The Importance of Portfolio Management and Rebalancing As Retirement Nears
By Daniel Baumgartner & Petra Peters
Just as charting a trip cross-country is important to arrive on time and in good condition, so is staying on track with your financial road map to experience the retirement lifestyle you want. Similarly, you may need to adjust the route on both your journey and your investments.
When it comes to your investment portfolio, this adjustment is known as rebalancing, or maintaining a level of risk aligned with your time horizon and financial goals. Over time, the relative weights of your asset allocations can drift, exposing you to risks such as market fluctuations. Rebalancing is important because you have less time to make up for losses that might result from market fluctuations.
At Terra Nova Asset Management, we provide investment advice to preserve and grow your wealth. Here’s why portfolio management and rebalancing are important near and in retirement.
What Is Rebalancing?
Rebalancing is periodically realigning assets in your portfolio to your financial goals. You want to restore your original asset allocation by selling overperforming assets beyond your target weighting and buying underperforming assets below your target weighting.
Two main strategies are to rebalance at regular intervals—quarterly or annually—and limit how far you allow your stock-to-bond mix to drift from your target.
Benefits of Rebalancing As Retirement Nears
The goal is to adjust your investment mix of assets to reduce risks. This can help you stay within your investment strategy for retirement. For example, if your portfolio grows beyond 60% stocks and 40% bonds, you can rebalance to maintain a focus on more income and less growth near and in retirement.
While controlling risks is the main reason to rebalance, you also can enhance returns over the long term. As riskier assets like stocks grow in your portfolio, rebalancing allows you to lock in those profits by selling high and buying low to return to your original allocation.
Tailoring Strategies for International Clients
Whether you’re in the United States or Europe, rebalancing for cross-border investments presents additional risks to consider for your retirement. The value of your portfolio and its level of risks can be impacted by:
- Exchange rates
- Currency controls
- Politics, economics, and social events
- The cost of foreign investing
These issues raise the importance of keeping an eye on portfolio management to measure how aligned your investments are with your retirement goals.
Tax Efficiency and Compliance
While rebalancing aims to realign your asset allocation, it also can have tax implications and is an opportunity to make your investments more tax-efficient, maximizing returns and generating more retirement income.
By strategically approaching rebalancing and following tax regulations, you can reset your asset allocation and limit your tax liability. Here are a few ways to rebalance your portfolio while considering the tax implications near retirement or in retirement:
- Rebalance within tax-sheltered accounts, such as your 401(k) and individual retirement accounts (IRAs), first to avoid capital gains taxes.
- Redirect cash flow in taxable accounts to underweighted asset classes.
- Consider gifting shares in overweight classes or contributing to a charity from an IRA as a qualified charitable distribution (QCD).
- Use your required minimum distribution (RMD) from a 401(k) or traditional IRA to reduce your overweight asset classes.
An investment advisor can guide you in rebalancing your portfolio and optimizing its tax efficiency.
Case Study
Consider a portfolio with a 60/40 split for stocks and bonds, with 600 shares of stock at $10 and 400 shares of bonds at $10 for a $10,000 portfolio. If the stock shares rise 12% to $11.20 per share and bonds fall 6% to $9.40 per share, the portfolio reaches $10,480, but with 64.1% stocks and 35.9% bonds.
To rebalance, you can sell off roughly 38 shares of stock to purchase 46 bond shares to get back to a 60/40 balance of stocks to bonds.
Find an Investment Advisor
When did you last look at your retirement investment accounts? At Terra Nova Asset Management, we serve European and U.S. clients who live in Europe or the U.S., and we can help effectively rebalance your portfolio for retirement.
Does it seem like we may be a good fit? Reach out to us directly at 212-355-1234 or ppeters@terranovausa.com for the New York office (Petra) or 855-248-6630 or baumgartner@terranovausa.com for the New Jersey office (Daniel). You may also contact us here to schedule a meeting and we’ll get in touch with you soon!
About Daniel
Daniel Baumgartner is a founding partner of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Daniel has extensive experience in marketing, development of special U.S.-investment products, as well as customer acquisition and relationship management. His ultimate goal is to make a difference in his clients’ financial lives through honest investment advice. He strives to provide high-touch, personalized service and enjoys getting to know a client’s personality as it relates to their financial circumstances before crafting the right solutions. As money is a very personal subject, Daniel takes his responsibility as an advisor very seriously, forming long-term relationships with clients based on trust.
Daniel received his degree in finance and international business from New York University. Outside of the office, he is a hobby landscape, street photographer, and has a great interest in U.S. and European history (16th-19th centuries), believing it helps him answer the question “Why is something the way it is?”
About Petra
Petra Peters is a founding partner and the Chief Executive Officer of Terra Nova Asset Management LLC, a partner-owned investment advisory firm that manages individual portfolios for clients. Petra has decades of experience in the banking industry, asset management, overseeing the administration of individual accounts, and designing and advising specialized funds tailored to the requirements of international private and institutional clients. With extensive knowledge of both Europe and the U.S., she’s able to provide advice and services beyond the typical investment advisor. Petra desires for her clients to live a financially care-free life so they can pursue their passions, and she values their trust and gratitude. Creating invaluable friendships formed over years of partnership, some clients even consider her part of their family.
Petra’s interests outside of work include classical music, history, travel, charities, motorcycling, and golf. She is also on the board of a German charity.