In a 401(k) plan, which is a retirement savings plan offered by many American employers, rebalancing refers to the process of realigning the weightings of the assets in the portfolio. Over time, as different investments earn different returns, the portfolio can drift from its original asset allocation. This drift can lead to a risk level that is inconsistent with the participant’s retirement strategy and goals.
Rebalancing involves periodically buying or selling assets in the portfolio to maintain the original or desired level of asset allocation and risk. For example, if the original target was to have a 70/30 split between stocks and bonds, and due to market movements the portfolio shifts to an 80/20 split, rebalancing would involve selling some stocks and buying bonds to get back to the 70/30 allocation.
This process helps to maintain a consistent risk profile over time, which is important for long-term investment strategies. Some 401(k) plans offer automatic rebalancing features that can help participants keep their investments aligned with their goals without having to manually adjust their portfolios.