October – Football is gearing up, the leaves are turning color, bonfires and pep rallies abound.
October is also the month when the stock market has had some of its biggest swings, unfortunately most frequently in the downward direction. It is the beginning of the 4th quarter for many businesses; it is a good time to mark an assessment of your personal portfolio of investments as well.
While we cannot stop the inexorable march of time and its impact on our investments, we do have a golden opportunity to rebalance the asset allocation that may have shifted over the course of the year. It is the perfect time to rebalance your portfolio.
Shifting Sands
When you (or you and your financial advisor) originally defined your investment strategy, you evaluated different asset classes, from cash or cash equivalents, to small, mid and large cap, growth or value, international or domestic, etc. The percentage of your investment that was allocated to each of the asset classifications represented your original asset allocation.
Over time, each of the classifications and the individual instruments within that classification shifts in terms of relative percentage, based on performance of that investment. For investments that are on the upswing, they would now garner a larger percentage of your portfolio. Even though you have not changed investments, your portfolio would no longer be allocated according to your original strategy.
Risk vs. Reward
One of the factors that your advisor took into account in defining the relative percentage of assets by classification was your risk tolerance. Some of us approach investing like a trip to Vegas; others of us are hyper cautious and invest akin to stuffing our mattresses with our money rather than trust the market.
While most financial advisors are likely to balance the risk of the investment with other factors, such as your time horizon for use of the funds, when they create your strategy, risk may creep in unbeknownst to you. For example, that latest high tech stock may be going gangbusters but it also increases the risk of your portfolio. Stocks are inherently riskier than some other asset classes.
Correspondingly, the tech bubbles (s) that have demonstrated the cyclicality of market swings may incent you to reduce your investment in stocks. This could result in an asset allocation that is much more conservative than you originally planned. While your risk exposure is certainly less in this scenario, so is your expectation of future gains.
Balancing Act
Keeping the strategy in place and being true to your investment objectives involves an annual review and rebalance. You can do this one of two ways: 1) restore you asset allocation strategy by shifting new contributions to your portfolio to invest in the underrepresented classification; or 2) sell some of the investments that have created the unbalance and buy investments in the underweighted class (es).
One word of caution, however, resist the urge to micromanage your portfolio, churning your assets to chase the latest high return. More than likely that high return may have already topped out at its zenith. Rebalance yes, once or twice a year. Consider October as a good month to get you in position for the end of the year.
