Don’t Forget to Rebalance Your 401(k)
Recorded on August 29th, 2016
Last summer, sadly for the first time in years, I sat down with my laptop and did the adult thing where you actually log into your 401(k) account and pick some new funds to allocate the current balance to.
I knew that the “Bogleheads” forums had some smart people in them and John Bogle of Vanguard was widely regarded as a decent source of investing wisdom, especially for people who don’t know much about investing (like me). I’ve been sold on index funds for a long time. Once you realize how your yearly returns are washed away by the high expense ratios (management fees) of most other actively-managed funds, the math overwhelmingly favors index funds. People like me aren’t going to beat the market, so we should at least aim to replicate its performance.
Knowing that I wanted index funds, I looked at a bunch of articles about asset allocation and settled on the Bogleheads Three-Fund Portfolio. Of course there are surely better ways to invest, and those ways would probably all take longer to research and would invite more risk than picking three broad asset classes like I do.
Here’s what the three-fund portfolio is about:
A three-fund portfolio is a portfolio which does not slice and dice, but uses only basic asset classes — usually a domestic stock “total market” index fund, an international stock “total market” index fund and a bond “total market” index fund. It is often recommended for and by Bogleheads attracted by “the majesty of simplicity” (Bogle’s phrase), and for those who want finer control and better tax-efficiency than they would get in an all-in-one fund like a target retirement fund.
Luckily, my 401(k) offered index funds that exactly matched those described in the three-fund portfolio. I split the entire balance of the account into 34% in the S&P 500 index, 33% in an international equity index, and 33% in a U.S. bond index fund. I set the auto-rebalance to kick in every year after that and to target those same percentages. And then I didn’t touch it for a year.
Tonight I logged in again to check on the first instance of auto-rebalancing since last summer. The returns weren’t great, but they were no worse than what the rest of the equity and bond markets did as a whole, and we didn’t lose money. All this for between 0.02% and 0.09% in fees.
Depending on what articles you read about rebalancing your 401(k), you’ll find that anywhere from 2% to 19% of people don’t bother to do it. That’s awful. If you ignore your investments for years, like I did, your allocations will get way off target and you’ll take on more risk than you intended. But if you commit to tending your garden of investments, you’ll be far ahead of most of the other investors out there, and you’ll at least have the mental calm of knowing you’re in control. You’ll also most likely preserve more of your returns than if you had opted for actively-managed funds with high fees. It takes only a few minutes and is a better investment of your time than TV or Facebook.
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