If, when you evaluate your 401(k) plan’s performance, you’re not satisfied with the progress you’re making toward your goal of a secure retirement, you can change the way you’ve allocated the assets in your account. In fact, there are several situations in which reallocating may make sense:
1. If some of your investments don’t measure up to their appropriate benchmarks, you might change your investment mix to bring your portfolio more into line with your expectations.
2. If your attitude toward investment risk changes, as it often does as you become a more experienced investor, you may want to make different types of investments.
3. If new types of investments are introduced to your plan, such as exchange traded funds or target date funds, you may want to expand your investment horizons.
4. If some of your investments have outperformed others, the stronger performers will make up a larger percentage of your total portfolio. You might want to direct more of the new money going into the account to the underperformers to bring the overall allocation into line with your original plan.
5. Over the years, you might reallocate because you’re changing your investment strategy. For example, early in your career you might be seeking strong, long-term growth early but, as you approach retirement, you may shift more of your assets to fixed-income securities.
You can actually make portfolio changes as often as your plan allows, from once a day to once a quarter. But doing an annual evaluation and update often makes the most sense. It’s generally unwise to reallocate if you’re trying to time the market — anticipate when the markets will move up or down — or reacting in panic to a market downturn. Remember, too, that reallocating frequently increases your trading costs, which can limit your return.
