As you get closer to retirement, or 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 or reallocate 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 offer to reallocate your holdings for you as you grow older and your investment goals change. These lifecycle funds may rebalance as frequently as every quarter. However, you may want to look out for transaction fees in automatic plans. Although these programmed funds may eliminate exit fees, their expense ratios are likely to be high.
| 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). |
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