401k rebalance?

#1

My retirement is allocated as follows:

US large cap 60%
US mid/sm cap 25%
International equity 10%
US bonds 5%

They are all low cost index funds.

If I leave these weights as is I understand that with time the weights can shift depending on the performance of each. But why does that matter? Let’s say US large cap does well and the weight shifts to 62% and bonds suffer and drop to 3%. Should I rebalance or will the market so that for me over time? I really don’t want to manage it and my company doesn’t offer any target funds. What would happen if I just left it the next 20 years? Am I shooting myself in the foot?

#2

Mathematically, and historically, you’re actually better off NOT rebalancing if you want the best chance of making the most money. The reason TO rebalance is to maintain your ideal asset allocation based on your risk tolerance.

For example, in an extreme case let’s say you’re 65 years old and have a portfolio that’s 50% bonds and 50% stocks. Then the market has a crazy good few years and suddenly you’re 75% stocks, 25% bonds. This person would probably want to rebalance back to 50/50 to “lock in” some of those gains and protect against the downside of a market crash when you need the income in retirement.

Based on your 95% stock allocation, I’m going to guess you’re not 65 years old. So basically, it’s not a big deal. I’d just leave it and not worry about it. Sometime in the next decade or two you’ll switch jobs and rollover your 401k. At that point you can dump it all into a target date index fund which automatically rebalances and reallocates. The course has a lesson on rebalancing that looks at the math a little deeper too.

#3

Thanks, Jeremy! I had a feeling that was the case and needed confirmation. I do indeed have a lot of time.