Financial Focus/Time To Rebalance Your 401(k) Holdings?
You may be casting your ballot this week for a new governor or senator. But you also might want to participate in a different type of election - the choice of investments for your 401(k).
Depending on where you work, your company may have offered an “official” window of time for you to increase contributions to your 401(k) plan. But you can generally change your 401(k)’s investment mix at any time of the year. And now might be a particularly good time to act.
Why? Because your 401(k)’s holdings may be out of balance with your desired asset allocation - the mix of investments that reflects your goals, risk tolerance and time horizon. And your 401(k) may have gotten “unbalanced” without you even realizing it.
To understand why this is the case, you need to examine how the different investments in your 401(k) have performed recently. You’re probably painfully aware that the equity side of your 401(k) portfolio has slumped. At the same time, your fixed-income investments, such as bonds, probably have done relatively well. In fact, they may have done so well that they now make up a much greater percentage of the total value of your 401(k). And that could be a problem you’ll have to address.
When you first set up your 401(k), you decided on a suitable asset allocation, with different percentages of your total portfolio going to stocks, bonds, money market accounts, government securities, etc. During periods of significant market fluctuations, these percentages can change - a lot. For example, during the long bull market of the 1990s, the equity portion of your 401(k) may have grown to such levels that your portfolio was taking on a higher level of risk than you were comfortable with. You may well have recognized this; if so, you may have rebalanced your portfolio by shifting some assets out of equities and into other areas.
Now, though, the situation is reversed. Within your overall portfolio, the value of stocks may be down, while the value of bonds may be up. Over the short term, you might not mind having a greater exposure to bonds while the market is so turbulent. But over the long term, stocks always outperform bonds - and every other financial asset, too. So, if your 401(k) is heavy with bonds or other fixed-income investments, your progress toward your retirement goals could be slowed.
Consequently, you may want to consider adjusting the percentages of your stock and bond investments within your 401(k). You may find it hard to put more money into stocks when the market is volatile. But when you invest in a 401(k), you are dollar- cost averaging - putting the same amount of money into the same investments, at regular intervals. As a result, you buy more shares when the price is low, and fewer shares when the price is high. Over time, this technique can reduce your overall cost of investing. And when the market turns around, as it always has in the past, all those low-priced shares you bought will be worth a lot more.
Take a close look at your 401(k). If it needs rebalancing, take action soon. Remember, you can hardly find a better retirement vehicle than your 401(k) plan - so make sure you get the most out of it.
This article was submitted by the financial representatives of Edward Jones in Hagerstown: Greg Garner, 301-733-9465; Dave Walker, 301-766-7300; Joan Bowers, 240-420-8514; and John R. Pullaro, 301-766-7300.