(February 2012) Your 401K plan probably provides you with a number of investment choices, which primarily consist of mutual funds. Those mutual funds invest in stocks, bonds or a combination of the two. Way back when you started the plan, you selected where you wanted funds to be allocated.
To make everything simple, lets say you allocated 60% to Fidelity’s Magellan Fund (FMAGX) and 40% to PIMCO’s Total Return Fund (PTTAX). Essentially, you would be investing your money 60% in stocks and 40% in bonds.
Those two funds did not have the same performance for the last 3 months. In general, stocks and funds that invest in them have had a tremendous run during last few months. In particular, the FMAGX has returned over 20%. Bonds have not done nearly as well. For example, the PIMCO Total Return Fund is up around 4.5%.
As a result of these gains, you may no longer have 60% of your portfolio in stocks and 40% in bonds. The value of the stock funds that you hold may have increased relative to the value of your bonds, so you may now have 70% of your portfolio in stocks and 30% in bonds. This is were automatic portfolio re-balancing comes in. When you set up your 401K or IRA and allocated your portfolio between funds, you may have selected that on a periodic basis (monthly, quarterly or annually) that your portfolio get re-balanced to the original asset allocation (ie 60% stocks, 40% bonds). For most people, this would mean that the some of the funds would be moved from the stock fund to the bond fund.
A balance between stocks and bonds reduces portfolio volatility. Having all your funds in one asset class or mutual fund means there is a greater chance that you could have a big sudden loss. Imagine owning an all stock portfolio in 2008, 2000 or 1987. At those points in time, you would have been better off having a combination of stocks and bonds. Everyone thinks they know when the stock market is going to tank. However, you can count the number of people that called the last crash with less than 10 fingers.
A number of super-heavy hitters, such as Larry Fink, have suggested that we are in for a long-term bear market in bonds. The FED has been actively intervening the market reducing yields and have pushed bond prices sky high. In the long-term, bonds have now where to go but down.
If you agree with the second view-point, you might consider changing your asset allocation.