Rebalancing Your Portfolio


In creating a portfolio of assets, you have two slightly contradictory goals:

  1. Maximize earnings.
  2. Minimize volatility, especially as you grow older.

The first point is obvious, but the second might not be. When you're young it's easy to invest in volatile-but-high-yield assets, since you won't need the money for a long time and can live on your stable salary.

Once you no longer have a salary to cushion volatility, though, you may be more interested in creating a reliable income stream than in simply maximizing earnings.


Keep Dividend-Yielding Investments in Tax-Advantaged Accounts


The Lazy Option: Target Date Funds

Rebalancing is easy, but you still have to, y'know, do it.

Target date funds offer an alternative. These funds contain a balanced mix of stocks and bonds and correspond to a certain date (generally your planned retirement date). As that date approaches, the fund will automatically be rebalanced to reduce volatility.

This is pretty cool! However, while target date funds are usually composed of index funds, they generally have slightly higher fees (an extra 0.1% or 0.2%, say) to compensate for the convenience of automatic rebalancing.

Honestly ask yourself: am I really going to annually rebalance my portfolio?

If you are, terrific! It's always nice to minimize your fees.

If not, though, I think target date funds are a perfectly fine choice. The value of rebalancing is worth the relatively small extra expense.

Remember: as with any fund that contains bonds (which pay dividends), try to keep your target date funds in a tax-advantaged account.

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