A common question I get from my clients is, “When should I change my allocation?”
I’m often asked this right after a big milestone, like a birthday or retirement, but the answer is more nuanced than you might think. Choosing the right allocation is important in helping your investments to weather market downturns and continue meeting your goals. Like many financial planning decisions, the right answer depends on your unique goals, circumstances, and comfort with risk.
While birthdays, retirement, and other milestones often prompt investors to revisit their portfolios, these events alone do not determine whether a change is needed. Instead, I focus on a series of questions that help uncover whether an allocation still aligns with a client’s goals, risk profile, and long-term plan.
Finding the right mix of stocks and bonds is based on your individual risk tolerance, risk capacity, goals and time horizon. You need to weigh the amount of risk you’re willing to take (risk tolerance) and how much risk you’re able to stand (risk capacity) against the return you need to meet your goals within your desired timeframe.
No matter how long I’ve worked with a client, I find myself returning to these five foundational questions to determine whether an allocation adjustment is truly necessary:
- What are your personal goals, and can they be met with your current asset allocation?
If not, higher returns may justify higher risk. This can be achieved by increasing the stock portion of your allocation for the long-term. By doing this, you may experience more volatility, but it can also lead to bigger returns. It depends on whether you can ride out the highs and lows (which leads me to my next question). - Do you find yourself stressing over the market, or do market corrections leave you unfazed?
As an adviser, I enjoy hearing my clients’ travel stories and learning about their families but hearing that they are they are not stressed about their investments may be my favorite part.
If you tend to check your accounts daily and obsess over every market dip or correction, then it might be better to adjust your spending rather than take more risk and end up stressing over your accounts every day. - Have you experienced a significant life event?
Retiring, switching jobs, losing a spouse, or receiving an inheritance can all prompt a review of your asset allocation. These events do not automatically mean you should change your allocation, but they do signify a good time to talk with your adviser about what these life events could mean for your current plan. - Does your fixed income cover your needs if the market is down?
Another important consideration is whether you have sufficient stable assets available to fund your spending needs during market downturns. We use a five-year bond ladder that allows clients to have cash available throughout the year in the event the market is down. Oftentimes, clients have more than five years’ worth of cash needs in their bond ladder, allowing them to draw from matured bonds and weather a market downturn. - 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.
The asset allocation of your portfolio is a key driver of returns. But beyond helping our clients reach their retirement goals, our focus is ensuring they achieve true peace of mind with their retirement plans. Thinking through these five questions is a good way to assess where you’re at, what your needs are, and how we can meet them together.
If you have experienced a recent change or life event, our financial adviser team is here to help you determine what you should (or shouldn’t do) next.
This article was originally published on March 7, 2023, and was updated for accuracy and relevance on the date above.
