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How often should I rebalance my 401k?

Learn about 401k rebalancing and when and why you should rebalance your 401k accounts

By Dwight SPublished 4 months ago 6 min read

“How often should I rebalance my 401k?” a friend of mine asked me once. I then asked him if he knew what that actually meant. He said he heard it on TV and figured I could tell him what it meant.

I told him that if you have funds that are being invested at certain percentages that over time those percentages will change because some funds do better than others. I told him that rebalancing means resetting your funds back to your desired percentages. So if he invested in say the S&P 500 and US Treasury Bonds (something Warren Buffet suggested for those not wanting to spend hours figuring out how to retire) then rebalancing would mean selling off one of those and buying more of the second to get back to his desired investment percentage in each.

I think that most people like to make money harder than it really needs to be. If you feel like that join my free Facebook group to ask questions like these and others to get honest answers. If you want more information about why you should rebalance your account please read on.

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How often should I rebalance my 401k text over an image with three eggs labeled IRA / ROTH / 401k.

What does it mean to rebalance a 401k?

Rebalancing a 401k is an important part of managing and maintaining a retirement savings portfolio. To rebalance a 401k means to adjust the number of different investments in your account so that it reflects your desired asset allocation and risk level. Rebalancing helps to keep your investments on track with your investment goals, while also reducing risk and keeping fees low.

A typical 401k plan will contain a mix of stocks, bonds, mutual funds, and other investments. If the markets change over time or one particular stock performs well, you may find that one type of investment is taking up more space in your portfolio than others. When this happens it’s important to rebalance so that all assets are represented according to their original weighting inside the portfolio. This keeps you from taking too much risk or having too little diversity in your retirement holdings.

How often should I rebalance my 401k?

Once a year is sufficient. You could do it twice a year if you would like.

Since I am still (unfortunately) in a state that practices daylight savings time I rebalance my account when I change my clocks and check the batteries in my smoke detectors.

Is rebalancing your 401k good?

Yes, because if you are invested in a growth fund like the S&P 500, Russell 1000 / 2000, or International index funds and bonds to preserve your wealth, then over time you will typically see the index funds taking up more and more of your portfolio.

For example, if you invested 90% of your money in an index fund and 10% in US Treasury Bonds. Generally speaking, the index fund will be making money at a faster rate than the bond will. So after a year, you may have 92% in index funds and only 8% in bonds. This doesn’t mean the bond lost money – US Treasury Bonds will only lose money if the US government collapses. So why do you only have 8% of your money in bonds? Because in this example your index funds grew in value faster than your bonds.

If you need more help understanding the difference between stocks, bonds, mutual funds, and index funds read my article on how to invest on autopilot.

Should I rebalance my 401k 2023?

Yes, I rebalance once a year, but it isn’t a huge deal if you haven’t rebalanced your accounts for a couple of years. You can go into where your 401k is being held and rebalance those funds.

The four 401k brokerages I have had funds in are Fidelity, Vanguard, Voya, and Charles Schwab. Each of those has its own web interface that changes often. So log into your 401k and you may need to search for help on how to rebalance the funds, but once you know where to go you simply set the percentages back to what you want. Then the 401k brokerage will sell those that are too high and buy those that are too low. And that is all you need to do.

How often can you change your 401k allocations?

If you aren’t happy with how much you are currently investing in index funds or bonds or any other investment option you have in your 401k you can change how you allocate your money. Allocation is a fancy term. When you are paid you have a portion of your paycheck that goes to your 401k brokerage. The allocation is where you tell the brokerage how you want them to buy for you. So back to that example above, if you want 90% of your money in the S&P 500 and 10% in US Treasury Bonds then every paycheck you will buy 90% S&P 500 and 10% bonds.

It depends on the brokerage but typically it will take a couple of weeks for it to take effect so you can change it out every several days if you would like but it would be better to figure out the strategy you want to follow. The idea is to

Does rebalancing give higher returns?

It depends on what you are invested in. I will tell you that rarely will you make higher returns by rebalancing because you are selling the ones doing really well for something that isn’t doing as well.

So if you are “losing money” why would you do it?

Because the market fluctuates and what is winning this month may not be winning next month or next year. It is important to work on a strategy over the long term and not on quick wins. Remember it is about time in the market because you cannot time the market.

Since you aren’t withdrawing the money you shouldn’t be taxed on rebalancing the money. You are only taxed (at this point) when you pull the money out of the account not for rebalancing the money inside of the account.

So how often should you rebalance your 401k?

Once a year is sufficient and follow the strategy you feel comfortable with over the long term.

Warren Buffet once said, “Investing should be like watching grass grow or paint dry, not like gambling at Las Vegas.” Therefore, pick a strategy that you feel good with and wait 20 – 40 years.

About Dwight Scull

I have been married to my wonderful wife, Rebecca, who puts up with me since 1999. I am a proud father to my Gen Z, son, and daughter-in-law. Grandfather to my favorite granddaughter who was born in 2021.

I lost my mom, father-in-law, and 12 others in 2013 and was DEEPLY in debt. I started reading and watching all the financial info I could find.

I chipped away at my debt and went from a negative $105k net worth having one home paid off, no credit card debt, and saving/investing 45%+ of my gross salary.

I used these daily habits to lose 100 pounds and keep it off.

I believe that you can overcome any challenge you face if you just take small daily actions and be consistent with them. It is how you will be financially successful.

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