The recent stock market fluctuations due to the coronavirus might have you thinking about rebalancing your 401(k). It could be a smart move. If your portfolio is unbalanced, you could be risking more than you originally planned on while also getting less in returns.
Think of rebalancing your 401(k) as a way to take emotions out of investing. Having a plan means you likely won’t get scared when the market goes awry because you’ll have the long term strategy in mind. A rebalancing plan also keeps you disciplined. You’ll be less likely to act irrationally because you’ve set yourself up for the future. Here are two rebalancing strategies to consider:
You can rebalance your portfolio on a specific month or day every year. You could even rebalance it once per quarter. It’s up to you. On the day you choose, you’ll want to make sure the portfolio is set up for your long-term investment strategy. Let’s say you want your portfolio to be 60 percent stocks and 40 percent bonds. If you check in on the portfolio on the designated day and see it’s changed to 53 percent stock and 46 percent bonds, you’d want to sell some bonds and buy some stocks to get back to your desired balance.
As USA Today notes, another rebalancing strategy is set in motion by certain investment rules. Generally, people who use this plan rebalance their portfolio when their target allocation moves by a certain percentage — usually anywhere from five to 10 percent.