When investment values change, your account’s mix of investment types — its asset allocation — also changes. Your account’s current allocation percentages may no longer match your risk tolerance or your goals. You can restore your target percentages by rebalancing.
Drew invests 60 percent of his account in stock funds and 40 percent in bond funds. Over time, his stock funds outperform the bond funds and grow to 70 percent of his account. The portion invested in bond funds drops to 30 percent.
Drew sells some shares in the stock funds and buys shares in the bond funds to restore his account to his target 60 percent stock/40 percent bond allocation. Alternatively, he could redirect his new contributions into the bond funds until his investment mix is restored.
You can do it yourself or your plan may offer an automatic rebalancing option. With automatic rebalancing, your account would be rebalanced for you at the frequency you choose.
