Asked by Lynn  |  Submitted September 11, 2013

I heard I should be "rebalancing" my 401k, what is that and how often should I do it?

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  Answers  |  2

September 12, 2013

Hi Lynn,

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.

Tracy Burke

$commenter.renderDisplayableName() | 09.26.17 @ 12:52

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March 15, 2017

Rebalancing is returning your plan to it's original percentages for your investments. For example you started with four choices and put 25% in each choice. When you rebalance you return those investments to their original 25% by selling and buying funds. Selling the ones that have preformed well to buy the ones that have not to get you back even over all investments. How often you should do it depends on how often you want to or if your plan charges you for moves. One rebalance a year is fine. You could even go every couple years. It's up to you.

$commenter.renderDisplayableName() | 09.26.17 @ 12:52

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