When first setting up your portfolio with a financial professional, you would typically consider your risk tolerance, time horizon, and your overall goals to decide which investments are right for you. In an ideal world, you could “set it and forget it”: your portfolio would continue to perform exactly the way you wanted it; however, it is possible for asset allocations to shift due to factors such as overall market performance or inflation.
For example, you may start out with a 60/40 allocation between stocks and bonds but, over time, see a gradual shift due to the price changes of individual investments. That may mean that instead of 60/40, your portfolio is 70/30 stocks and bonds, which may not align with your desired tolerance risk. When that happens, it’s time to review and rebalance your portfolio.
When Should You Rebalance Your Portfolio?
Even if your asset allocation has not changed, it’s still a good idea to review your portfolio 1-2 times per year. These factors may influence how you want to allocate assets:
Has your risk tolerance changed? Risk tolerance falls into three general categories: Conservative, moderate, and aggressive. How “risk-averse” someone is depends on their personal financial situation, but someone who is in their 20s may be more aggressive with their investments than someone who is nearing retirement.
Have your goals changed? Any time your financial goals have changed due to lifestyle factors, you should revisit your portfolio allocation and make sure your investments are still working for you at that stage of your life.
Has your time horizon changed? Time horizons can be short, medium, or long-term. If you’re looking to buy or invest in real estate, for example, that might be a short time horizon - but it affects your overall investment strategy. When your time horizons have changed, it’s a good idea to discuss with your financial advisor how this will affect your portfolio.
Is inflation or market volatility affecting your investments? Inflation can affect your investments by eroding potential gains. Market volatility is a common concern for investors, but asset diversification and sticking to your long-term goals can help. If you’re having trouble with your investments during prolonged periods of inflation or market volatility, reach out to your financial advisor for assistance.
How Do You Rebalance Your Portfolio?
Typically, you can rebalance your portfolio by selling and buying portions of your portfolio, or you add additional funds to keep your portfolio in your preferred alignment. Before you make any financial decisions that will affect your asset allocation, you should discuss your options with your financial and tax professionals to ensure you won’t accidentally cause any tax headaches for yourself.
Rebalance your portfolio with Chatterton & Associates
If you are concerned that your asset allocation may be shifting or if any of your financial goals, time horizons, or risk tolerances have changed, we’re happy to review your portfolio and discuss your rebalancing options with you. We will help you evaluate strategies that can work for your current financial and tax situation as well as your future.