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Home > Library > Stable Times > Volume 4, Issue 1  The quarterly publication of the Stable Value Investment Association First Quarter 2000 • Volume 4 Issue 1 It's Easy to Sell High And Buy Low: RebalanceBy David L. Wray, President Profit Sharing/401(k) Council of America Early 401(k) critics stated that employees, especially lower-paid employees, would over trade their accounts and attempt to time the market. They predicted disastrous consequences both for individual employees and the retirement system. To paraphrase one of my good friends from Alabama "that dog just didn't hunt." In fact, most defined contribution plan participants have done just the opposite. When employees join a plan they choose approximately three fund options (Table 1), that they never change, in which to invest their contributions. Even older employees, those with the largest account balances, typically do not make changes in how their balances are allocated. As you can see in Table 2, in 1998 most participants made no adjustments to their accounts.
It is good that throughout the stock market volatility of the past several months, plan participants have, for the most part, stayed the course, not reallocating their 401(k) assets, embracing an "in it for the long haul" ideology and avoiding attempts to market time. However, being too passive also has negative consequences. The problem is not that participants have traded too much in their accounts, it is that they have traded too little.  If participants do not periodically rebalance the assets back to their original allocation percentages they risk having markets make the allocation for them. This is because without periodic rebalancing, the better performing asset classes will become a greater portion of the overall portfolio over time. For example, equities have substantially outperformed fixed investments like stable value and money market funds since 1990. The lack of rebalancing is one of the reasons that the investment of defined contribution assets has changed so dramatically since 1990 (Table 4). In addition to helping participants stay in control of their portfolios, periodic rebalancing has the additional benefit of forcing participants to sell high and buy low. That's because at the point when rebalancing occurs the best performing asset is sold and the worst performing is bought. Billions of dollars and millions of hours have been invested by plan sponsors and service providers teaching participants about types of investments and the value of long term investing. Now it is time to put rebalancing on our plan education agenda. 
Read Next: 401(k) Investing - A Look At The Data
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