Managing retirement savings in down markets

3. Rebalance your portfolio 

"No tree grows to the sun." Rebalancing your portfolio involves pruning your winning positions and using that money to buy into underperforming assets at regular intervals to bring you back to your target asset allocation.

Calendar rebalancing takes place on a periodic basis, whether quarterly or annually. Percentage-of-portfolio rebalancing takes place when an asset group is over or under the target asset allocation by a stated percentage amount. For example, if you're targeting stocks to be 50 percent of your portfolio and they currently represent 35 percent of your portfolio, you would need to reallocate your portfolio, bringing stocks back to 50 percent of your portfolio valuation.

In tax-advantaged retirement accounts, the tax impact of rebalancing is minimal. Consider rebalancing based on the asset allocation of all your investments and look to minimize the tax impact of changes by managing asset allocations across taxable and tax advantaged accounts. For example, you may want to keep investments taxed at ordinary rates, such as certain bonds, in your retirement account, while other investments taxed at favorable long-term capital gains rates might be kept in your taxable account.

4. Consider investment choices 

If you don't like the investment choices in your 401(k) or 403(b) plan, then work with your plan sponsor to change them. Plan sponsors are becoming increasingly receptive to feedback from participants.

Beyond choices, you also want to consider the annual fees and expenses associated with investing in the plan. Fees and expenses will always be part of the equation, but you don't want an excessive drag on your investment returns. In recent months, regulators have focused on the issue of plan fee disclosure due in part to the spate of lawsuits filed by plan participants.

5. Determine your risk tolerance 

Know how you feel about risk in investing. The "Investment Risk Tolerance Quiz" offered by Rutgers' New Jersey Agricultural Experiment Station, can give you a quick read on your risk tolerance. It's a quantitative approach to the "sleep number" test discussed by David Stevens in the Bankrate feature, "8 tips for investing in hard times."

If you find yourself tossing and turning at night, and it's not your mattress but rather the markets keeping you awake, then it's time to dial down the risk of your portfolio.


If you're not willing to take on much risk, then you should expect to contribute a higher percentage of your income to your retirement investments. There's a trade-off between the willingness to accept risk in investing and the returns you can expect from investing. It's easy to focus on the safety of principal invested, but you have to also be concerned about earning a high enough return to have that principal's purchasing power increase with inflation. If your investments can't keep pace with inflation, then you will fall behind in meeting your retirement goals.

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