A large stock market downturn has undoubtedly rebalanced the portfolio already. As stock price values declined, stocks would have become a smaller percentage of the investor's portfolio than they were previously. For example, an investor may have started out with a 60% stock allocation (i.e., 60% of the total portfolio in stocks) only to see it slip to 55% or 50% or lower. What to do? Investors need to determine their "true" risk tolerance level and stick with it going forward. During market downturns, many people come to realize that their risk tolerance level is lower than they thought it was when stock prices were rising. Research confirms this with studies that have shown a positive link between investors' risk tolerance scores and market indices such as the Dow Jones Industrial Average (DJIA). Ideally, however, risk tolerance should be somewhat stable regardless of market conditions. If your stock weighting has dropped to a percentage of your portfolio that you truly feel comfortable with (e.g., from 60% of your portfolio in stocks to 45% in stocks), you can "stay the course" for now. If it has dropped below where you want to be, you can rebalance by purchasing more stock (at reduced share prices) to get to your target level. Holding more shares of stock at reduced share prices now can help portfolios recover as share prices increase. Some retirement account providers offer an automatic rebalancing service where, at least once a year (e.g., your birthday), your account holdings are reviewed and rebalanced, if necessary. We would like your feedback on this Personal Finance Frequently Asked Question.

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