You should rebalance your portfolio at least once a year. But what do I mean by rebalancing? I mean that you should work through the math and make sure that your positions are sized appropriately.
When you call your HR department and change your paycheck percentage allocations for your 401k plan, you are only changing the future dollars that will be invested in each of your 401k investments. That change does not rebalance the investments in your portfolio.
Over time, some investments go up or down more or less than other investments. This normal market action causes your investment allocations to get out of whack. Combine that with changing the allocation percentage and you will find that you need to rebalance more often than you think.
So how do you rebalance your portfolio? If you have $100,000 in your 401k and are you looking to rebalance your portfolio to the percentages shown on page 1, you should have $45,000 invested in the S&P 500 Fund, $35,000 invested in Small Caps, and $10,000 each in the Emerging Markets and Intermediate Corporate Bond Fund. So looking at your account balances and some funds have more than the target amount, you should sell some of those investments until you are at the target amount. This will generate cash in your account so that you can then add to the investments that are below the target amount. If you have a little bit of cash left over at the end because you can’t buy any more full shares, that is fine.
Rebalancing is important because you want your investments to be properly allocated so that you achieve the diversification and risk balance that this newsletter promotes. If you don’t rebalance, over time, your allocations will drift to be something that may be less desirable.