When Should You Rebalance Your 401(K)?


Your 401(k) plan is an excellent retirement-savings vehicle — so don’t let it stall out.

How can you help keep your 401(k) moving forward? For starters, make sure you periodically rebalance the investments within your plan.

Fortunately, you’ll find that you’ll have plenty of opportunities to do just that. In recent years, 401(k) plans have begun offering participants an increasing number of investment choices.

Also, most plans allow you to make changes frequently — as often as once a day.

You may not require this degree of flexibility, but it’s nice to know it exists.

Unfortunately, many people adjust their 401(k) only when one or more of their investments has lost value.

To compensate, they often switch some of their money into the more conservative choices.

This could be a mistake. Remember, your 401(k) is designed to help you build resources for retirement, so you will want your money to have the chance to grow — which means you should allocate a good percentage of your 401(k) holdings in those accounts made up of stocks.

When Should You Make Changes?

So, how often should you review your 401(k)? At least once a year — and every time you experience a significant life event.

For example, if you get married, and your new spouse also has a 401(k), you may want to make sure your 401(k) holdings complement, rather than duplicate, those of your spouse.

You also may need to make some changes when you encounter any of the following situations:

• Your money isn’t growing fast enough — If you’ve got a comprehensive financial strategy in place and if you don’t have one, you should. You may have identified a specific rate of return you’ll need from the stock-oriented accounts in your 401(k) to help achieve your retirement goals.

So, if you determine that your current mix of investments is not on track toward giving you the returns you’ll need, you may need to adjust your holdings.

As mentioned above, though, it’s important not to over-react to short-term price drops. But if your 401(k) stock accounts just aren’t performing well in the long term, it may be time to make some changes.

• You’re not diversified enough — By diversifying your 401(k) dollars across a range of accounts, those containing stocks, bonds, money market accounts, certificates of deposit, etc., you can help blunt the impact of market downturns that mostly affect just one type of asset.

The diversification that’s right for you depends on your individual situation.

But if you find that your 401(k) dollars are over-concentrated in one type of investment, it’s probably time for an adjustment.

• You’re nearing retirement — If you’re within a few years of retirement, you may want to shift some, but certainly not all, of your 401(k) dollars from stock accounts to bond accounts.

When you had many years in which to contribute to your 401(k), you had the time to bounce back from any down periods, but at this stage of your life, you’ll want to focus on locking in any gains and helping to avoid excessive volatility.

By following these suggestions, you can go a long way toward keeping your 401(k) in good shape year in and year out.

Scott Flake is a licensed financial adviser with the firm of Edward Jones. He hosts a weekly informal investment discussion on Tuesdays at 10 a.m. at the Good Samaritan Majestic Rim at 310 E. Tyler Parkway (near KMOG). For more information, call his office at (928) 468-1470.


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