Give Your Portfolio an Annual Check-Up
The practice of “rebalancing” your 401k is tricky because it involves assessing how your portfolio has changed over time and moving the money around to best suit your retirement goals. Because of how different mutual funds perform, your 401k might get top-heavy without you even noticing.
Think of it this way: You have $10,000 in a fast-moving stock fund, and $10,000 in a low-risk bond fund. Your goal is to be allocated 50-50 between the two. Well, if the bond market is flat and your stock fund goes up 50%, you now have $15,000 in stocks and $10,000 in bonds. You’re now 60-40.
So what do you do? You rebalance. Take $2,500 out of your stock fund and transfer it into bonds so you can return to a 50-50 mix.
This is a key part of risk management, because over time you might not notice that the lion’s share of your portfolio is in risky, fast-moving investments. It’s a good problem to have, of course, that one part of your portfolio has grown so fast. But if you don’t move that money around, you could expose yourself to disaster if things turn the other way.
There’s a catch, though: Some 401k plans don’t let you constantly move around your money and have a cap on the number of transfers you can perform annually. If you exceed that amount, you might have to pay a fee. So while rebalancing is important, don’t overdo it.
A good rule of thumb is to simply rebalance once a year at tax time, with the help of your accountant or financial adviser if you have one.