Ask the Adviser: When should I change my asset allocation? - Rodgers & Associates

Ask the Adviser: When should I change my asset allocation?

Q: When should I change my asset allocation?

A: Asset allocation is critical to weath­ering volatility in the stock and bond markets. But there’s not one “right” ratio of stocks to bonds: The ideal mix depends on your goals, risk tolerance, risk capacity, and time frame. Risk tolerance means how you feel about risk and investing, while risk capacity is your financial ability to take on risk and still accom­plish your goals. Your time frame is based on when you need access to your funds. Here are five questions to consider when deter­mining if you should change your asset allocation:

  1. Have you experi­enced a signif­icant life event? Retiring, switching jobs, losing a spouse, or receiving an inher­i­tance can all require changes to asset allocation. If any of these life events occur, consider whether you’ll need access to your funds sooner (or later) than origi­nally planned.
  2. Are you losing sleep worrying about your invest­ments? If so, you may need to reallocate your assets to better match your risk tolerance. Even if you have the financial capacity for more risk, a reduction in stocks may help you sleep better. Discuss your concerns with your adviser to under­stand how a change could impact your long-term goals.
  3. How much of your portfolio is invested in fixed income? Bonds can help reduce volatility in your portfolio. We use a five-year bond ladder with the goal of having bonds mature every year. This way, if the market is down, you can draw money from matured bonds—and keep your stocks invested. This strategy can help you weather a downturn in the market.
  4. Have you accom­plished your goals? If so, you may want to dial back the risk and reduce your stock exposure. Or, if your focus has shifted even further into the future—towards your long-term legacy—you may want to become more aggressive.
  5. Do you need to take more investing risk to reach your goals? Increasing the stock portion of your portfolio should increase the oppor­tunity for your portfolio to grow faster. However, you’ll likely experience more volatility.

The asset allocation of your portfolio is a key driver of perfor­mance and returns. Do you have the right mix of stocks and bonds in your portfolio? A financial adviser can help you assess your goals, risk tolerance, risk capacity, and time frame. At Rodgers & Associates, our mission is to help clients become finan­cially independent for retirement. We are here to help you stay the course when volatility comes and evaluate when (or if) a change is needed.