Getting the Most out of Your 401(k): Don’t Forget to Rebalance

Here is tip #5 of our seven-part-series to help participants get the most of their 401(k) plans.

Nobody knows the future, but everybody can rebalance. Rebalancing your 401(k) is important because position sizes will change over time. Allowing your equity allocation to go unchecked in hopes of capturing additional gains is tempting but also exposes you to more risk.

How Rebalancing Works

As with any plan, straying from the original path is always possible. Investing is no different.

As certain asset classes outperform others, your portfolio fund weightings may have skewed from your original allocations. This is generally an easy fix by simply accessing your account and rebalancing your portfolio to its original condition.

Having the discipline to take this important step is difficult, especially if one of your particular holdings has skyrocketed. It may seem counter-productive to sell your star performer and buy more shares of the lesser performers. Maintaining conviction in your original plan is critical.

Many record keepers, including BPAS, will allow you to set your investment plan to automatically rebalance at a pre-determined frequency. This way, you can devise your investment plan and remove the emotion from the rebalancing decision making process.

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