Monday, December 21, 2009

Time to Rebalance Your 401(k)

According to a study by The Wharton School, 79% of 401(k) participants make no trades within their account over a 2-year period.

The advantages of rebalancing have been well documented, but here is a good way to look at it. Suppose that several years ago you completed the allocation exercise in your enrollment book and decided that a 60% equity/ 40% bond allocation was appropriate….and you did nothing further. You may very well have had an 80/20 allocation when the market went sour…meaning that you took a bigger hit than you needed to.

By rebalancing on an annual basis, you “snap back” to your original 60/40 allocation, which is the one you wanted in the first place. And you take the emotion out of trying to guess how much higher the market will go, where the “top” is, etc.

Most 401(k) platforms have an automatic rebalancing feature, so there is really no excuse. You don’t need to mark your calendar, just check the box.

If you set it now for rebalancing every January 1, you’ll be ahead of the pack at retirement time.