Ask Kim
Devise a Rebalancing Plan
Should I continuously reallocate my 401(k) funds to maintain the right investment mix?
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
February 28, 2003
I am 30 years old and have a 401(k) that I've been contributing to for about eight years now. Should I continuously reallocate my funds in order to maintain the same percentages that I have when making contributions?
You don't need to constantly fiddle with your portfolio. Instead, devise a plan for rebalancing and stick to it. For example, some people rebalance once a year; others move money when their portfolios have strayed more than five percentage points or so from their original allocations.
Rebalancing can be tough psychologically. After all, it seems irrational to sell some funds that have performed well and buy more funds in categories that have lagged behind. But maintaining your original allocations will keep your savings on track regardless of which way the markets move.
If your allocations are just a little off, you may not have to sell funds. You could rebalance your portfolio by temporarily discontinuing new contributions to the investments that have grown too fat and sending more money into a thinning category (this strategy is particularly helpful if you're making changes to a taxable account, where you'd pay capital-gains taxes for selling winners).
Kiplinger's Fund Portfolios offer some sample allocations based on various time horizons. Since you're 30 years old, focus on the long-term portfolio for your 401(k) investments. This portfolio is designed for anyone who is more than six years away from retirement or 10 years away from any other investing goal. It is invested entirely in stock funds -- with 25% in foreign funds, 25% in stocks of small companies, and the rest invested primarily in large and medium-sized companies.
Since you have limited investment choices in your 401(k), you may not have access to all of the funds in our recommended portfolio. If that's the case, click on our "similar funds" link to learn about other funds with similar investing strategies.