Avoid the urge to rebalance your 401(k)


As you would expect, the recent stock and bond market headlines have brought with them recommendations to rebalance your company 401(k) retirement plan account.

The main concept of rebalancing is that all-time stock market highs and all-time interest rate lows have moved your predetermined asset class mix beyond acceptable risk levels.

Your stock and bond market investments have worked too well. The rebalance solution is to sell some of those investments, and buy more of the worst performing mutual funds on your default company 401(k) retirement plan menu.

For those individual company 401(k) retirement plan participants who have drunk the rebalance Kool-Aid, take a few moments here to consider an alternative investment management strategy.

The main selling point behind the financial advice industry rebalance mantra is to reduce risk. A large part of the rebalance investment management strategy is that you should not own too much of what investment are working the best. You always need to own some part of investments that have not worked out for the last several years.

The major league baseball season began its second half last week. The Las Vegas sportsbook professionals have listed five teams that are strong favorites to win the World Series. The remainder of the 25 professional baseball teams are considered “long shots.”

The investment professionals who make their living betting on sports don’t bet on long shots. Instead, they bet their money on teams that have the best chance of winning.

Thing about the same investment management strategy for your company 401(k) retirement plan mutual funds. Own the stock and bond market mutual funds that are working the best now. Avoid the mutual funds that are not.

Why would you continue to invest 20-40% of your company 401(k) retirement plan menu in the worst mutual funds available to you?

A computer model pie chart that recommends that these underperforming mutual funds will someday “work out” is not a good enough reason. You are supposed to have a logical and organized investment management strategy for the largest part of your retirement assets.

You are not supposed to bet your retirement assets on longshots.

The U.S. stock and bond markets are both at all-time investment performance levels. You should have all of your company 401(k) retirement plan money invested in the three or four best mutual funds on your default company 401(k) retirement plan menu.

The last several years of your company 401(k) retirement plan stock and bond market investment gains will be a risk at some point. A stock and bond market risk management strategy is the only thing that will minimize the investment risk.

At the current all-time high company 401(k) retirement plan account balance levels, your primary investment strategy should be to preserve your retirement plan principal. Rebalancing has not one thing to do with that.

Ric Lager
Lager & Company, Inc.

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