401(k) Rebalancing: Unguided Missiles It’s a very bad idea to never rebalance your 401(k) account.

Investors in their 50s who start to look at their retirement asset numbers may find that they have made one huge completely avoidable error in their efforts to save. They never rebalanced their 401(k) account. They started out with four different funds allocated at 25% each, and those funds changed dramatically over time. Many 401(k) plan participants choose a risk tolerance strategy a group and then choose investments available within that strategy when they sign up for their 401(k) account. Money is added regularly to their account --automatically deducted from their pay and automatically contributed by their employer. The markets go up and markets go down and the employee rarely looks at his or her statement.

If the funds had been looked at quarterly, they could have been trimmed back and rebalanced. If one fund had grown to 32% of the portfolio, that means another is down 7%. The goal for participants is to maintain their original allocation that met their risk tolerance. Rebalancing inside a 401(K) causes no tax consequences so selling shares of one fund and buying shares of another is efficient. The employee must decide what is a reasonable variance from their original plan. If something is 5% up in value, there is an opportunity to sell. The mistake is in assuming that the percentages of your investments that are invested in certain market sectors stay the same. They rarely do.

Take an example of John Ketchum. He signed up for his 401(k) plan 7 years ago (just after the tech wreck) when he joined the company. He chose a 60/40 Equity/Bond portfolio that did very well until the last year. Now, with all the talk about the market’s recent drop on the news every night, he finally looked at his statement for January 30 and was shocked that his portfolio originally at 60/40, had grown to a 65/30 and after market corrected, growth on the equity portion had changed his 60/40 to 55/35 equity/bond and his losses in the recent market turmoil have been substantial. In effect, John’s account was an unguided missile and he had no control over where it would land. It’s counterintuitive that fixed income should be sold and equities purchased in a market down turn to bring his balance back to 60/40, but that will allow him to take advantage of the next market upswing.

Had John chosen to take his portfolio information to an investment professional, they would have pointed out that his equity growth was putting him in harm’s way should there be a sudden market drop. The professional would have suggested he make a change of fund in his portfolio. He would have looked at the underlying funds in his portfolio to see if there was duplication in the stocks that were driving the increase in value of the portfolio. Such duplication can double the impact of a market downturn.

The advisor can also talk to John about his time until retirement and his expectations for monthly income at retirement, as well as what his wife Judy’s 401(k) account is invested in and other taxable investments the couple might have.

An overall look at John and Judy’s total investments and rebalancing on at least an annual basis might have saved them the discomfort and investment losses they just experienced.

Stonegate Wealth Management ’s highly experienced professionals, including partners Thomas J. Geraghty, Jr., CPA, CFP, Steve Craffen, MBA, CFA, and Craig Marson, JD, CPA, solve complex financial challenges and provide counsel for the pressing financial issues confronting their high net worth clients.  They have deep knowledge and experience in taxes, estate planning, investment management and divorce settlement counseling.  The firm manages $185 million in assets. Tom Geraghty, tomg@stonegatewealth.com, office ,  201-791-0085, cell 908-347-3032

Trends from Ink&Air -- Editor: Lisbeth Wiley Chapman, beth_chapman@inkair.com, 508-479-1033