If your 401(k) has tripled in value over the past decade, experts say it's time to rebalance.
Rebalancing means selling stocks and buying bonds to align with your retirement goals. While selling in a bull market seems counterintuitive, corrections are inevitable, especially for those nearing retirement.
"All of this is just making sure that you have a lot of eggs in different baskets," said Heather Knight, VP at Fidelity Investments.
Why Rebalance Now?
Stocks have nearly quadrupled since 2015, while bonds have been flat. A 70-30 stock-bond mix has likely shifted to 80-20 or more, increasing risk.
Bonds have also disappointed, with a benchmark index dropping 18% from 2020 to 2022. That has tempted many DIY investors to stay 100% in stocks.
"A 100% stock portfolio is going to be very volatile," said Sabino Vargas, a senior financial adviser at Vanguard. "We don't know when a correction or recession might take place."
Who Needs to Rebalance?
If you have target-date or balanced funds, they rebalance automatically. DIY investors should review their portfolio every 90 days to a year.
How to Rebalance
Set a target mix (e.g., 60% stocks, 35% bonds, 5% cash near retirement). Use tools like Vanguard's Portfolio Watch or Fidelity's Portfolio Analysis. Adjust by buying/selling or changing future 401(k) contributions.
Remember, diversification extends beyond stocks and bonds. Consider small vs. large cap, U.S. vs. international, and various sectors.
"You want to learn a schedule that you can stick to," Vargas said.