Rebalancing is the process of adjusting your portfolio to maintain your desired asset allocation and risk level. For example, if you have a 401k plan with Fidelity and you want to keep 75% of your money in stocks and 25% in bonds, you may need to rebalance your portfolio periodically to keep those percentages in line.
What is rebalancing?
Rebalancing is the act of selling some of the assets that have grown in value and buying more of the assets that have declined in value. This way, you can restore your portfolio to its original or target allocation.
For instance, suppose you have a Fidelity 401k plan with $10,000 invested in a stock fund and $10,000 invested in a bond fund. Your asset allocation is 50% stocks and 50% bonds. After one year, the stock fund grows to $12,000 and the bond fund drops to $9,000. Your asset allocation is now 57% stocks and 43% bonds. To rebalance your portfolio, you would sell $1,500 worth of the stock fund and buy $1,500 worth of the bond fund. Your asset allocation would then be 50% stocks and 50% bonds again.
Why is rebalancing important?
Rebalancing is important for several reasons:
- It helps you stick to your investment plan and avoid emotional decisions. By rebalancing, you are following a disciplined and systematic approach that reduces the influence of market fluctuations and emotions on your portfolio.
- It helps you maintain your risk level and diversification. By rebalancing, you are ensuring that your portfolio does not become too risky or too conservative over time. You are also reducing the concentration of your portfolio in any single asset class or sector.
- It helps you enhance your returns and reduce your volatility. By rebalancing, you are taking advantage of the market movements and buying low and selling high. You are also smoothing out the ups and downs of your portfolio and reducing its volatility.
How to rebalance your Fidelity 401k?
There are different ways to rebalance your Fidelity 401k portfolio, depending on your preferences and options. Here are some common methods:
- Manual rebalancing. You can rebalance your portfolio yourself by logging into your Fidelity account and making the necessary exchanges between your funds. You can do this as often as you like, but most experts recommend rebalancing at least once a year or when your portfolio deviates from your target allocation by more than 5% or 10%.
- Automatic rebalancing. You can set up your Fidelity account to rebalance your portfolio automatically at a certain frequency (such as quarterly, semiannually, or annually) or when your portfolio drifts from your target allocation by a certain percentage (such as 5% or 10%). This way, you don’t have to worry about monitoring your portfolio or making the trades yourself.
- Target date funds. You can invest your Fidelity 401k in a target date fund, which is a fund that adjusts its asset allocation based on your expected retirement date. For example, if you plan to retire in 2040, you can choose the Fidelity Freedom 2040 Fund, which will gradually shift from more stocks to more bonds as you approach retirement. This way, you don’t have to rebalance your portfolio at all, as the fund does it for you.
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