Should I choose to Auto rebalance my 401k?

Question

I'm now starting my 401k and wanted to know what the Auto rebalance option does and whether I should check it and for how long? 3,6,12 months. What does this do and what should I do about it?

Answer 1

Always rebalance! Once to twice a year is usually sufficient. Rebalancing maintains your investment objectives, minimizes your risk, and will likely increase your returns.



Let me illustrate. In order to gain on an investment, you buy low and sell high, right? Let's say your 401K is invested in two mutual funds (hopefully, you're more diversified than that, but just to keep the illustration simple). If one grows since the last rebalancing, and one decreases (or grows less than the other), the proportion changes. When you rebalance, you're selling shares of the higher-earning fund (taking advantage of the gains), and buying shares of the lower earning fund (while it's down). It's basically an automatic buy/sell function.

Answer 2

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RE:

Should I choose to Auto rebalance my 401k?

I'm now starting my 401k and wanted to know what the Auto rebalance option does and whether I should check it and for how long? 3,6,12 months. What does this do and what should I do about it?

Answer 3

Rebalance 401k

Answer 4

This is a personal decision...prior poster says you should always do that. I say that rebalancing should be a manual thing. Here's why...compounding is income earning on income. If you transfer money away from the fund that is doing well to one that perhaps is not doing well you may be preventing your high flyer from maximizing your gains and compounding that by transferring into a fund that isn't doing so hot.



This is especially true if you're in a stock/bond mix. Right now the market is doing rather well (could be better but hey...can't have it all). Bonds, however, are not....why automatically rebalance into bonds if you know that they are not going to do so hot. Additionally, perhaps your ratio is out of whack simply because one or two funds are diving! So you're not selling high...you're selling even and transferring to a dog and actually going further backwards than you should.



I say rebalance once every few years....your portfolio will not get so out of whack in the interim that you're weighted too heavily in one sector. I'm sorry but in a 70/30 split it's simply not a big deal if your ratio goes to 79/21 over the course of 2-3 years. Retirement investing is long term...rebalancing is short term thinking.

Answer 5

The point of rebalancing your portfolio is to ensure you're able to periodically lock in the gains in your portfolio as well as buy into the less-expensive portions w/o having to think about it.



Rebalancing whenever you feel like it feeds into the hot hand theory, where you continue to ride your bet until you feel it's reached the top, then cash out. Problem is, most people don't know when they've reached the top until they've skidded into a low patch. Then they decide to ride it out, thinking maybe the downturn is temporary until they realize later that the low patch is going lower than they'd hoped.



Ask those former Enron employees if they'd wish they had rebalanced their portfolios out of so much Enron stock.



Most advisors tell you to consider rebalancing every 12 months, to minimize transaction fees.