You put money in, check it regularly either by statement or online. Maybe too frequently!
Sometimes it could use a little tune up. Just like my car right now!
Here are 5 401(k) tune up tips for year end:
1. A little clean up. It’s not exactly like a car wash or detailing. Sometimes in a 401(k) you switch investments or move money around based on excellent suggestions from your financial advisor! Right? Those changes sometimes result in dividends or interest payments that come in after you long sold that investment. So you’ll have a little mess to clean up. Make sure you move that money into your current investments. Plus, check your future contributions as well. You may still be putting a small amount into an investment that you no longer need as a part of your asset allocation.
2. Assess risk. Remember that risk questionnaire you filled out during your initial enrollment? You may want to go back and do it again. You may have changed your mind about how much you are willing to lose in a down market. Having a larger 401(k) balance could affect your feelings about risk and loss. What could it hurt?
3. Sell winners. Yep. You could sell investments that you made a lot of money on. Then take those gains and buy investments in your allocation that didn’t do so hot this past year. This is the hard part about rebalancing. It may sound counterintuitive. But it works. If the investments have had a good run, then it’s likely they have skewed your asset allocation. Potentially making your portfolio more aggressive than you intended.
4. Buy losers. None of us want to buy losing investments on purpose. However, to properly rebalance and give your portfolio a tune up, it needs to be done. Let’s say one asset class in your 401(k) declined from 30% to 25%. That other 5% went to one of your other asset classes. This would make the allocation more aggressive. The trick is to look at your target allocation and move any overages to the underperforming investments. Buy low, sell high, right?
5. Automate. Most modern 401(k) plans have a auto rebalance feature. This will allow you to do what I suggested in step 3 and 4 automatically. Making your life a little easier. You can set it up to rebalance quarterly, semi-annual or annual. I personally think an annual rebalance is sufficient. Some investments do this internally, so check with your plan to see if yours does.
Make sure you take the month of December and do a little tune up on your 401(k) plan. Rebalance using the suggestions above. It also may not be a bad idea to reassess your risk tolerance once a year too. If you liked this article, you can get it in your inbox every Friday! Subscribe here for FREE!