4th Quarter 2018

Investing Spotlight: Rebalancing and Diversification

If market volatility has you worried about your retirement savings, it’s important to keep these market swings in perspective. Even though there were days when the Dow Jones Industrial Average (Dow) rose or fell by more than 500 points, the Dow only fell in value by 3.5 percent since the beginning of 2018 overall, as of Dec. 19, 2018. This modest decline in 2018 is after more robust annual returns of 28.1 percent in 2017 and 16.5 percent in 2016.

Focus. Despite the market noise, it is important to focus on what you can control such as your investing strategy. Choose your asset allocations based on your investing time frame and risk tolerance not the daily market noise. Keep your portfolio aligned with your target asset allocations by rebalancing. If you have a long time before you need the money for retirement, you may be able to weather the market’s ups and downs without taking any action. Regularly review your goals and consider pulling back on stocks as you get closer to retirement to reduce your risk.

Diversify. Having a diversified portfolio can help you mitigate some of the risk. You can invest some of your long-term savings in stock funds, but also keep some money in cash and bond funds, which generally perform differently than the stock market. And you can diversify your money in each type of investment. For example, you can invest some money in funds that invest in large companies, some in funds invested in small companies, and some in funds invested in international companies. This reduces risk because each type of investment is unlikely to perform the same way at the same time. For more information, see Investment Planning for Public Sector Employees.   

Rebalance. It’s also important to rebalance your investments on a regular basis to make sure your portfolio is still in line with your goals. If stocks have performed much better than bonds, for example, your portfolio will have a much larger percentage in stock funds than your original allocation and could be riskier than you intended. Set a regular time to review your portfolio every year; for example, the beginning of each year may make sense for you. You can rebalance your retirement plan portfolio either by realigning your account to match the allocations you want, or by investing more of your new contributions into the types of investments that have not performed as well and now represent a smaller portion of your portfolio, to get back to your target allocations. For more information, see Rebalance Your Investments to Manage Risk.

Plan. Review your allocations on a regular basis as your goals and time frame change. As you get closer to your retirement date, for example, it may be a good idea to start shifting more of your money to less-volatile investments — such as moving some money from stock funds to bond funds and cash. But, remember, because retirement could last for 20 or 30 years, it’s still important to invest some money for the long term even as you get close to your retirement date.

Resources. If you want professional help with these decisions, consider a target-date fund1 based on the date you plan to retire. Investment professionals create a diversified portfolio based on your time frame and gradually shift the money to more-conservative investments as your target date gets closer. They also monitor the investments and rebalance regularly. ICMA-RC also offers several levels of Guided Pathways® Advisory Services, which can provide personalized guidance or account management to help with your investing decisions. See Choose Your Approach to Investing for details.

1The Fund is not a complete solution for all of your retirement savings needs. An investment in the Fund includes the risk of loss, including near, at, or after the target date of the Fund. There also is no guarantee that the Fund will provide adequate income at and through an investor's retirement.

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