Here’s a reader question I received this past weekend and I wanted to float by response with you all to see what you thought:
I had a curious question that you may have some experience with. My company’s matching contributions are 100% in the company’s common stock. The upshot of this is that the vesting is immediate. Nonetheless, since this is common stock, there is a small fee associated with selling it. Anyway, how often would you suggest rebalancing. I can’t quickly find any information on exactly what the fees are, but I think it is a per-share without a per-transaction fee. We can run on that assumption for now.
Anyway, the question is, how often should I be rebalancing my portfolio to reduce the amount of common stock in it? Annually? Quarterly? More often?
Thinking it out, I feel that since my plan is new and literally is a 50/50 split between company stock and everything else that I should rebalance quarterly and move pretty much all of it every time. Additionally, if I wait until dividends are distributed on the funds, it should mostly or completely offset the costs of moving the stock (dividends are automatically redistributed into the plan). Eventually, as the contributions became a smaller part of my portfolio, I think I could hold onto the stock semi-annually to yearly without exposing myself to too much risk. Does this seem like a sound investing principle?
In general, I think rebalancing should be done once a year but depending on how large of a balance you have (in terms of total dollar amount), it may not be worth it given the transaction fees. By this I mean if you have $500 in your 401k and each transaction costs you $5, you’re talking about losing 1% of your total portfolio just to make one trade… your rebalancing will take far more and it’s simply too expensive to rebalance.
I don’t think you should think about the dividends separately from your principal. It’s your money and not a very good reason to justify rebalancing, you know? You should think about the costs of rebalancing separate from what you earn.
If I were you, and I don’t know anything about your company, your total financial picture, or your 401k picture (so please don’t construe this as direct advice, this is just what I’d do); I’d wait until I had more in my funds that the fees aren’t a significant percentage (perhaps wait a year). Then I’d rebalance once a year after that (or just adjust my contribution allocations so that it would rebalance, thus avoiding the trading fees that it sounds like you pay).