Congrats on landing your first real job! Also, congrats on your 401(k). The idea of such an awesome opportunity to invest money is simply exciting regardless of how many forms you will have to sign to start participating. It is quite tempting to skip the portfolio reports you will receive monthly. However, that would be an awful mistake because the sooner you start investing, the more time your money will have to work. Let me introduce the notion of rebalancing your portfolio in this article.
The rebalancing of your portfolio is very much alike to weeding your garden. When you landed the job, you’ve probably determined the appropriate ratios of stocks and bonds, 60% and 40%, for instance. However, the stock market doesn’t remain the same and some day you’ll notice that the proportion of stocks in your portfolio is 80%. That means that your portfolio became considerably riskier than it was intended. In order to rebalance your portfolio, you will have to sell some of the winning positions and buy some losers.
It is not necessary to be a financier to do this task. However, what you will need is the ability to set an alarm every six months and check whether the ratios are appropriate. If the deviations are more than 5%, you should make transactions. No need to run to your broker’s office now, most online platforms, such as Fidelity and Vanguard, will be able to help you with it.
However, there is one common mistake new hires make, which is letting the company’s stock keep growing and eventually taking the control over the entire portfolio. As you may see, it is quite clear what the problem of this strategy is, since if the company runs into troubles, fires you and you lose everything at once. By keeping the diversification of your investments and having the exposure to one company below 10%, you’ll save yourself from that.
It is beneficial for you to start doing this when you are in your twenties, because you will have decades ahead of you for your money to grow constantly. Such small steps will prevent you from big problems later and will make the process of buying the house simpler. Try not to be intimidated by the financial jargon and complicated words. Just set the strategy and follow the schedule.