July 11, 2013
I recently helped a client begin contributing to her new employer's 401(k) plan, and couldn't help but chuckle at the following line, found buried in the fine print: "you may change your investment allocation 99 times per plan year." At that rate, you'd be making changes to your plan nearly twice a week! Making that many changes to your 401(k) is a bit much, but that does not mean that rebalancing your portfolio on a regular basis doesn't make sense. It does.
I advise my clients to start with four funds in their 401(k), allocating 25% to each fund. After that, plan to rebalance your funds, bringing the percentages allocated to each investment back in line with your original plan (25% to each fund). You can call me crazy for telling you to move money from your top performers into those that have lagged behind, but trust me - funds that have grown like crazy will almost certainly slow down at some point. Conversely, the slow growers in your portfolio are sure to turn around at some point. Everybody wants to buy low and sell high, and rebalancing your portfolio does exactly that.
How much is too much? Your assets need time to actually work for you - and making changes on a weekly or monthly basis is not nearly enough time. Consider bringing your assets back in line with their original percentages two times per year. It used to be that you had to set a reminder to do this yourself each time, but most 401(k) plans have features allowing you set your account to automatically rebalance itself - take advantage of this!
We all want to beat the market, to buy low and sell high at all times. Unless you've found the crystal ball with all of the answers, that can be pretty tough. Instead do yourself a favor - rebalance your portfolio on a regular basis - in time you'll be glad you did.
Chuck Wade
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).