Portfolio Rebalance

Q: What does rebalancing a portfolio mean?

- H.C., Anderson, Ind. 

A: It involves tweaking the percentage of your portfolio in various holdings (such as stocks, bonds, etc.) by reallocating your money. Imagine that three years ago you invested in 10 companies, putting about 10 percent of your portfolio's value in each. If today one of the firms has grown to represent 30 percent of your portfolio, you might rebalance by selling off some of that and reinvesting the money elsewhere.

Rebalancing isn't always best. Sometimes it's good to let your winners keep winning, as long as they still seem undervalued, with ample room to grow.

Q: What are "defined contribution" and "defined benefit" plans?

- S.M., Nashua, N.H.

 

A: These are the two main kinds of retirement plans. Traditional pensions are defined benefit plans, where employees know exactly what they'll receive in retirement. It's the employer's responsibility to have the needed sums of money available for retired employees.

Defined contribution plans, such as 401(k)s and 403(b)s, have now replaced many traditional pension plans. With them, the amount of money contributed into the plan is defined: You know how much you and your company are depositing into the account. The amount available at retirement is uncertain and will depend on how you invest the contributions. You typically have more control over these kinds of accounts, as you can usually specify what kinds of investments your dollars are plunked into (growth mutual funds, company stock, bonds, etc.).

With both Social Security and 401(k) results uncertain, it's vital to plan effectively for retirement. You'll find lots of guidance at www.fool.com/retirement. htm. Learn how to maximize your 401(k) at www.fool.com/money/401k.

Got a question for the Fool? Send it in - see Write to Us.