Double Check Your Asset Allocation to maintain a Balanced Portfolio

If you take good care of your health, you understand the importance of scheduling an annual checkup for preventative health. The same concept holds true with investments: if you take good care of your portfolio, you understand the importance of checking to make sure your portfolio is balanced annually.

Buying and holding investments is the key to seeing a consistent return on investment. But even this strategy requires you to occasionally check in with your portfolio.

Investments that fit in the past may no longer suite your needs. Your goals, objectives and financial situation may have changed. You may want to make adjustments to your investment strategy as you move through your life. If you make regular contributions to your portfolio, as you should, your asset allocation might change due to the performance of different asset classes.   An annual checkup can help keep you on track.

If a financial advisor manages your portfolio, they should be monitoring your portfolio. However, ultimately it is your responsibility to monitor your investments. You should check in with your advisor on a regular basis. After all it is your money. If you manage your own portfolio, it is important to be aware of what classes of assets you own and how they may add value to your holdings and how both your objectives and markets conditions may change over time.

Balanced and Diversified

Every portfolio should contain holdings in different asset classes, such as stocks, bonds, real estate, mutual funds, etc. Your asset allocation, or the way that money is distributed over different types of investments, is a reflection of your investment strategy and depends on your specific goals and objectives.

For example, if you are young and setting aside long-term investments, you might consider putting more money into higher risk assets that may have a higher potential return. If you want to reduce the possibility of your investments losing value, you may want to invest your money in more conservative investments.

You need to check for balance within asset classes as well. You may want to consider purchasing assets in both domestic and international markets. You can diversify by purchasing stocks from different sectors or investing your assets into Mutual Funds or Exchange Traded Funds.

Over time, you will need to adjust your investment strategy and reconsider your portfolio holdings. Although it sounds like a daunting task, it comes down to three main steps:

Review Your Target Asset Allocation

What is your investment strategy? One investor may take an aggressive position and invest heavily in startup companies, while another might invest their money in more conservative investments. The first step to rebalancing your portfolio is redefining what your investment goals are and the best way to achieve them.

While there are many “quick” methods of calculating what your ideal mix of stocks, bonds, mutual funds, and other kinds of investments should be, the heart of your investment strategy lies in your relationship with risk. If you are not comfortable with the thought of losing money, you may want to keep a higher percentage of your money in more conservative investments. If you would rather take the chance of losing money for a higher return, you may want more money in stocks.

Your age may have an effect on how much risk you are will to take on. A young investor may be more attracted to the idea of risk because if they experience a loss, they have a longer time frame to recoup potential losses. As people get closer to retirement, they may want to avoid losing any money because they will need to begin drawing on it soon. Although not everyone feels the same in general the older you are, the less comfortable you may be with the idea of risk.

Look at Your Current Allocation

How are your assets currently allocated in your portfolio? If you keep all of your assets in one place, such as in your company-sponsored 401(k), it may be pretty easy to figure out your current asset allocation. In fact, that information can often be found on the dashboard of your portfolio account. But if your investments are spread out over different accounts, determining asset allocation is a little more difficult.

There are different tools online to help you with this task, but a simple spreadsheet can give you an overview of where your money is located.

Buy and Sell as Needed to Rebalance Portfolio

Once all of your investments are laid out, you can compare your current asset allocation to your ideal asset allocation. This often means you may have to buy and sell assets in order to rebalance your portfolio.

For example, a young investor is interested in taking on greater risk with the chance of higher returns, so he/she decides to allocate 80% of their money to stocks and 20% to bonds. His or her current portfolio has an asset allocation of 60% stocks and 40% bonds. In order to rebalance their portfolio along the guidelines of their new goals, they will need to sell 20% of their bond holdings and use that money to purchase stocks.

At the end of the day, it is a simple three-step process to bring balance to your portfolio. However, the number of moving parts in any given portfolio makes it easy to get confused and overlook things. An experienced financial advisor can help you decide which asset allocation works for you, determine your current allocation, and make recommendations for how to structure your portfolio.