With recent record market highs, many investors have paid little attention to the asset allocation of their 401(k) accounts. However, whatever your financial situation, you should aim to rebalance your 401(k) on an annual basis. The financial landscape has changed dramatically over the past five years, and it is very likely that these shifts have affected the asset allocation of your portfolio. Recent increases in stock values mean that stocks are likely overrepresented in your current portfolio and rebalancing your 401(k) can help minimize risk as you move closer to retirement.
For example, someone who started 5 years ago with 60% of their portfolio in the S&P 500 and 40% in a US bond index would now see their asset allocation has shifted to 73% stocks and 27% bonds* causing their portfolio to become more aggressive than originally intended. As you move towards retirement, periodic rebalancing of your 401(k) helps you adjust to market fluctuations and better align your portfolio to your current financial situation.
When in doubt, consider investing in a target date fund in order to take advantage of automatic allocation and annual rebalancing based on your age. Rebalancing your portfolio is always important, especially for those investors who are closer to retirement and have less time to neutralize unexpected fluctuations in the markets.
*Hypothetical Portfolio: 60% iShares Core S&P 500 ETF, 40% iShares Core US Aggregate Bond ETF. Performance period: 10/31/12 to 10/31/17 assuming reinvestment of dividends and capital appreciation and net of fees. Source: BlackRock, Inc.
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