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When to Rebalance your 401(k) or Investment Account

In the wake of the nations fascination and craze with Gamestops rise and fall I thought it would be a good time to re-visit a core pillar of disciplined investing – when to rebalance your 401(k) or investment account. Rebalancing is the process of periodically reviewing your investment weightings to adjust for any changes due to market movements. For example, an investment account that had a targeted value of 70% in stock investments has now grown to 75% in stocks due to strong returns. Rebalancing would involve selling your stock investments that have done well and reinvesting the proceeds into bonds, cash, or other asset classes.


This fundamentals based approach to investing allows one to practice the principle of “selling high and buying low”. Over time this reduces risk, adds value, and helps move you closer to achieving your goals.



There are three general approaches to deciding when to rebalance:


1) Percentage change rebalancing


This approach is based on rebalancing your investment holdings when their weightings have changed by a pre-determined amount. For example, sell your stock investments when they have grown by more than 5%. This approach involves the greatest time commitment as you will need to check in on your accounts more frequently to determine if any changes are warranted. This approach may work best for individuals who review their accounts more often and tend to track markets more closely.


2) Time based rebalancing


Time based rebalancing is just as the name sounds. You review your accounts on a frequency of your choosing such as annually, semi-annually or quarterly. Each time you review your accounts you will rebalance your investment weights to adjust back to your original objectives.


Pro tip: Pick dates or times that are meaningful to you and will allow you to be more likely to stay on schedule. For example, if you review your finances each January consider adding reviewing any rebalancing to your annual routine.


3) Hybrid


A hybrid rebalancing approach combines time-based reviews with percentage change. You begin be selecting what rebalancing frequency makes sense for you. Each time you review your accounts you then only make changes if your rebalancing percentage change has been exceeded. For example, if you review your accounts twice a year with a 5% range you would not make any changes to your accounts if your weightings have not moved by more than 5%. Higher ranges will be consistent with a greater degree and comfort of risk. For example, a 5% threshold exposes you to greater risk than a 3% threshold. Individuals who are moving closer to retirement may consider having more narrow or smaller rebalancing ranges.


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Ryan Phillips, CFP® is the founder of GuidePoint Financial Planning. He is passionate about helping busy families plan, save, and invest for their financial future. Contact him today if you are interested in learning more about the benefits of working with a fee-only (no-commission) financial planner.



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