What does rebalance mean in roth ?

[savingdealz]

I read some news on yahoo.com. I found the term rebalance in roth. I dont know what does it mean? any body helps please? Thanks!

Also, when I read a blog for ROTH, the owner of the blog suggests to invest in HOME EQUITY stock in Roth (Trowe Price). So What does Home Equity mean in Roth Trowe Price.
Thanks for your help

[jIM_Ohio]

Home equity in roth makes little sense unless you provide more information.

rebalance means to sell some of your best assets and buy more of your lower assets base on your asset allocation.

[disneysteve]

OP, you should have a pre-determined asset allocation spelling out what percentage of your portfolio you want in each class of investments. For example, you might want 80% stocks and 20% bonds. That 80% in stocks might break down as 40% large company, 20% small company and 20% international and the bonds might break down further with government bonds and corporate bonds or based on maturity as in long term, intermediate term and short term. There are lots of sites and resources to help you come up with an asset allocation that fits your goals and risk tolerance.

Over time, due to market performance, your initial allocation can shift, sometimes quite a bit, from your intended allocation. This year, as stocks have taken a dive, many people will find that the stock portion of their portfolio has become smaller and smaller. What started out 80% stocks and 20% bonds might now be 70/30 or 65/35. Rebalancing means getting things back to your original plan. You can do this by selling holdings that have performed well and using the proceeds to buy more of the underperforming holdings. So sell off some of the bond holdings and buy more stocks. You can also rebalance be redirecting new money going in. That takes more time to get back to the original allocation but the end result can be the same. Stop contributing to the bond holdings and direct all new money toward the stocks until the percentages are back near 80/20 as intended.

I also have no idea what home equity in Roth means. Perhaps he was referring to investing in a real estate investment trust (REIT).

[savingdealz]

Oh, I am so sorry, I spelled a wrong word. I mean "Equity Income". I chose Equity Income in my Trow Price. However, I dont know what Equity Income mean?

Would you give me what sites that can help me in choosing asset allocation please ?
Thanks!

[jIM_Ohio]

IMO you need to read up on "getting started with investing" at a website like T Rowe or smartmoney or morningstar.

If you depend on forums, blogs and articles to teach you about investing you will get very limited and biased advice.

Equity Income is a mutual fund which invests in stocks which pay a dividend. Usually this is large cap stocks, but read a prospectus to know how that particular fund chooses stocks.

In general you should choose the funds in your Roth IRA based on an asset allocation you defined for your own risk tolerance. Someone's blog should not define how much risk you take.

I like equity income funds for their dividend and use T Rowe's as my core fund for my own retirement needs. I also have mid and small caps, foreign stocks and bonds. This strategy does have some shortfalls (lack of growth), but overall I am not complaining.

[disneysteve]

I chose Equity Income in my Trow Price. However, I dont know what Equity Income mean

Then why did you choose it? You should never invest in anything that you don't understand.

IMO you need to read up on "getting started with investing" at a website like T Rowe or smartmoney or morningstar.

I agree. There are many good books and websites to learn about investing. Also, I think it is worth subscribing to a personal finance magazine like Money or Kiplinger's or Smart Money. I know you can read the stuff online, but I guess I'm old-fashioned and find it is different and sinks in better if I sit back with a magazine and really pore over the articles.

[Ima saver]

i agree with Steve. I moved to a very small town 25 years ago, which had no books about investing at the library. To learn about investing, I started reading Money magazines. It helped a lot.

[Broken Arrow]

As the funds in your portfolio grow and shrink, the percentages will start to stray. Rebalancing is simply the act of restoring them back to the percentages you have predetermined.

Rebalancing can be and should be done in any type of account, be it Roth, Traditional, and even taxable.

Directly selling and buying is one way to rebalance your portfolio, but another is also to simply stop contributing to the ones that have grown too big, and to focus the contributions on the ones that are lagging behind.

In a Roth, it doesn't matter too much how you rebalance. However, in a taxable, the latter method of redirecting contributions is preferable since selling to rebalance will produce a capital gains event.

[Broken Arrow]

Typically, equity simply means stocks, and income means dividends.

I believe that's the objective of an equity income fund; to provide dividends through a basket of stocks.

I double checked to be sure, and it seems about right.

[jIM_Ohio]

One additional point- the OP created the Roth a few months ago, the need to rebalance happens maybe once every TWO years, and possibly less if person is starting out and has contributions which are higher than the difference between the funds within the allocation.