One Move That May Improve Your 401(k) Returns in 2025
If you’re looking to improve your 401(k) performance in 2025, there is an often-overlooked strategy that may help.
It’s called rebalancing.
And failing to rebalance your portfolio could mean losing more than necessary in down markets or not maximizing gains in strong ones.
Yet, many 401(k) investors often fail to rebalance, and, in doing so, they potentially miss out on growth while taking on more risk than they intended.¹
Here’s why rebalancing matters and how it may help improve your 401(k) returns in 2025.
What Is Rebalancing?
Rebalancing is the process of realigning your portfolio to maintain your original asset (investment) allocation to stay in line with your risk tolerance and timeline for retirement.
This means you periodically buy or sell assets in your portfolio in order to maintain the initial desired level of asset allocation.
For example, if your goal was to maintain a 50/50 split between stocks and bonds, but your stock investments have grown faster, your portfolio could become 80% stocks and 20% bonds.
This may expose you to more risk than intended, increasing potential losses if the market drops.
To rebalance (return to your initial target of 50/50), you may need to sell some stocks and buy more bonds to bring your allocation back to its original target.
The Difference between Rebalancing and Reallocation
Rebalancing is not the same thing as reallocation.
Reallocation is when you change the percentage of invested assets in different asset classes to balance risk versus reward.
In other words, it is about how much risk you want to take.
Why Is Rebalancing My 401(k) So Important?
There are a few reasons.
First, your investment goals and risk tolerance may shift over time, especially as you get closer to retirement.
Adjusting your asset allocation to align with these changes is key.
Without rebalancing, you may be taking on more risk than necessary to meet your goals.
Failing to rebalance has the potential to do real harm over time to your retirement account performance.
As retirement nears, managing risk typically becomes even more critical, and increasing your bond holdings may be a smart move to help preserve your savings.
Second, in volatile or down markets, rebalancing your 401(k) may help you stay within your risk level and protect against potential losses.
On the flip side, rebalancing may help you take advantage of opportunities for growth during good markets. Let’s say you set up and invested money in your 401(k) in 2014, and your original asset allocation target was to have 60% in stocks and 40% in bonds.
And let’s say those stocks have performed well over this period of time.
If you never rebalanced your account and stocks performed far better than the bonds, you’d have much more money invested in stocks.
This may increase your asset allocation to 80% of your portfolio in stocks and only 20% in bonds.
While your account may have posted high returns during this period, you are now at a higher risk level than you originally selected.
And, should the market drop and stocks take a dive, your retirement savings could potentially suffer major losses, and you might lose some (or a lot) of your hard-earned retirement savings.
If you’re in your 40s, this might not be a big issue to you.
But, if you are nearing retirement, this may cause a lot of anxiety and take a chunk out of your retirement savings.
In this example, to return to your initial 60/40 target weighting, you would need to sell some of your stocks and purchase more bonds.
Another reason to rebalance is if you’ve had certain life events or financial changes.
These could include…
- A significant deposit or withdrawal from your investment or retirement accounts.
- A shift in your risk tolerance or investment strategy that requires an adjustment.
- Changes to your investment options, such as a 401(k) rollover or updates to your employer’s retirement plan.
- Inheriting an IRA or brokerage account, which may require rethinking your asset allocation.
Get Help Rebalancing You 401(k)
If you are unsure how to properly rebalance your account or don’t know where to start, we’re here to help.
401(k) Maneuver provides independent, professional account management with the goal to help employees, just like you, grow and protect their 401(k) accounts.
Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that are hurting your retirement account performance.
401(k) Maneuver allows you to go about your life doing what you love with confidence, knowing we are handling the changes for you.
Here’s what you can expect as a 401(k) Maneuver member:
- You receive professional quarterly 401(k) account rebalancing that is personalized to your tolerance to risk and based on current economic and market conditions.
- You get an email notification every time we review your account.
- Membership to our online community where you’ll get exclusive access to content that will help you better prepare for retirement.
- Access to a private Facebook group where you can ask questions and get answers from our expert advisors.
Find out what 401(k) Maneuver may do for your retirement account balance. Click below to book a complimentary 15-minute 401(k) Strategy Session with one of our advisors today.
Sources:
- “Over 90% of Americans make this 401(k) Mistake.” Mauri Backman, The Motley Fool.
