Strategies to Rebalance Your 401(k) Portfolio and Investments

In 2020, there has been considerable volatility in the financial markets. After the S&P 500 hit record highs in February, we saw declines of more than 30 percent during the month of March. In April, the markets were on the upswing again with gains of over 10 percent for the month. It’s enough to make your head spin and wonder where the markets will go next, though unfortunately it’s impossible to time the markets’ movements. With large swings in the markets, your portfolio has also probably seen significant movements.

Review your allocations

When you receive your 401(k) and investment statements, it’s important that you take a look at them. Naturally, the dollar value changes each month, and it’s likely decreased since the beginning of the year. However, it is critical to know the current allocation of your portfolio.  We recommend that you take some time to review and update your financial plan. It may also be an opportune time for you to rebalance your portfolio to get back to your original asset allocation.

Let’s say you had a portfolio with an asset allocation of 80 percent stocks and 20 percent bonds. With the recent market downturn, your allocation may be closer to a 75-25 ratio. The reverse happens to the portfolio on the upside. If the market increases like it did over the past number of years, the allocation could be closer to 90-to-10 from that initial starting allocation.  In this example, both market fluctuations may cause your portfolio to drift away from your intended allocation.  When your portfolio drifts away from your starting allocation, you are taking on a higher level of risk than you originally intended.

Risk Management for Your Investments

Part of an investment plan is finding a way to manage risk for your specific investment situation. A targeted asset allocation is a key component to this process. Asset allocation will not be the same for every investor. Likewise, each investor does not have the same risk tolerance, time horizon or investment goals. All the elements piece together to make the investor’s financial and investment plan. It is helpful to think of each element in your investment plan as a leg of a table. When you have a financial plan in place, it is as if each of the legs have been measured precisely so the table is level and fully functioning. Over time, through wear and tear, the legs can become different lengths. Adjustments need to be made to get the legs (and consequently, the table) back to form. Rebalancing your portfolio is similar to taking measures to adjust a table that wobbles. Those adjustments may lessen the chance of a significant problem occurring down the road, such as having to delay your retirement date.

When rebalancing your portfolio, it may seem counterintuitive to sell winning investments and buy lower performing investments. However, the goal of this strategy is to bring the portfolio back to the targeted asset allocation, according to the tenets of risk management. If an individual has numerous accounts, it can become very complicated to review your overall asset association. Combined with the constant market fluctuation and uncertainty, it is an exhaustive process.

If you would like to review your allocation and establish a Financial Plan, please reach out to our experienced professionals on Sikich’s Wealth Management team.

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This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

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