I heard I should be "rebalancing" my 401k, what is that and how often should I do it?
Answers | 2
Rebalancing your 401(k) is a good idea. As an example, assume your 401(k) has an initial asset allocation of 50% stocks/50% bonds. If the stock market does well over a period of time you may find that allocation to now be 55% stocks/45% bonds (not that bonds lost money but stocks did much better than bonds). At that point it would make sense to "rebalance" your account back to the original 50% stocks/50% bonds. In doing so, you will be "locking in" some of the gains you've accumulated in the stock market (the 5% you're moving from stocks back to bonds). If you do not rebalance, assume the stock market then goes down and what was 55% stocks/45% bonds now goes back to 50% stocks/50% bonds BUT did not happen by rebalancing but by the market going down and as a result you lost the gains that we're previously had. By rebalancing when the target allocation is off target (either up or down - the opposite of the above example can happen when the stock market goes down), you are practicing the "buy low - sell high" approach that is so important.
As for when to rebalance, many 401k plans allow you to set it up automatically - if so, quarterly or twice a year are usually good choices. If the 401k does not allow for automatic rebalancing, doing it at least once a year is a good idea. I hope this helps.