Don't Forget to Rebalance Your 401K!
It's the end of the year and that means that it is time to rebalance your 401K. In a previous post (link), I discussed the reason why you should rebalance (also called reallocate). With this post, the goal is to discuss how you should rebalance.
The first step is to find out how much SHOULD be in each fund, based on your allocation plan. For an equal allocation, you can get this number by simply dividing the total dollar amount in the 401K by the number of funds you are using. For instance, if you have $100,000 in your 401K allocated equally among 5 funds, then you should have $20,000 in each fund. If you don't, then you need to reallocate.
Once you know how much SHOULD be in each fund, simply subtract that number from the actual amount in each fund. A positive number will tell you that you have too much in that fund and a negative number will tell you that you don't have enough in that fund.
For example, say you have $100,000 in your 401K with the following year-end balances:
$15,000 - S&P 500 Index Fund
$13,000 - Large Cap Growth
$25,000 - Small MidCap Growth
$26,000 - Small Cap Value
$21,000 - International Fund
We already determined that you should have $20,000 in each fund. So, we have to do the following calculation to figure out how to adjust the different balances:
$15,000 - $20,000 = -$5,000 - S&P 500 Index Fund
$13,000 - $20,000 = -$7,000 - Large Cap Growth
$25,000 - $20,000 = $5,000 - Small MidCap Growth
$26,000 - $20,000 = $6,000 - Small Cap Value
$21,000 - $20,000 = $1,000 - International Fund
The RED numbers indicate funds that are UNDERFUNDED and the GREEN indicate funds that are overfunded. So, if you wanted even amounts in each of the funds, you would simply sell $5,000 worth of the Small MidCap Growth fund and use the proceeds to buy $5,000 worth of the S&P 500 Index Fund. Then, you would sell $6,000 in the Small Cap Value fund and $1,000 in the International fund and use those proceeds to buy $7,000 worth of the Large Cap Growth fund.
If you aren't sure why you want to go through all the trouble to do this, then you need to brush up on the purpose of asset allocation. You can read my previous post on the subject (link). Asset allocation helps you to have discipline when managing your portfolio.
Here's to a great 2005!
Until next time...
The first step is to find out how much SHOULD be in each fund, based on your allocation plan. For an equal allocation, you can get this number by simply dividing the total dollar amount in the 401K by the number of funds you are using. For instance, if you have $100,000 in your 401K allocated equally among 5 funds, then you should have $20,000 in each fund. If you don't, then you need to reallocate.
Once you know how much SHOULD be in each fund, simply subtract that number from the actual amount in each fund. A positive number will tell you that you have too much in that fund and a negative number will tell you that you don't have enough in that fund.
For example, say you have $100,000 in your 401K with the following year-end balances:
$15,000 - S&P 500 Index Fund
$13,000 - Large Cap Growth
$25,000 - Small MidCap Growth
$26,000 - Small Cap Value
$21,000 - International Fund
We already determined that you should have $20,000 in each fund. So, we have to do the following calculation to figure out how to adjust the different balances:
$15,000 - $20,000 = -$5,000 - S&P 500 Index Fund
$13,000 - $20,000 = -$7,000 - Large Cap Growth
$25,000 - $20,000 = $5,000 - Small MidCap Growth
$26,000 - $20,000 = $6,000 - Small Cap Value
$21,000 - $20,000 = $1,000 - International Fund
The RED numbers indicate funds that are UNDERFUNDED and the GREEN indicate funds that are overfunded. So, if you wanted even amounts in each of the funds, you would simply sell $5,000 worth of the Small MidCap Growth fund and use the proceeds to buy $5,000 worth of the S&P 500 Index Fund. Then, you would sell $6,000 in the Small Cap Value fund and $1,000 in the International fund and use those proceeds to buy $7,000 worth of the Large Cap Growth fund.
If you aren't sure why you want to go through all the trouble to do this, then you need to brush up on the purpose of asset allocation. You can read my previous post on the subject (link). Asset allocation helps you to have discipline when managing your portfolio.
Here's to a great 2005!
Until next time...
posted by JLP | 11:54 AM
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