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401k Investing: If You Didn't Panic, Then Rebalance

If you didn't panic when the stock market took a dive, good for you.  Since the March 2009 low, stocks are up 50 percent.  If you stayed with your plan, pat yourself on the back.  Now it's time to think about rebalancing.

Rebalancing is when you bring your asset allocation--how your investments are divided among different types of assets--into line with your goals.  For a simple example, let's say that a year ago you had 50% of your assets in the U.S. stock market, and 50% in U.S. bonds, and you started with $100.  Here's what you had a year ago:

Stocks:  $50     ( =50% of total )

Bonds: $50      ( = 50% of total )

Over the last 12 months, stocks are down about 20% and bonds are up 8%.  Assuming no contributions or withdrawals, here's what you now have:

Stocks: $40     ( = 43% of total )

Bonds: $54     ( = 57% of total )

To get back to your 50-50 allocation, you need to sell $7 of bonds and buy $7 of stocks.  I recommend that in normal times you do this rebalancing annually.  With all of the market gyrations we've had, it makes sense to rebalance a little more often.

You can get more information about rebalancing in the drill down to Lesson 4 of The ABCs of Your 401k.

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