NEW YORK (MainStreet) – Don't feel too good about a retirement portfolio stocked with winners and lacking losers. That imbalance is more dangerous than you think.
Rebalancing a portfolio is an important part of any investment strategy, but it's vital to your retirement. Sure, you can set and forget your asset allocation, but rising markets can make your financial future overly dependent on one investment. Meanwhile, falling markets can chip away at underperforming investments and leave your overall portfolio depleted and vulnerable.
This basically requires you to sell off some of those high-flying winners and buy up some more of the losers while they're at their lowest. If you're doing this in the confines of a tax-free retirement account, you don't have to worry about the tax implications of those moves, but you do have to consider maintaining at the level of risk you're willing to accept in a well-diversified portfolio that's built for the long haul. Steve Wallman, founder and chief executive of Folio Investing, notes that you want your portfolio to be in a position where it can grow over time and where you can take a little risk and allow yourself time to recover if there's more volatility than you expected.
“You're able to go for higher levels of risk to get higher levels of return, but you should only do that if you're well diversified, because otherwise you might be in a position where you really bet wrong on a couple handfuls of stocks,” Wallman says. “If that's the case, you may not be able to recover at all, especially if they go under.”