Workplace retirement plans, like 401(k)s, let you save for your future without much thought after you first sign up.
That “set it and forget it” strategy works really well on the contribution side, so you’re constantly adding money without skipping. But that’s not the best strategy for wealth building.
Only about 20% of people regularly rebalance their 401(k) accounts – and those people have the right idea. I don’t mean that you should switch up your investments all the time, just revisit your account once a year or so…because it, and you, can change more than you realize.
Here’s what I mean by that: Let’s say you started out with 80% of your 401(k) invested in stocks, and 20% in bonds. After a year or two, because of normal stock and bond prices changes, your percentages will be different. That balance could swing in either direction – like 82% to 18%, or 76% to 24%, for example – depending on what’s going on in the markets. And if it gets far enough off course, it won’t fit your personal finance goals any more.
And then there’s the “you” factor. Your risk tolerance may change for any number of reasons: marriage, divorce, kids. The investment balance in your 401(k) should reflect your risk tolerance now, not how you felt six years ago.
Keep in mind: This isn’t about reacting to market swings. It’s about making sure these investments still fit into your overall financial plans and wealth-building goals. If they don’t, it’s time to rebalance.