A New Way To Rebalance Your 401K

When it comes to 401ks, many people get caught and end up losing huge amounts of money. Here are some ideas to save money and make things easier for those who are contributing to a 401k plan at work.

Often, when it comes to managing your money, you have a good sense of diversification. You know that you are contributing enough. And after a little while, you are even becoming more comfortable with terms like management fee, asset allocation, and class A versus class B mutual fund shares. However, there are still a few tips that you might not know that have worked well for me.

Rebalance Rebalance Rebalance

Every year we are reminded either by the 401k company or during a seminar or by some PF blogger that we should once again look at rebalancing our 401k. In my experience it is not so much of a rebalance as a new allocation for my regular contribution. Here’s why:

When it comes to asset allocation it makes sense to rebalance to ensure that you are diversified correctly because you don’t want to lose all that you might have gained in a good sector. But when it comes to changing this distribution when you have a small amount, you might only have to move 200 dollars from mutual fund A to mutual fund B. In this case, if you decide to make the transfer, you might have to pay a fee because you have held the shares for share A less than ninety days.

Beware the Transfer Fees

When it comes to purchasing mutual funds, most companies like it when the money comes in slowly at a stead rate and they want to discourage large in or outfluxes of money. One way that they keep people from “trading” these mutual funds is by adding a short-term-trading fee if it is sold back in less than a set pariod of days. For me, this means I need to hold a fund for 90 days.

And in a situation where you want to rebalance a few hundred dollars, you don’t want to lose 30, 40 dollars during a rebalance. Lets say that you are making contributions of 75 or 100 dollars each pay period. Rather than moving the money to the new fund B, it makes more sense to just give all of the contribution to fund B until your correct balance is achieved. This avoids the fee that you might have had to pay if you did a transfer during the 90 day window.

Rebalance Your 401K Passively

In one sense, this is a way to passively rebalance the 401k and also will effectively dollar-cost-average the purchase of the shares of mutual fund B. But, the downside is that it must be managed by hand. Ensure that you set some kind of reminder or note for yourself so that you don’t forget to change your allocation back. Personally, I pick a few funds and passively rebalance my 401k purchases about once per quarter. I do it online and it costs me nothing. This strategy might also work well for you.