Get Aggressive, Now Is the Time to Rebalance Your 401k
It was just a few hours ago that I rebalanced my sister’s 401k after not taking another glance at it since 2006. Luckily, together we averted most of the fallout from the recession, avoiding real estate, small caps, and having only a tiny portion in bonds. However, as I relooked her 401k it was time to make a big switch, a really big switch, she needed more small cap stocks.
Rebalancing the 401k
The first thing I did was reduce the ridiculous amount of large cap stocks she was holding in her 401k. I believe she had something like 54% of her account invested in large caps, which is great for defense but for someone in her twenties and with the worst of the recession behind she needed some small cap stocks. To the rescue were several small cap funds which helped bring her large cap exposure to nearly 30% and her small cap exposure to roughly 50%.
After playing defense for four years she needs to be on the aggressive side of things. Employment numbers are looking better, large caps are starting to show some valuation problems and emerging markets have ran too far, too fast. Also, bond funds should be on the lowest priority. Low rates and the possibility of holding paper losses for years on end is hardly a solid investment strategy. The time for recovery is now, and frankly, when the economy begins to cool we can be sure to ditch some of the small caps in favor of large caps, but for now she needs growth, and in a big way!
Look at Your Own Portfolio
There is no better time to begin rethinking your investment strategy. Many investors opted to play it safe following the credit crunch and are now earning a pittance on their retirement. Others holding huge capital gains in bond funds are reluctant to sell, hoping the rally continues. At this point it would be a good idea to re-balance your accounts and make the necessary changes. March’s employment numbers leave me incredibly optimistic, if only for a few years.
Check to see if your 410k contributions leave open the opportunity to receive a $1,000 savers tax credit.