5 tips to consider when rebalancing your 401(k)

Tips for proper asset allocation and management of your 401(k) plan:

1. Establish your risk tolerance. A good litmus test is if you can't sleep at night because you're too worried about your investments, then you're probably in too many stocks. It's a clear signal that your allocation is too risky and you'll need to make adjustments.

2. Determine a proper mix. Once you've established your risk tolerance level, set your allocation targets to reflect your goals. A moderate risk plan might have 60 percent allocated to stocks, 35 percent to bonds and 5 percent to cash equivalents such as stable value or money market funds.

3. Set a schedule. Decide how frequently you want to check your account. Many advisers say once a year is enough. Others including Dean Kohmann, vice president of 401(k) plan services for Charles Schwab & Co. Inc. say every six months is good. Just make sure you're following a plan and not reacting emotionally to market changes.

4. Know your limits. Decide how much variation you want to allow before you rebalance. Many advisers recommend 5 percent. If any of your target amounts for a particular asset class stray more than 5 percent, rebalance by buying more shares of the asset class that has fallen below its target, or by taking money from the highest-returning asset class and putting it into the one that's lagging. If you're making continuous contributions, adjust the weightings so that you're adding more to the class that has recently underperformed.

5. Get help. Consider an auto-rebalancing feature if your plan offers it or explore investing in life cycle or target-date funds, which automatically rebalance and adjust the allocations toward less risk as you get closer to retirement.

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