The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 62. Rebalance

ONCE YOU'VE THOUGHT through your risk tolerance, looked at asset classes, made your investment selections, and started your 401(k) plan contributions, are you finished? Not quite. Now you must do two things that are seemingly contradictory. First, you must have the discipline to stick with your plan. Second, you must rebalance your investments once a year.

One of the keys to investment success is to avoid second-guessing yourself and to stick with the asset allocation you've made no matter what happens in the markets. So when you read that the stock market is getting too high, just let that information roll by.

However, your asset allocation will grow out of balance simply because of the cycles in the investment markets. That's when you should do something. Think of it as weeding a garden. You've selected the plants well, now you must control their growth. For many investors, that's the toughest part. That was particularly difficult at the end of 2008 because it meant putting more money into stocks, which had suffered so drastically in 2008. And the trouble was, stocks started off 2009 by doing even worse. Most investors were terrified that the market and life as we know it were over. Many of them decided to sell their stocks rather than buying more to rebalance their portfolios. Can you blame them? If the stocks in your portfolio are down by half, it takes great discipline to keep adding stocks. But that's exactly what you should do.

Consider this simplistic ...