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Rebalancing act


En español | The past several years have been hard on investors. Some stayed in the market, determined to ride out the ups and downs. Others bailed out of stock funds and moved into more conservative investments. And some simply pulled out of the market altogether—frustrated by the uncertainty.

No matter which camp you fall into, the way your assets were allocated six years ago may be very different than the way they are allocated today. If that’s the case, it may be time to consider a portfolio maintenance strategy called rebalancing.

Rebalancing ensures your portfolio continues to reflect your risk tolerance and time horizon.

Even if you’re still comfortable with your overall investing strategy, it’s important to review your current holdings to make sure that market conditions have not significantly shifted your allocations. You can restore your allocations back to their original targets by rebalancing. That means selling shares of investments that have become a larger portion of your account than you intended and purchasing investments that have fallen below their target allocations. Using another approach, you can adjust your future investment purchases or 401(k) investment direction until your original allocations are restored. (However, rebalancing in this way may take longer.)

Breaking it down

Consider the example of Gail, a somewhat cautious investor who, at the end of 2008, chose a moderate level of risk for her 401(k) account, with a corresponding allocation of stocks, bonds and cash equivalents. As the stock market marched upward, Gail did not make any changes to her account. However, by the end of 2014, her asset allocation—and risk level—looked quite different from what she had intended.


Because Gail didn’t rebalance her account at any time over the six-year period, she ended up with a more aggressive stock allocation than she initially chose—exposing her to more risk than she may be comfortable with. To restore her chosen allocation and risk level, Gail can sell some of her stock funds and buy more bond funds and cash equivalents. While this may feel hard to do in an uncertain market environment, Gail understands this discipline is necessary to help her maintain her intended strategy.

Rebalancing your 401(k) account enables you to act without immediate consideration of the tax impact of capital gains and losses. However, if you have investments outside of your retirement account, you should consult your financial or tax professional on potential tax consequences before attempting to rebalance.

A case for target date funds

Like many investors, you may simply never take the time to modify your allocations—or feel confident doing so—and end up doing nothing. That’s where target date funds come in.

Each target date fund is designed to have its allocation modified gradually over a period of years, shifting its focus from seeking growth to providing income and preserving principal. Usually, this is accomplished by reducing the fund’s allocation of stocks and increasing its allocation to bonds. To make matters simpler, a fund’s timeframe is often part of its name. So, in 2015, if you’re thinking of retiring in about 15 years, you might put money into Fund 2030. And if your target retirement date is 30 years away, you might choose Fund 2045.

Before transferring your balances to a lifecycle fund, investigate the fund as you would any potential investment, looking at its objective, fees, manager, historical performance and risk levels, among other details.


Rethinking your asset allocation

Market turbulence is a reality of investing. There is no reward without some risk. If you have not actively managed your investments or decided to sell your investments, during downturns you may be doing yourself a disservice.

Consider choosing a mix of investments that you can live with through good markets and bad.

Take some time rethink your asset allocation. Consider choosing a mix of investments that you can live with through good markets and bad. Bailing out—or staying out—of the market can work against long-term results. In fact, missing out on only a few key days in the market can greatly impact the performance for an investor over time. While on the surface the impact may appear minimal, with the top-performing days accounting for less than 1% of the total trading days evaluated, the performance dispersion is quite dramatic, as illustrated in the chart below:


Source: Bloomberg, ML GWIM Investment Management & Guidance. Data evaluated using S&P 500 total returns on a daily basis from Jan. 1980 through Jul. 2015. Past performance not indicative of future results.

Advice Access: another way to rebalance

If your 401(k) plan is with Merrill Lynch, it may offer the Advice Access service—a great way to get specific, personalized recommendations for your 401(k) account. You don’t have to spend a lot of time—or need a lot of investment knowledge—to decide how much to contribute to your 401(k) plan, or to choose investment options that may be right for you. Advice Access can do all of this for you.

Based on information provided by you and your employer, Advice Access will tell you how much income you may need in retirement and recommend a strategy to help put you on track. And depending on which level of service you choose, Advice Access can rebalance your account to maintain the recommended investment mix.

Make a date with your 401(k)

Asset allocation gets a lot of attention because it has shown to be one of the key factors in long-term investment performance. Make an annual date with your 401(k) account to review your asset allocation plan. One rule of thumb is to rebalance when your asset allocation has strayed at least five percentage points from your targets. And remember, you should consult your financial or tax professional before you rebalance assets that are outside of your 401(k) account.

Learn more and take action

  • If your 401(k) account is with Merrill Lynch, check your current allocation and make any necessary adjustments at Benefits OnLine®.
  • If you need help managing your plan investments, check out “Investing Wisely,” a video that offers valuable information to guide you through the investment process.

Past performance is no guarantee of future results.

Investing through your plan involves risk, including the possible loss of principal invested.

Neither Merrill Lynch nor any of its affiliates or financial advisors provides legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

The sample portfolios in this article are not intended to represent investment advice. This material does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed. Each investor’s portfolio must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investing timeframe and other relevant factors. Each investor’s financial needs, goals and risk tolerance are different.

Please note that the target date, or retirement date, as applicable, for target date funds is the approximate date when an investor plans to start withdrawing his or her money. The principal value of these funds is not guaranteed at any time, including at the target date. These funds are designed to become more conservative over time as the target date approaches.

The Advice Access service uses a probabilistic approach to determine the likelihood that you may be able to achieve your stated goal and/or to identify a potential wealth outcome that could be realized. Additionally, the recommendations provided by Advice Access may include a higher level of investment risk than you may be personally comfortable with. You are strongly advised to consider your personal goals, overall risk tolerance, and retirement horizon before accepting any recommendations made by Advice Access. You should carefully review the explanation of the methodology used, including key assumptions and limitations, which is provided in the Advice Access disclosure statement. It can be obtained through Benefits OnLine or through a participant service representative.

IMPORTANT: The projections or other information shown in the Advice Access service regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Results may vary with each use and over time.


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