It is that time of year. Casual financial news readers overwhelmed with articles about the merits of year-end rebalancing.
Once a year, a 401(k) rebalance is a promising idea. The U.S. stock markets have closed at all-time highs recently. Your 401(k) has the largest exposure to stock market investments ever.
It is easy to make changes in tax-advantaged accounts such as a 401(k). You can sell mutual funds in a 401(k) without any adverse tax consequences. There are no realized capital gains to worry about.
The specific timing of rebalancing does not matter. Any sensible rebalancing strategy is likely to lead to better long-term investment returns.
The main element of any 401(k) rebalancing effort is simple. Rebalance your stock market risk levels in line with your comfort zone.
How much money can you lose from your current 401(k) account balance levels, and not feel bad about the losses?
In dollars, or percentages. How much of either one are you willing to lose in your 401(k) account?
Sell the worst 401(k) mutual funds you own now. Place the proceeds into the safety of your 401(k0 money m market account. This rebalance allows you to raise the money to buy the best mutual funds available to you later. Once the stock market storm has passed.
“Cut your losses short, but let your winners run.” Still one of the all-time great Wall Street stock market adages.
Do you have a part of your 401(k) account invested in the Foreign or International mutual fund option now? Rebalancing articles will urge you to invest at least a small amount of your 401(k) in these mutual funds.
U.S.-based stocks have outperformed non-U.S. stocks by a wide margin over eight of the past ten calendar years. There is no common sense diversification argument. Keep your stock market exposure to U.S. stock mutual funds.
The lesson is to not rebalance your 401(k) account for the sake of “doing something.” If you are going to rebalance, sell the worst 401(k) mutual funds you own now. The ones that have the highest annual fees. Those are the same mutual funds with the lagging annual investment performance.
Raise cash. Reinvest that money in your 401(k) account when the stock market risk is in your favor. When you can buy the best mutual funds available to you on your default company 401(k) mutual fund menu.
Ric Lager
Lager & Company, Inc.
There is no need to continue to guess with your 401(k) mutual funds. All you need is a second opinion. You deserve it.
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