfectly fine to pick a date and do it once a year. Vanguard has found that, historically, rebalancing once or twice a year — and only when a portfolio has drifted from its goal by at least 5 percent — produces results that are just as good as more complicated, frequent rejiggering strategies.

Consider what might happen if you did nothing at all. Beginning in 1987, a portfolio of 60 percent stocks and 40 percent bonds would have ballooned to 71 percent stocks by the end of last year, according to Vanguard. Rewind the same portfolio back to 1946 and it would have almost completely changed into an all-equity portfolio, at 97 percent stocks.

It is a counterintuitive strategy, since you’re basically adding money to your losing investments and selling off those that are doing well. But by sticking with it, the exercise helps take the emotion out of investing.

Of course, there are several low-cost services that can do it for you, while many online brokerages will manage your account for a fee. But here’s an informal survey of the offerings for those who want to handle it on their own, both inside and outside of retirement plans (if we missed any, you can add your own suggestions to the list on our Bucks blog):

  • FIDELITY  The firm offers a rebalancing feature through its Portfolio Review tool, available to its 401(k) participants and to retail brokerage customers. After you set up a portfolio, it automatically sends you alerts through its “myPlan monitor” service when your portfolio drifts more than 10 percent from your goals. When you revisit the tool, it will ask you a few questions to make sure your goals remain the same and then recommend how to get back into balance. “So while it’s not automatic, there is an educational element of taking a few minutes to go through it,” said Jeffrey K. Cimini, executive vice president in Fidelity Investments’ personal investing division. Then you can “click to trade” to put everything back into balance.
  • T. ROWE PRICE  The company offers automatic rebalancing as a standard option within the retirement plans it provides to employers. But only 25 percent of workers with access to the tool sign up for it, according to James Griffin, a senior product manager in its retirement plan services group, and that number has been declining over the last few years given the widespread adoption of target-date funds. It offers a similar option for its I.R.A. customers. After filling out a form indicating your selected mix of investments — you need to keep at least $1,000 in each fund in the portfolio — the firm will automatically rebalance your portfolio each quarter if your investments stray more than 5 percent from those goals.
  • VANGUARD  It also offers a similar free rebalancing feature in its 401(k) plans, but employers have to choose to turn on the feature. While offering the service within a 401(k) is relatively straightforward, since there are no tax implications and rarely any related trading costs, the company said it did not currently offer the service to individual investors, though that was something it continued to consider.
  • SCHWAB    It does not offer automatic rebalancing options to retail customers, though it has a couple of tools that illustrate whether your portfolio is off track. But its 401(k) plan participants can elect to have their portfolios rebalanced quarterly, semiannually or annually, and they receive a notice each time it has been reallocated.
  • TD AMERITRADE  Its customers can automatically rebalance through its free Portfolio Planner tool, where you can analyze an existing portfolio or get help building a new one. While the service does not send any automatic reminders letting you know when your portfolio needs to be rebalanced, after you go through the tool, you can choose to “align your current portfolio to your target portfolio,” and it will do the math and set up and execute your trades with a few clicks. You can try to keep commission costs to a minimum by using its 100 commission-free exchange-traded funds and more than 700 mutual funds that don’t charge any transaction fees or commissions.
  • ING DIRECT/SHAREBUILDER The online brokerage said it would introduce an automatic rebalancing tool to its retail customers later this year. But its 401(k) participants, who are employees of small businesses, can already elect to have their accounts automatically rebalanced each year at no cost.


At Folio, another online brokerage, you are presented with so many options that it can take a few moments to adjust to the way the site is organized (and in their lingo, all portfolios are known as “folios”) since it’s not immediately intuitive. It does not automatically rebalance on a set schedule, nor does it e-mail you if your portfolio is out of whack. But if you automatically add money to the account on a regular schedule, you can choose to have the money land in such a way that it will bring your portfolio as close to your goals as possible. (You can do the same if you want to remove money.) Among other options, you can also simply choose to Rebalance, which will buy and sell holdings to bring you back to your goals without adding or withdrawing money.

If I could create a rebalancing tool from scratch, however, it would look a lot like the MarketRiders*, which helps you build and monitor a portfolio of exchange-traded funds (though its cost recently rose to $149.95 a year, so it doesn’t make sense for those with smaller accounts). It sends you an e-mail when your portfolio has drifted 15 percent or more from its desired allocation, and the e-mail includes easy-to-understand instructions on how many shares you need to buy or sell. But what’s really smart about this service is that it allows you to specify which online broker you use and will automatically substitute that firm’s exchange-traded funds that trade free so that you can minimize trading costs.

In a perfect world, those rebalancing instructions would link to your brokerage where you could carry out the plan with one click.

After all, automating has a dual benefit: it helps us do what doesn’t necessarily feel quite right — like buying stock when you may be more inclined to sell — but it ensures the task will get done.

* Rebalance shares the same investment platform as MarketRiders.