If you’re just starting out with your savings, then you should begin with setting up your retirement plan first. Rebalance is the next step after you set up your retirement plan.
If you have a current 401(k) plan through your employer, then you probably are dealing with the question,
“to rebalance or not to rebalance?”
Your 401(k) is an important part of your financial plan and using the right investment strategies can make a big difference in achieving your financial goals.
Target Date Funds
Not all 401(k) plans have the same investment choices when building your portfolio. First, check to see if you have target date funds in your 401(k) plan. They typically have a date in the name and will rebalance automatically for you. The investment allocations change according to that specifically targeted date. These portfolios sometimes have higher fees because of extra management, but not always, so check with your plan provider. Depending on your situation, these options may be a good fit.
Investment Funds Other Than Target Date Funds
If you don’t have target portfolio choices in your 401(k) plan then keep reading. (If you don’t have anything but target options, the next section will just help you for the rest of your financial planning.) It can often be overwhelming with all the choices in your 401(k) plan, but it’s not always as complicated as it may appear. First, you will need to understand your risk tolerance and time frame to build your investment portfolio correctly. You can take risk tolerance tests or meet with an independent financial advisor to figure out your risk tolerance. Taking the time to understand your correct risk tolerance is huge when it comes to financial planning and your investment portfolios so take the right moment to figure it out.
Choosing Your Funds
Once you have found your appropriate risk tolerance, you’ll be able to determine the right allocation for each asset class. The options in your 401(k) plan will each have an asset class noted (large cap, mid cap, small cap, international, etc.). Although you may have lots of choices listed, what you’ll find is that you won’t have too many in each asset class.
You don’t have to lose sleep over which options to choose. Most of the battle is having the correct asset allocation model for your risk tolerance and time frame. It’s also important to rebalance this portfolio consistently. As the market changes, some of your assets will increase in value and others will decrease. When you rebalance, you’ll bring each position back to the percentage you first used. Essentially, selling high and buying low!
The next step is to remember the importance of rebalancing your portfolio consistently. As the market changes, some of your assets will increase in value and others will decrease. When you rebalance, you’ll bring each position back to the percentage you first used. Essentially, selling high and buying low!
Nit Picking Your Funds
You can dig deeper when making your portfolio picks, like which large cap growth position you’ll choose. I’m just pointing out the big picture here and the importance of diversification, asset allocation, and rebalancing.
A fund that has high fees, deviates from their objectives, and doesn’t meet certain required standards will get replaced. So long as the retirement plan is properly managed. It’s regulated by the Department of Labor — which has fairly strict requirements. That being said, you’re still free to dig deeper.
It is also important to understand how your 401(k) fits into your overall financial plan. Will these dollars be used at the beginning of retirement? Or at the end? That could be a difference of 10, 20 or 30 years.
The information provided by your 401(k) company may not always be sufficient either. You should probably do more research or seek advice beyond just what the 401(k) company provides. As laws and regulations change, they’re not enough in my view to give you the complete picture.