Auto-rebalancing 401(k)

[her209]

Do you do it? How often?

 

[kranky]

Yearly.

 

[Yossarian]

yeah yearly. there's really no point to doing it more often than that.

 

[her209]

Originally posted by: Yossarian
yeah yearly. there's really no point to doing it more often than that.

Why is that? I was thinking about setting it up to do it quarterly.

 

[Triumph]

Does this mean resetting your investment amounts to the same amount, or redistributing the money evenly across investments? What are the benefits of doing this?

 

[Pliablemoose]

Sort of hard to re balance my 100% in the foreign growth fund Just broke $25K with current job after 2 years this month.

I'm gonna love retirement

Retarded 401K choices FTW

Of course when China's market melts down, it's gonna get ugly

 

[Engineer]

Originally posted by: kranky
Yearly.

 

[Yossarian]

Originally posted by: her209

Originally posted by: Yossarian
yeah yearly. there's really no point to doing it more often than that.

Why is that? I was thinking about setting it up to do it quarterly.

I didn't notice the "auto" part of your post (read it at 4am after playing poker for 8 hrs . That's pretty cool that your plan has an auto rebalance feature. There's nothing wrong with doing it more often especially since it takes zero time on your part. But for many people without the auto feature it can take some time to crunch the numbers. Once a year gives the market enough time for there to be appreciable differences between your funds.

 

[Yossarian]

Originally posted by: Triumph
Does this mean resetting your investment amounts to the same amount, or redistributing the money evenly across investments? What are the benefits of doing this?

It means reallocating your money to bring your portfolio back to your target allocation, assuming you have one. For example, if you contribute 80% into an S&P 500 index and 20% in bonds and leave it alone for several years, a lot of growth in the S&P 500 may throw things out of whack and leave you with something like 90/10. Selling off some of the S&P 500 and buying more bonds to get you back to 80/20 will make you more money in the long term.

Reallocating guarantees that you sell high and buy low. It is a counterintuitive concept though because you end up buying more of investments that have not performed as well. Check out books like Bogleheads Guide to Investing and All About Asset Allocation for more info. And as always I recommend www.diehards.org

 

[boomerang]

Originally posted by: Yossarian

Originally posted by: Triumph
Does this mean resetting your investment amounts to the same amount, or redistributing the money evenly across investments? What are the benefits of doing this?

It means reallocating your money to bring your portfolio back to your target allocation, assuming you have one. For example, if you contribute 80% into an S&P 500 index and 20% in bonds and leave it alone for several years, a lot of growth in the S&P 500 may throw things out of whack and leave you with something like 90/10. Selling off some of the S&P 500 and buying more bonds to get you back to 80/20 will make you more money in the long term.

Reallocating guarantees that you sell high and buy low. It is a counterintuitive concept though because you end up buying more of investments that have not performed as well. Check out books like Bogleheads Guide to Investing and All About Asset Allocation for more info. And as always I recommend www.diehards.org

I just had this explained to me at a class I took. I really, really wish I had known the things I learned in this class 25 years ago. I can't stress this enough. It's a discipline though. You have to stay the course.

 

[alrocky]

5 & 25 and other considerations

I note that some people mention a 25/5 rebalancing rule, ie rebalance if the weight deviates more than 5% absolute or 25% relative to the target weight (eg if your target weight is 10%, then 25% of 10% is 2.5% so you rebalance if your weight is outside 7.5% to 12.5%) For target weights less than 20%, the range based on the 25% relative limit is narrower than for the 5% absolute limit. Now given that the risk associated with your portfolio weights deviating too far from target is related to (a) the absolute size of the deviation and (b) the contribution to tracking error of your portfolio relative to the target asset weights, then this rule may well be un-necessary.

Rebalancing means you're buying low and selling high, you return to your desired risk level, and you might achieve a rebalancing return bonus.