Rebalancing your 401k

[LuckyTaxi]

what the heck does it mean? i hit it once by mistake and i dont think it did anything. 😕

 

[Me Llamo Hefe]

It basically rebalances your investments to your desired allocations. Since each fund will grow differently over the course of the year, it is likely that each fund will not represent the same percentage of your portfolio at the end of the year as they did at the beginning. Rebalancing gives you the chance to make sure you are diversified in the strategy you desire.

 

[LuckyTaxi]

so lets say i put 60% into Portfolio A and 40% into Portfolio B, you're saying over the course of the year, that might not be the case?

 

[kranky]

Before "rebalancing" has any meaning, you first have to establish the percentage of your money you want to have in each fund. You have to create the baseline first.

Let's say you set it up so your desired allocation is 35% of your money in Fund A, 50% in Fund B, and 15% in Fund C. After a year, some funds changed in value, so the percentages have changed. When you tell it to rebalance it will move money around among the funds to get back to those percentages.

If you never set up your desired allocation, it's no wonder it did nothing when you told it to rebalance.

 

[LuckyTaxi]

Originally posted by: kranky
Before "rebalancing" has any meaning, you first have to establish the percentage of your money you want to have in each fund. You have to create the baseline first.

So if you set it up so your desired allocation is 35% of your money in Fund A, 50% in Fund B, and 15% in Fund C, when you tell it to rebalance it will move money around among the funds to get back to those percentages.

If you never set up your desired allocation, it's no wonder it did nothing when you told it to rebalance.

I forgot to mention, I just started in October of 07 so maybe it didnt do much or maybe I looked and didnt notice anything. And yes, I did set up my allocation.

 

[LegendKiller]

Originally posted by: LuckyTaxi
so lets say i put 60% into Portfolio A and 40% into Portfolio B, you're saying over the course of the year, that might not be the case?

Lets say you have $100 and you use your 60/40.

Fund A appreciates at 15%, yielding $69 at the end of the year fund B appreciates at 10%, leaving $44.

At the end of the year you have $113, and Fund A makes up 61% of it, Fund B makes up 39%. If 60/40 is your desired allocation, you sell the 1% of Fund A and put it into Fund B.

Doing so is re balancing.

 

[LuckyTaxi]

Originally posted by: LegendKiller

Originally posted by: LuckyTaxi
so lets say i put 60% into Portfolio A and 40% into Portfolio B, you're saying over the course of the year, that might not be the case?

Lets say you have $100 and you use your 60/40.

Fund A appreciates at 15%, yielding $69 at the end of the year fund B appreciates at 10%, leaving $44.

At the end of the year you have $113, and Fund A makes up 61% of it, Fund B makes up 39%. If 60/40 is your desired allocation, you sell the 1% of Fund A and put it into Fund B.

Doing so is re balancing.

THANK YOU! Needed an example to understand it.