401k Match In Company Stock, How Often To Rebalance?

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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).

So, what do you guys all think of my response?

{ 1 comments, please add your thoughts now! }

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One Response to “401k Match In Company Stock, How Often To Rebalance?”

  1. Robert Lebo says:

    I believe rebalancing is key to creating wealth and reducing risk. It is also most effective on portfolio’s that are not supported by a constant stream of income (plans that you contribute into systematically). To rebalance means you have an Ideal portfolio as a base and periodically return to that model. Without thinking about it rebalancing pulls money/profit from the profitable investments and purchases into the under performing holdings(at a discount). You make money purchasing low and selling high. If you have a income stream into the portfolio you should be able to hold off the need to rebalance (occur charges) by properly allocating you contributions(Dollar cost averaging into the under performers). This becomes a bit more tricky in this situation because you have 50% of your contributions in one security. First consider the company stock, by asking a few questions.

    1) What category does it fall into? (Large, Mid or Small Cap, or international)
    2) Is being consistantly overweighted in this category with in the risk level I can tolerate.
    3) How long till I start withdrawing from this account.
    4) Strength and performance of the stock (try to avoid your bias)

    If you can live with the account being overweighted in that category, you won’t being withdrawing from that account for at least two years and you are confident in the security. Allow the over weighting and set your limits, example I want that sector to represent 25% of my portfolio I can tolerate up to 65% of my portfolio. When you hit 65% then you occur the expense and take it down to say 15%. You should liquidate 100% of the company stock and invest the 15% in a diversified investment(same category). As your portfolio gets larger it will need to be rebalanced less and less because of your company stock. The percentages above were an example and you should calculated for what you are comfortable with. If you aren’t comfortable with the overweighting and/or the stock then consider lowering the percentage that you rebalance at.

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