All our lives, we are taught that actions lead to outcomes. And in general, that more activity leads to better results. It only makes sense that we would apply that logic to investing. So, how often do we need to take action and change our investments as participants in a 401(k) plan?
First things first, let us differentiate between rebalancing a portfolio and other investment changes. All are forms of changing investments, but their preferred frequencies differ.
Let us start with rebalancing. Most financial plans include a target asset allocation. For example, one well-known and straightforward allocation is the "60/40 portfolio," comprised of 60% stocks and 40% bonds.
But we all know that assets can ebb and flow in the market. Thus, one could start at 60/40, and then the market could push that portfolio to 70/30. How do we “reset” the allocation of this portfolio, and how often should we do it?
Rebalancing is the act of buying and selling such that the 70/30 portfolio moves back, or 'rebalances,' to 60/40. In this case, we would sell some stocks (decrease the 70%) and buy some bonds (increase the 30%). Rebalancing re-establishes the risk posture of a portfolio back to the predetermined target risk.
Most financial professionals will recommend rebalancing a portfolio at least once or twice per year but no more than four times per year. Here at Sage Rutty, most of our clients check their statements and rebalance once per year.
Going too long without rebalancing might lead to a portfolio that is far out of balance with its target allocation. And rebalancing too frequently is 1) a logistical headache and 2) reactive to short-term noise in the market instead of a long-term signal.
Other Investment Changes
That is rebalancing---between once and four times per year. But what about other investment changes?
401(k) participants most frequently choose to make significant changes to their asset allocations as they age, changing their risk posture in anticipation of retirement. These changes are commonly called "glide paths" since an employee approaching a smooth retirement is reminiscent of a waterfowl gliding into a lake landing.
Most glide path formulas are age-based and thus recommend a change in investments once per year.
For example, one common glide path recommends that an investor's stock allocation be 100 - Their Age + 14. By this recommendation, a 40-year-old would have a portfolio of 74% stocks. And once they turn 41---then they change their investments to 73% stocks. It is a once per year change.
What About a Complete Reset?
Is there ever a time to do a complete reset, like changing my investment from all stocks to all bonds? Or should I ever add in new assets, like REITs or precious metals?
The short answer is less about changing investments and more about changing financial plans. And there is nothing wrong with changing plans, so long as life dictates it! Lives change, dreams change, and financial goals should remain flexible along with that.
But one should not change investments without serious thought, and that thought is typically done by re-working a financial plan.
That means that there is no set frequency for significant investment changes. Instead, large investment changes are a function of unexpected changes to one's life or financial plans. For example, an unexpected inheritance might influence someone to change their financial plan and change their investments.
Should I Update More/Less Often As I Age?
In general, we suggest that you revisit your finances more frequently as you approach retirement.
For example, a 30-year-old might only need a formal check-in once per year. But a 55-year-old might want to update or rebalance their finances 3 or 4 times per year.
Again, the “coming in for a landing” analogy works here. When the jet is miles from the runway, its path is straight and unwavering, requiring only minor tweaks. But in the final seconds before landing, the pilot might have to make a few quick adjustments to ensure a smooth touchdown.
Do not worry - we will make sure there is no turbulence on your flight!
Is There an Upper Limit to Changes I Can Make?
While each plan is different, it is common to see 401(k) plans limit your ability to move out of and back into the same fund once per fund per 30 days. 401(k) custodians structure rules to empower you to make positive long-term changes and discourage day trading your retirement nest egg. Consult your plan's literature or your Sage Rutty advisor if you have questions on this.
There's no one-size-fits-all answer here. But there is a one-size-fits-most solution. Most standard investment changes should occur between once per year and four times per year. Any non-standard investment changes will typically only happen after unexpected events in life.