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How Often Should You Rebalance your 401(k)?


Hugh Meyer

Retirement Rebalancing Rationale: How Often Should You Rebalance your 401(k)?

By: Hugh Meyer

Rebalancing a standard portfolio can be a challenge. Bond funds might be flat while stocks surge, as we saw for the past few years, or vice versa. Your carefully crafted 60/40 portfolio is out of balance and have significant tax implications on realized gains if you sell off stock to boost your bonds.

Luckily, your retirement accounts avoid this dilemma – both the 401(k) and 401(b) can be rebalanced (active selling and buying equities in the account) without tax implications.

Why Rebalance?

Regardless of your life stage or distance from retirement, you should have an investing goal and risk profile assigned to your account. Closer to retirement may fewer stocks and more-fixed income assets, while younger investors keep a more aggressive and risk-positive inverted portfolio.

If there is significant market fluctuation, or if you have not rebalanced for a long time, you might see your capital allocations misaligned with your goals and risk. You would hate to be close to retirement, and a bull market brings your stock allocations to >75% of your portfolio without a rebalance. If that happened, you may have to delay retirement if the economy quickly fell back to Earth, as we have seen recently.

So, How Often Should I Rebalance?

There is no hard rule, so it is essential to understand your goals and risk profile while also watching the account and markets.

Managing your retirement is one of the most critical financial jobs, and it does not take considerable time to stay on top of your future.

If you do want a general guideline, it is best to set aside time once or twice a year to:

  1. Review your investing goals and risk profile.
  2. Check the account status: what was your original allocation proportion, your current goals, and how does the portfolio’s breakdown compare? You should also know the threshold tolerance for misallocation- i.e., you are OK with a 5% difference between the assigned proportion, but anything beyond is a red line. This will also drive rebalancing frequency.
  1. Rebalance as needed. This means selling and buying across equity asset types to reset the required allocation proportion.

However, when the market is incredibly volatile, greater inter-month or quarter swings could quickly throw off your balance, and a swing in the other direction could knock out unrealized gains.

A Helping Hand

Active portfolio management is not for everyone. You may prefer to let the money work for you with minimal involvement. In that case, there are options.

  • Hiring a financial professional is a prudent way to ensure you maintain a well-diversified, balanced portfolio. Financial professionals are duty-bound to understand your needs and honor those needs when managing your portfolio.
  • Target-date funds are assigned a date, and you select a fund based on your retirement. As that date nears, the fund managers rebalance the holdings, so the risk profile automatically adjusts.

Hugh Meyer is a Director and Financial Advisor with Highline Wealth Partners. Highline Wealth Partners is a Fee only advisor, specializing in Financial and Retirement planning for individuals and business owners.

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