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Author: londo Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75787  
Subject: 401k Adjustments Date: 8/7/1997 9:29 PM
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Hi,

I know that it's a good idea to periodically take a look
at the relative performance of your 401k funds, and
adjust the percentages accordingly. Should the adjustment
to future investments and current balances be made to
match, or should you leave your current balance alone and
just adjust future investments? On the one hand, it would
seem prudent to adjust your balances to match your current
thinking. On the other hand, it seems that you would be negating the future gains of your original choices. I
hope I've made myself clear.

Londo
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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 169 of 75787
Subject: Re: 401k Adjustments Date: 8/8/1997 11:55 AM
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Greetings, Londo, and welcome to Fooldom.

<<I know that it's a good idea to periodically take a look at the relative performance of your 401k funds, and adjust the percentages accordingly. Should the adjustment
to future investments and current balances be made to match, or should you leave your current balance alone and just adjust future investments? On the one hand, it would
seem prudent to adjust your balances to match your current thinking. On the other hand, it seems that you would be negating the future gains of your original choices. I
hope I've made myself clear.>>

Well, I have to admit I'm not too sure what you're speaking about. But to me, it does sound a little like asset allocation. Say you've decided on a mix of bonds, stocks, and money market in which you want 70 percent of your money in stocks, 20 percent in bonds, and 10 percent in money market. You've also decided that in the interests of keeping trading costs down, you will let those percentages vary plus or minus fice percent from your ideal.

During one of your periodic reviews, you determine the new market value of your account is divided between 81% stocks, 10% bonds and 9% money market. In theory, you should rebalance your existing portfolio by selling stocks to bring them back to 70%, and buying bonds and money market to restore their ratios to 20% and 10% respectively. OTOH, suppose your review showed 74% stock, 18% bonds, and 8% money market. No asset is outside your tolerance of plus or minus 5%, so you would do nothing.

And if you liked the mix at 81% stocks, 10% bonds and 9% money market? Nothing says you can't let it ride or change your mind. It's all strictly up to you.

Regards.......Pixy

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Author: londo Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 170 of 75787
Subject: Re: 401k Adjustments Date: 8/8/1997 4:27 PM
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Thanks, Pixy, for the reply. Yes I'm talking about
asset allocation. Perhaps I can better explain what I
was getting at with a concrete example. To keep it
simple, suppose a mix of 80% stocks, 20% money market.
Naturally I would expect the value of the stocks
to grow faster. Say I start with $8000 and $2000.
Suppose the stock doubles, while the MM fund rises
10%. I now have $16000 and $2200. Adjusting back to
80-20, or roughly $14500 and $3700, seems kind of
self-defeating; the original strategy counts on the 80%
growing faster, and by putting some of those profits back into MM, you lose some of the compounding effects you
were hoping for all along. But of course by NOT making
the adjustment, you are in a potentially more precarious
position. Seems paradoxical, hence my confusion. Is that
any clearer? Many thanks for your thoughts,

Londo

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 171 of 75787
Subject: Re: 401k Adjustments Date: 8/8/1997 5:42 PM
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Yo, Londo.

<<To keep it simple, suppose a mix of 80% stocks, 20% money market.
Naturally I would expect the value of the stocks to grow faster. Say I start with $8000 and $2000. Suppose the stock doubles, while the MM fund rises 10%. I now have $16000 and $2200. Adjusting back to 80-20, or roughly $14500 and $3700, seems kind of self-defeating; the original strategy counts on the 80%
growing faster, and by putting some of those profits back into MM, you lose some of the compounding effects you were hoping for all along. But of course by NOT making the adjustment, you are in a potentially more precarious position. Seems paradoxical, hence my confusion. Is that any clearer? Many thanks for your thoughts,>>

Sure. I understand perfectly. But keep in mind that asset allocation is a method of investing with a system. Any methodogy, to be effective, should be applied unemotionally and with discipline. The object is to let the head rule, not the gut. This particular method operates with the understanding that the stock, bond, and money markets in theory don't move together. As one is up, another is down, and the third is somewhere in between. The method says you pick what percentage of your portfolio you want in these markets to achieve an acceptable average return on that portfolio. Over time, the market forces things out of alignment, so you have to sell one thing to buy another in order to restore the balance you're seeking and to maintain the average return you desire.

Right now stocks are high. Your gut and your emotions tell you it seems silly to sell while they've still got upward momentum. The asset allocation system, though, says no. Sell stocks now (while they're high) to buy money market or bonds (while they're low). In other words, you're being forced to take your profits and run. Additionally, you're being forced to take the somewhat lower average return the balanced portfolio provides. Some day stocks will fall. When they do, bonds and money market will in theory profit from that fall. At that time, you'll be forced to sell them at their high to buy stocks at their low, again cashing in gains to maintain the average return. The result of all this (again in theory) is you won't suffer violent swings in your average returns and your growth will be sure and steady.

That's the system in a nutshell, and to be of value to you, it should be followed consistently. Otherwise, why use it at all?

Regards........Pixy

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