Key Takeaways
- If you haven’t checked your 401(k) allocations in a while, you may find that they’re no longer allocated the way you set them up.
- With the stock market increases these past two years, you may be more heavily allocated in stocks than you realize.
- Review your allocations on a regular basis to stay on track.
If you lift weights or do any type of strength training, you know to work both sides of your body equally. Otherwise, you’ll end up with uneven muscles, with one side being stronger than the other. What does this have to do with the title of this blog, “Reallocating Your 401(k)”?
Well, over the past two years, the stock market has been up about 100% from its low point. The bond market has been up between 3% to 10%. If you’ve allocated your 401(k) in both stocks and bonds and haven’t changed anything over the past two years, you’re going to be more heavily positioned in stocks now than you were two years ago. One side got much stronger than the other – a bit like if you were lifting a heavier weight with your right arm than you were with your left…and kept doing that for two years!
For instance, if your initial allocation was 70% equities and 30% cash and bonds, it may have shifted now to 85% equities and 15% cash and bonds. It’s important to understand this, because this means you have more risk and you’re at the top of a market. As a result, you have a greater propensity to lose more money when the market goes down.
Now, how often do you need to look at your allocations? Well, at least once a year. And if you’re not sure how to go about this, most 401(k) sites have helpful reallocation tools to guide you and do the heavy lifting for you. If that’s not available, find yourself a qualified advisor who can help you reallocate your portfolio.
Make sure to check in and keep your allocation the way you want it, so you don’t get into trouble when the markets go down (and they do). This can help you avoid getting yourself into a situation where you make some bad decisions, panicking and selling because you didn’t pay attention to changes over time. Just like strength training, you want to keep things balanced. Until next time, enjoy.
Gary
If you’d like to read more on this topic, here are a few of Gary’s previous posts that you might enjoy:
