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October's Market Highs Got You Spooked?

However, the current ultra-low interest rate environment presents a little twist on which asset classes to involve in rebalancing. Since a bond's value varies inversely with its interest rate, any inevitable increase in bond interest rates will invariably decrease the value of bond holdings.

So in our current low-interest-rate environment, proceeds from stock sales placed in bonds may not hold much promise for appreciation. Therefore, a modified form of rebalancing would call for placing the proceeds of stock sales in cash, rather than bonds, so as to preserve value.

With limited prospects for generating any significant increase in value through interest, cash becomes more of a placeholder, ready to be used to buy stocks when natural market volatility eventually brings prices back down. Then the buy-low-and-sell high premise behind rebalancing becomes more about getting into and out of stocks at the right times to set up and capture gains from stock market volatility.

Because taxes and trading costs generally cut into any gains brought about by rebalancing, many individual investors shy away from periodic portfolio rebalancing more frequently than annually. Yet this type of rebalancing on an even more frequent basis -- even daily -- becomes quite effective in producing lasting gains in retirement accounts, where transfers between funds do not trigger immediate taxes or direct trading costs.

Such is the concept behind 401(k) daytrading which, if done the right way to satisfy funds' frequent trading restrictions, will garner lasting gains in retirement savings.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Richard Schmitt is an actuary, adjunct professor at Golden Gate University, and author of 401(k) Day Trading: The Art of Cashing in on a Shaky Market in Minutes a Day.
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