Don’t Rebalance; Use Common Sense in Your 401(k).

Rebalancing a 401(k) is well-worn financial media content.

Financial advisors talk endlessly on its merits.

But can Rebalancing help your 401(k) account mutual funds?

Rebalancing your 401(k) means on a predetermined date.

You reset your 401(k) mutual fund asset allocation.

The mix or percentage you own of stocks and bond.

Rebalance to protect against 401(k) principal risk.

Determined by your answers to a risk tolerance questionnaire.

A list of computer-generated questions.

Like the required questions in your doctor’s office.

Only much less useful in real life.

These questionnaires would not be so bad.

If 401(k) investors understood the questions in the first place.

Let’s say your questionnaire results are the following.

A 70% stocks and 30% bonds 401(k) strategy.

On your Rebalancing date, you face the following dilemma:

401(k) Rebalancing requires the sale of mutual funds.

The same mutual funds that have rebounded in price recently.

So, why sell those 401(k) mutual funds?

Wait. It gets even worse.

The remaining part of your 401(k) Rebalancing mandate.

Encourages to buy the worst mutual funds in your 401(k).

The same mutual funds underperforming the stock market averages.

So, why buy those 401(k) mutual funds?

Does “throwing good money after bad” ring a bell for you?

No. Then how about this one? “Sell low and buy high.”

Rebalancing repeats bad 401(k) investment management strategy.

The exact opposite of what common sense dictates.

Regardless of your level of finance and investing knowledge.

Ever receive poor service at a restaurant?

Do you “rebalance” your experience there by going back?

In the hope that at some future point, the service will improve.

Car repair. Dry cleaning. Doctor. Dentist.

Do you continue to endure poor customer service?

Rebalancing reminds me of the old joke.

About the guy who continues to bang his head against a wall.

One day he can’t take the pain, so he visits the doctor.

The doctor asks him how he thinks he got the headache.

The guy says that he bangs his head against the wall.

The doctor says, “Why don’t you stop hitting your head against the wall?”

The guy goes home and stops hitting his head against the wall.

His headaches stop.

That joke always reminds me of Rebalancing your 401(k).

Selling good 401(k) mutual funds to buy bad 401(k) mutual funds.

With the hope the bad mutual funds will “get better” soon

Because a computer told you to.

Based on your response to questions you did not understand.

Nowhere else in your life does Rebalancing makes sense.

It makes less sense in your 401(k).

Ric Lager

P. S. There is no need to Rebalance your 401(k) mutual funds the wrong way.