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I put 100% of my 401k into an S&P index fund.

Do I need to rebalance that, or is rebalancing only necessary when you have multiple asset allocations such as 80% in stock, and 20% in bonds and then you rebalance to keep that same allocation.

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There's nothing to rebalance, the index fund rebalances itself to continue matching the index.

However, you need to understand that such an investment is not diversified and you only invest in a very specific market, and very specific stocks on that market. S&P 500 is large (500 different companies, most of the time), but still not as broadly diversified as your retirement investment portfolio should be.

You should talk to a financial adviser (CFP for example), many companies provide access to these for 401k plan participants. But in any case, I'd suggest considering "target date" funds - funds that are investing based on your expected retirement year, and become more conservative as you get closer to that year.

  • Note that if you want to be a bit more or less aggressive than the target date fund for your intended retirement year, you can always pick one that is targeted for a bit later or earlier, respectively. People sometimes forget they have those options. (I periodically think about switching my 401k to a target date fund. But I'm sorta balancing it against the rest of my investments, so... What I really should have done, quite some time ago, is put most of my non-401(k) investments into an IRA. Getting a bit late now. – keshlam Nov 15 '14 at 20:55
  • Target date funds have a pretty high expense ratio though. – Jack Marchetti Nov 15 '14 at 21:57
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    @JackMarchetti what do you consider to be "pretty high"? – littleadv Nov 15 '14 at 21:59
  • Target funds I can buy are 0.78% compared to 0.05 on the index fund which outperforms the target fund. – Jack Marchetti Nov 17 '14 at 1:26
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    @JackMarchetti that's surprisingly high. I was looking at VFORX for example - 0.18%, which considering the diversity and bond portion is pretty low. In any case, for a managed fund, ratio below 1.0% is decent. – littleadv Nov 17 '14 at 2:06
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Rebalance is across asset-classes which are mutually independent [like stocks and bonds; they may be inversely correlated at times as when stocks go down, bonds go up]

80%-20% (stock-bond) split is good for a young investor [say in 30s, some suggest 110-age as a good stock allocation percentage].

Here rebalance is done when say the asset-allocation(AA) strays away more than say 3 to 5% (again just a rule of thumb). E.g. if due to a recent run-up in stocks, AA could become 85%-15%. Then you sell stocks to buy bonds to make the AA 80%-20%

And since this method always sells the winner -- you automatically make gains [selling high and buying low]

S&P 500 index gives decent diversification within stocks; you want a total-bond-fund to take care of the bond side of your AA.

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