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The Last 401(k) Guide You’ll Ever Need, Five Tips, Part 4

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I’m still enjoying Money Magazine’s “Last 401(k) Guide You’ll Ever Need.” So far, I’ve addressed the first three tips offered by the magazine, save early and often, spread your money around, and limit company stock. Here’s the fourth tip for maintaining a strong retirement investment portfolio.

Check in Once a Year

Take a date you’ll remember every year, perhaps your birthday as the magazine suggests, and evaluate your portfolio. Look at your contribution instructions to make sure you are allocating your money in a way that makes sense for your situation, looking at risk profiles. If you’re invested in a target retirement fund, this risk adjustment is done for you, but you should make sure this is still what you want.

If certain investments have performed well, consider rebalancing — selling (tax-free) part of the investments that have done well and buying investments that have performed poorly. It sounds strange to buy poor-performing funds, but you’re selling “high” and buying “low,” and that’s good for long term investing.

Benefits consultant Hewitt Associates found that in 2005 many 401(k) investors loaded up on emerging markets funds, which had been delivering double-digit returns. But in May of this year, foreign markets tanked, and panicked investors found themselves selling with 20% losses.

I’ve experienced this. In 2005, people everywhere were talking about emerging market funds because they had performed so well up to that point. My international equity fund is balanced more towards established markets, but it hasn’t performed well lately. I’m fine with that; in the buying stage, as the fund goes down a little, I’m getting a better price that will hopefully pay off for me well into the future.

The article suggests looking at asset allocation and risk profile once a year to make adjustments. This is what I do now, but I used to do this once every quarter. In fact, my 401(k) was configured to automatically rebalance once a quarter so it was no effort on my part. Since there are no tax consequences to moving funds around within a 401(k), and I would think transaction fees would be very rare, I think it’s safe to do this every quarter if you desire. I’m more comfortable with a yearly rebalancing.

Here’s a question for those who have managed to read this far into the article. Do you rebalance your portfolio? If so, how often, and is it an automatic process? Leave a comment if you like.

Updated January 12, 2018 and originally published July 28, 2006.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

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{ 3 comments… read them below or add one }

avatar 1 Anonymous

Do you rebalance your portfolio? If so, how often, and is it an automatic process? Leave a comment if you like.

I’ve re-balanced once, and it was a pretty irrational episode! Your post is reminding me that I want to write a post about the effect the collapse of Enron had on many people my age (early twenties at the time), specifically with respect to how we approached retirement investing.

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avatar 2 Luke Landes

I used to have my 401(k) set up to rebalance once a quarter. The company’s computer would rebalance my portfolio according to my contribution instructions… (x% in large-cap, y% in small-cap, etc.) I’ve cancelled that for the moment.

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avatar 3 Anonymous

I rebalance about once a year or less. It really depends on where I think I need to be in terms of managing risk. Sometimes it’s ad hoc to take advantage of things like rising interest rates, etc. But overall I don’t think about it too much and try to save regularly above anything else.

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