401(k) Rebalancing: Your Future Deserves More than ‘Set it and Forget It’
CRAIG LOKEN, ASSOCIATE PORTFOLIO MANAGER
When it comes to investing, the “set it and forget it” approach worked wonders for Ron Popeil’s Showtime Rotisserie. But when it comes to your 401(k) is it really the best strategy?
Periodically rebalancing your portfolio is considered a wise practice to ensure you don’t drift too far from your comfort zone and risk tolerance.
The danger of drifting
Think back to when you first enrolled in your employer’s retirement plan. You likely decided how much of your paycheck to contribute and how to allocate it among various investment options. Once those decisions were made, you may have felt like you’d reached the “set it” phase – but it’s important not to “forget it”.
Consider this example “…a portfolio with 60% equities and 40% fixed income at the end of 1989, if never rebalanced, would have had 80% in equities at the end of 2021” (Vanguard Research). This is obviously an extreme example, but it does illustrate how market movements can significantly shift your asset allocation over time, potentially exposing you to more risk than you intended.
Revisit your plan regularly
What factors influenced your initial investment choices? Was it your age, retirement horizon, financial situation, risk appetite, or even advice from colleagues or friends? Chances are, at least some of these factors have changed since you first enrolled. That’s why it’s worth revisiting your choices.
So, how often should you revisit your 401(k) allocation? Many experts recommend an annual “check-up” to confirm that your investment mix still aligns with your goals and risk tolerance. Today’s retirement plans often include tools to make this easier, such as:
- Target-date funds: These automatically adjust your asset allocation as you approach retirement.
- Automatic rebalancing features: Some plans let you set periodic rebalancing on autopilot.
- Expanded contribution options: Your plan may now allow Roth contribution, giving you more flexibility with tax planning.
Benefits beyond the numbers
Rebalancing isn’t about trying to time the market – it’s about staying disciplined and avoiding emotional reactions to market ups and downs. It helps keep your strategy aligned with your objectives, so you’re less tempted to chase performance or make impulsive decisions.
Simple next steps
- Review your risk tolerance and retirement timeline each year.
- Check if your plan offers automatic rebalancing and turn it on if appropriate.
- Evaluate if Roth contributions might fit your strategy today.
Your future self will thank you for taking the time to rebalance – and for not forgetting it.