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How Often Should You Rebalance Your IRA And What Funds Do You Choose?

Are you off balance?

Hopefully everyone reading this already has some form of retirement account set up or is planning to get started in the near future. I began contributing to my retirement plan as soon as I had a real job, which wasn’t until I was 26 (it takes a long time to get through optometry school!). I didn’t know anything about the stock market or planning for retirement. I only knew that my employer was offering a match up to 3%,  and I am not one to pass up free money. While I wish I had started saving a higher percentage of my salary from the beginning, hindsight is always 20/20, and I can only go forward. Now that I have been saving and slowly increasing my contributions, I always run into the dilemma of when to rebalance my IRA and what funds to invest in. Since I could never find the perfect answer, I have never really rebalanced. Knowing I should have done this a while ago,  I’m finally taking action, and October 2012 seems like the perfect time. While there are tons of ideas and formulas, it comes down to a few simple steps. As a disclaimer, please remember, I majored in science, not finance.

What is your risk tolerance?

If potential declines in stock prices keep you awake at night and you’d rather keep money in a jar buried in the backyard, you probably can’t tolerate a huge percentage of your retirement in the stock market. However, if you avoid stocks altogether, you miss the chance for some huge gains over time. If you don’t want to put much in stocks, you will need to save more to retire comfortably unless you have other sources of income, like rental property.  There are also many good financial posts out there to help you determine how much volatility you can take like this one from John at Frugal Rules. I have a very high risk tolerance. I love stocks, and I have always been too heavily invested in that area.

I never really set up a percentage of what I wanted in my IRA. I just put everything in stock index funds.  In 2008, I saw my portfolio go down in value by about 40%.  After that I didn’t want to move from stocks until the value returned. The knee jerk reaction is to bail out of a sinking ship, but if you sell when you are down, that’s a true loss. In the years since, my IRA has recovered. For the past 12 months, it is up almost 24%.  95% or my retirement was in domestic large and mid cap stock funds. (You can consider small-cap investments, such as penny stocks, but be aware they are inherently highly volatile.) While I am comfortable with that, I know the market is probably due for a correction. While I still feel 26 most days,  I am now 38 years old. It was time to rebalance. I decided to contiue with a large allocation in stocks because I still have many years before I will withdraw this money, but I also need to add some diversity. My decision was to split the stocks with 65% domestic and 10% international, add 20% bonds and 5% real estate.

What Does it Mean to Rebalance?

Without getting too technical, rebalancing your portfolio means to decide what percentage you want in your total investment. As an example, if your risk tolerance determines that your best allocation is 60% stocks and 40% bonds, you’d watch to see what happened with the market after a certain period of time. If stocks have risen during that period, you might find that your percentage has shifted into 70% stocks and 30% bonds. You would sell 10% of the stocks to buy bonds. If you are like me and have many years until you will access IRA money, annually rebalancing should be fine. Since I waited over ten years to rebalance, though, don’t follow my example too closely. (That hindsight 20/20 thing again!)

What  Funds Did I Choose?

If you’ve learned all you need to know, you can stop reading now, but if you want to second guess my picks you’re curious about the funds I chose I’ll list them below. My work and Roth IRA’s are with Vanguard. Although they should be paying me, I am getting no compensation for mentioning them. They are easy to work with and have very low fees.

Kim’s Allocation

Domestic Stock-Vanguard Total Stock Market Index Fund 60%

International Stock-Vanguard Total International Stock Index Fund 10%

Bonds-Vanguard Total Bond Market Index Fund 20%

Real Estate-Vanguard REIT Index Fund 5%

Kind of like investing for dummies, but at least I’m making an attempt at diversity. As I get older, I’ll shift more out of stocks. I have also started putting some money into non-IRA holdings in the event that I decide to retire before I am old enough to withdraw from the IRA. I have a long way to g0 and am still waiting for Shilpan from Street Smart Finance to pick the next Apple.

If you have an IRA or want to start one, first determine your risk tolerance, then rebalance at least annually to keep your money working for you.

How often do you rebalance your investments? Is my strategy too simple? Should we just keep our money buried in the back yard?



About Kim Parr

Kim Parr is a private practice optometrist, freelance writer, and personal financial blogger. You can follow her journey to 20/20 financial vision at Eyes on the Dollar.


  1. I have recently invested my first £1000 in a stocks and shares ISA. I have gone for a medium to high risk fund (given my age) and am excited to invest more. Secretly, it gives me a thrill watching the numbers. Aside from this I have a final salary pension

  2. Nice mix of investments. I do not have an IRA but I have a 401k whose allocation I need to revisit. Thanks for the reminder!

  3. Good post and thanks for the mention! I typically look to rebalance anually. Well, at least look at how everything is and see if anyone allocation is out of whack. Looks like you have a good mix going on there.

  4. I’m in Canada so I have an RRSP (registered retirement savings plan). I haven’t mixed things up in a while – I probably should!

  5. I think we need to have more money in our funds before we worry too much about re-balancing, lol… For our RRSP, I have all of my money in a single mutual fund (which I will be transferring to ETFs, yes yes… need to make time to visit the bank…).

  6. What “should” you do is a much longer comment! I believe keeping a set rebalancing schedule is important. Some people will shift 4 or 5 times in a few month period and then ignore it for two year….by calendaring the task and making it systematic, you’ve historically had better returns.

    • I guess if I die without going broke, I made the right choices. I’m going to remember to balance around Halloween. Candy, costumes, pumpkins, and stock/bond allocations. All goes together like peas and carrots!

    • I guess if I die without going broke, I made the right choices. I’m going to remember to balance around Halloween. Candy, costumes, pumpkins, and stock/bond allocations. All goes together like peas and carrots!

  7. Writing down your balancing percentages and investment goals won’t hurt either – otherwise once a year you may start wondering “did I say 10 or 15% international” and rethink it each time, which is not really rebalancing any more.
    I have a more complicated mix of Vanguard funds, but you are exactly following the Boggleheads principles, have you visited their forum?

    • I have visited the Bogleheads. I had several funds before, but all were in the same class, so I was essentially buying the same ones but with different names. I have gotten overwhelmed and backed out of rebalancing several times. I finally decided to just keep it simple.

  8. Kim, your allocation looks pretty good. 20% bonds is perfect (in my mind) to maintain a slightly aggressive portfolio and not lose your shirt if another “super drop” hits 🙂

  9. We use Vanguard for our IRAs as well. Have you considered their Target funds? Our IRAs are mostly in the Vanguard Target 2045 funds (we’re a little younger than you…) and I love the idea of them for people who want to be hands off. With low fees (the fee ratio is 0.19% on that fund), they take care of all the rebalancing and adjusting allocations to include more bond/income investments as the years approach 2045.
    I don’t think it’s our “forever fund” – I’ve actually got a meeting with someone in a couple of weeks to talk funds on some of the ones in our 401K, but I felt pretty good having that as our “hands off” account when we were spending so much time worrying about other investments (like RE, etc…)

    • I have looked into those fund and I think those are good options. I’m going to try and be more proactive about balancing, but if it looks like I’m dropping the ball, I will switch to an automatic fund.

  10. We should emphasize, however, that investing isn’t a get-rich-quick scheme. Taking control of your personal finances will take work, and, yes, there will be a learning curve. But the rewards will far outweigh the required effort. Contrary to popular belief, you don’t have to let banks, bosses or investment professionals push your money in directions that you don’t understand. After all, no one is in a better position than you are to know what is best for you and your money. -::.

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