Do you regularly assess your investment portfolio on your own or with the aid of a financial advisor? Would you be aware of any of the signs you should change your asset allocation strategy?
The problem is that many Americans are invested in the stock market or own any personal investment. And of the number that does, many have no idea what they are doing.
A fourth of Americans with investment portfolios are clueless about whether or not they are diversified. Almost 43% of Americans have no ideas what investments they hold because they were chosen by a financial advisor, Robo-advisor, or are tied into a retirement account.
But one thing you should also consider is how your assets are allocated in your financial portfolio. Some investments and assets are riskier than others, so it is important to balance and rebalance your asset allocation strategy as often as needed.
How often you do this is up to you. If you assess your personal budget weekly or monthly, then you should take the time to look over your asset allocation strategy just as often. There is no one-size-fits-all approach when it comes to personal finance.
The longer that you are unaware of your portfolio performance, the longer you are playing Russian Roulette with your finances.
Here are four signs you should change your asset allocation strategy.
The 5% Value Vigilance Rule
One of the strongest signs you should change your asset allocation strategy is witnessing a value shift in one or multiple assets in the portfolio.
As we already discussed, a good asset diversification strategy in a financial portfolio is predicated on not having all of your eggs in one basket. But this is not a one-size-fits-all kind of financial advice.
You must develop a base financial policy mix of assets according to your preferences that reflect a personal expectation of return for each asset. And you also need to consider your overall risk tolerances for each asset as well when diversifying a financial portfolio.
Also previously mentioned; you should never invest in a financial portfolio and then forget about it. You should assess your financial portfolio regularly to see how they are performing and if any assets require rebalancing relative to your risk preferences. And you should set targets or goals for your assets and rebalance accordingly as well.
Watch if any of your assets increase or decrease in value by a margin of 5% or more. Then you will know what to buy more or less of relative to each asset as you rebalance.
How Has Your Personal Life Changed?
Another one of the surest signs you should change your asset allocation strategy is when experiencing any major life changes.
Think about it; anytime that your life, employment status, or familial status changes, then your financial needs, ambitions, and investment goals will change accordingly as well.
After you lose a job, change jobs, or get a promotion, you need to adjust your taxes accordingly. Or you may have to access personal savings accounts to cope with an employment upheaval.
Your entire life, especially your financial status, changes appreciably when you get married or divorced. When you have a child, you may need to open new bank accounts, think about future health and education costs, and so on.
Are you moving to a new city? Did you buy a bigger house or downsize completely? Making such decisions will dramatically affect your life and finances.
If you have or will soon experience any major life changes or upheavals, then it behooves you to rebalance or even reset the asset relocation strategy in your financial portfolio.
Are You Nearing Retirement?
Another of the most important signs you should change your asset allocation strategy is the implementation of a retirement plan.
The average American retires at age 62. However, over 77% of Americans don’t have enough money to feasibly fund their retirement plans. Over 50% of Americans are literally forced into retirement.
And the average retiree needs at least $45,000 annually to live in a moderately sized city and pay their expenses.
The average person is living much longer today due to numerous advances in medical technology. Still, the longer that you live, the more likely you will need advanced medical care and treatment. The human body breaks down as we age, no matter how healthy you are.
The typical retired couple will need to spend at least $300,000 on their medical care needs throughout the entirety of their retirement.
Personal finances can be abruptly changed or disrupted during retirement as retirees qualify for Social Security. Or if they start receiving their pension or 401(k).
Retirement changes everything and there is no reason to believe that one’s finances or investments would remain unaffected.
So, if you are nearing retirement, it would be a good time to assess how you should change your asset allocation strategy.
Adjusting Your Investment Risk Tolerances
Financial markets don’t stand still. Stock and investment valuations change all of the time. Due to a war initiated in Ukraine by Russia, the price of everything from fuel to food is steadily rising.
The only thing that you can count on in life besides death and taxes is change. And investment risk changes are one of the biggest signs you should change your asset allocation strategy.
Your investment risk preferences relative to your financial portfolio are going to change because of time and circumstance. And they are really going to change if you neglect to check in on your portfolio from time to time.
Your time horizons, or time-based goals to realize particular returns for particular stocks, can change irregularly. Make sure you assess your portfolio regularly.
And this strategy goes beyond the 5% rule; some of your investments may become far riskier than others. Some of your investments may no longer be financially beneficial to your needs.
Or some of your investments may require further investment augmentation. So, assess your preferred investment risks and time horizons accordingly.
Signs You Should Change Your Asset Allocation Strategy
The signs you should change your asset allocation strategy is signature to your needs.
Assess your investment on a regular schedule. A Robo-advisor or a financial advisor could give you updates on your investments on a preferred schedule.
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Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.
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