During a recent review of a couple’s investments, we discovered that while both spouses participated in their employers’ 401(k) plans, they approached the savings vehicle very differently. She was an “active trader,” frequently tinkering with her investment lineup to capitalize on market moves. He had worked with the plan’s third-party adviser to develop a portfolio three years ago and hasn’t looked at it since. Truly, opposites attract!
Our first reaction was, “Kudos to them for even participating.” Many employers offer plan participants a matching contribution up to a certain cap. Remember when you were young, and your parents said if you could save half, they’d pony up the other half to buy your car, a bike, or maybe a gaming system? This is the same concept. You jumped at the opportunity when you were a child. Why not take advantage of the same offer now?
Participation aside, let’s look at how they manage their investment selections. First, actively trading is not advised. Trading within a tax-deferred account has advantages, as there are no trade fees or tax consequences. However, many plans or funds within the 401(k) may not allow more than one trade every 30 days. The investments in your 401(k) are designed for holding long-term. Most studies show that frequent trading is a detriment to your portfolio, leading to lower returns and more risk.
On the other hand, no investment should ever be set-and-forget-it. When investment recommendations are made, they are based on a snapshot in time of the economy, your financial goals, your time horizon, your tolerance for risk, etc. Ideally, you leave your allocation alone unless something changes in your personal circumstances or financial situation.
Still, checking in on your portfolio occasionally—for example, every six months or so—is a good idea because your asset allocation will change on its own due to market fluctuations. For example, after a particularly strong year for the stock market, you might discover that your portfolio is overweight in stocks. Alternatively, if the stock market has downturned, you could have a much higher percentage in bonds and cash. This also happens between investment styles. For instance, while it is common for Small- and Mid-Cap investments to outperform, they also come with more volatility, which can mean more risk for funds that are meant for your retirement.
When you notice this type of allocation shift, it’s generally time to rebalance—that is, buying and selling positions to get back to your original asset allocation. One way to balance a portfolio is to sell the assets that have grown and invest the proceeds into the other asset classes to bring the portfolio back to your desired ratios. Another way to balance a portfolio is to use the funds contributed monthly to purchase the asset class that is below specified levels and return that portion of the portfolio to the appropriate percentage.
One common practice is to rebalance your portfolio whenever one type of investment becomes more than 5% out of line. Thankfully, rebalancing your 401(k) is easy and often without fees. It is suggested you rebalance at least once a year but no more than once a quarter. Many administrators provide websites that allow plan participants to easily modify their holdings throughout the year.
If you have questions on how to maintain your asset allocation for retirement, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the February 10, 2024 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
