You’ve gone through a financial planning process, and you’ve looked at your assets, debts, income streams, and future goals. Now it’s time to work on your asset allocation, which is the process of dividing your investment portfolio among different asset categories, such as stocks, bonds and cash.
Asset allocation should aim to help you meet your goals, whether that is to create future income or use your assets now. It involves looking at two important factors, your risk tolerance and your time horizon.
Over time, some assets will perform better than others. You will want to make sure that your assets only expose you to as much risk as makes sense given your goals. You will want to balance and rebalance your portfolio based on your overall financial picture, tax picture, and portfolio value.
Cash Gives You Flexibility
Where you are in your financial journey generally dictates how much of your portfolio you should keep in cash. When you are younger or still working, you need less cash on hand as your risk tolerance is higher because your time horizon is longer. If you are working your income needs are generally met by your income, and it makes sense to be more focused on growing your assets.
However as you near or enter retirement, your cash holdings usually increase. This is because you are now living off of your portfolio, and you need it to carry less risk so that your living income is guaranteed. This helps reduce risk because you don’t want to sell investments that are at lower levels during a market downturn to make ends meet.
As you rebalance your portfolio, you’ll want to assess whether you have enough cash to cover fixed expenses that are on the horizon. If you know you’ll have increased expenses in the short or medium term, you may want to add more holdings in cash so you can ensure you can cover those expenses.
How Often Should You Rebalance?
Many people look at their portfolios quarterly or semi-annually, and you should make sure you are looking at your portfolio at least annually.
Alternatively, you can use benchmarking as a tool and decide how far you are willing to drift from your benchmark before taking action. If you do this, make sure you decide what percentage above or below your benchmarked will trigger a portfolio review.
Ultimately, the schedule of your review matters less than actually doing it. Making a portfolio review a regular part of your year is one of the best things you can do to ensure your portfolio stays on track for your goals.
Market volatility isn’t usually a reason on its own to rebalance your portfolio. Your allocation should be set for long-term investing, and you’ll want a plan that can withstand market ups and downs to allow the market to recover.
Rebalancing is Necessary
Taking the time, at minimum annually, to rebalance your portfolio is an important way to keep on track to meet your financial goals. You need to keep your investments working for you, not against you, and rebalancing your portfolio to meet your goals is a great step in that direction. If you need help getting started with making sure your portfolio is balanced, get in touch with me! https://aligningwealth.com/contact
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