Rebalancing: A 401(k) Advantage

The benefits of investing in a 401(k) are many, but one rarely mentioned is that 401(k) participants can rebalance their plan asset allocation without concern about the tax consequences. An optimal way to manage a long-term investment account is to initially identify and implement an asset allocation strategy and then to periodically bring the asset allocation back to the original plan.  Not only does this approach deliver optimally for the strategy chosen, it forces consistent selling high and buying low of the assets in the portfolio, which can significantly increase return.  However, in a retail account such buying and selling often generates increased taxes each time you rebalance, and the benefit of rebalancing is somewhat mitigated.  In contrast, in a 401(k) there are no tax consequences, and the participant reaps the full benefit of rebalancing. Rebalancing is not only a good practice, it’s a 401(k) advantage.

David