401k Rebalancing and Management

You’ll want to check up on your 401(k) to make sure that it’s performing according to your expectations. That means keeping an eye on your investments’ performances and potentially reassessing your asset allocation.

As market performance alters the values of your asset classes, you may find that your asset allocation no longer provides the balance of growth and return that you want. In that case, you may want to consider adjusting your holdings and rebalancing your portfolio.

Assets grow at different rates—which means that your portfolio might end up out of line with the allocation you have chosen. For example, some assets might recently have grown at a much faster rate. To compensate, you might reallocate some of the value of fast-growing assets into assets with slower recent growth, which may now be poised to pick up steam while recent high-performers slow down. Otherwise, you might end up with a portfolio that carries more risk and provides a smaller long-term return than you intended.

Although there’s no official timeline that determines when you should rebalance your portfolio, you may want to consider whether you need to rebalance once a year as part of an annual review of your 401(k) plan.

The Cost of Shifting

If you can access your account online, you may be able to shift your assets as often as you like. Keep in mind that constant shifting means potential sales charges, exchange fees, exit fees and back-end loads. The more often you trade, the more often you’ll owe. And, aside from the costs this might incur, switching out of equities when the market is doing poorly means locking in your loss—and unlike a taxable account, you can’t take a tax deduction on capital losses in a 401(k).

How to Rebalance

You can rebalance your portfolio in different ways to bring the way it is allocated back in line with the balance you intend it to have.

One rebalancing strategy is to redirect money to the lagging asset class until it returns to the percentage of your total portfolio that is held in your original allocation. Or, you could add new investments, and concentrate your contributions on that class.

Another strategy is to sell off a portion of your holdings within the asset class that is outperforming others. You may then reinvest the profits in the lagging asset class.

All three approaches work well, but some people are more comfortable with the first two alternatives than the third. They find it hard to sell off investments that are doing well in order to put money into those that aren’t. Remember, though, that if you invest in the lagging classes, you’ll be positioned to benefit if they turn around and begin to prosper again.

Let Woodlands Portfolio Management rebalance your 401k on a regular basis to keep you on track for retirement.

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