Rebalancing

As market performance alters the values of your asset classes, you may find that your asset allocation no longer guarantees the balance of growth and return that you want. In that case, you may want to consider adjusting your holdings and rebalancing your portfolio.

Assets grow at different rates—which means that your portfolio might end up out of line with the allocation you have chosen. For example, some assets might recently have grown at a much faster rate. To compensate, you might reallocate some of the value of fast-growing assets into assets with slower recent growth, which may now be poised to pick up steam while recent high-performers slow down. Otherwise, you might end up with a portfolio that carries more risk and provides a smaller long-term return than you intended.

Although there’s no official timeline that determines when you should rebalance your portfolio, you may want to consider whether you need to rebalance once a year as part of an annual review of your 401(k) plan.

Some funds, often called asset allocation funds, may reallocate your portfolio regularly, sometimes as frequently as every quarter. However convenient this may seem, you may want to check the transaction fees for such a fund before selecting it. Overall, expense ratios and transaction fees tend to be higher than average. In addition, such frequent trading may reduce rather than enhance your long-term return.

The Cost of Shifting If you can access your account online, you may be able to shift your assets as often as you like. Keep in mind that constant shifting means potential sales charges, exchange fees, exit fees, and back-end loads. The more often you trade, the more often you’ll owe. And, aside from the costs this might incur, switching out of equities when the market is doing poorly means locking in your loss—and unlike a taxable account, you can’t take a tax deduction on capital losses in a 401(k).