At the beginning of any conversation about investments, we like to note that there’s no such thing as a one-size-fits-all asset allocation, nor any magic numbers of how much or how little you should have invested at any point in time.
That being said, a basic asset allocation guideline is to take your current age and subtract 100. This tells you the percentage of your investment that should be in stocks. So, if you’re 30, you should aim 70% of your portfolio into stocks, whereas a 70-year-old may want only 30% in stocks. (Because people are living longer and it’s likely you’ll need to make your money last longer, however, it might make sense to subtract 110 or 120 from your age instead.)
But is there a magic number of how many times you should review your investments once you’ve made them, you ask? Yes. For most investors, the answer is no more than twice per year.
There are a variety of reasons, but the biggest is loss aversion. We, as humans, hate to lose. We hate losing more than we enjoy winning, as a matter of fact, and so the volatility of the daily market makes checking your investments more frequently dangerous to both your mental and financial health.
Why? Because seeing a loss in your portfolio might cause you to make the knee-jerk reaction of selling stock to avoid the “pain” of losing money. Most of us aren’t experts, however, and the consequence of selling stocks because they dropped is rarely averting loss – typically, selling stocks because they dropped only solidifies a loss. It’s easier to avoid the emotional roller coaster by creating firm rules for when to make changes and when to leave things alone. (Avoid these other investment mistakes, too.)
What to Do Every Year
With an annual or bi-annual review, you can determine if your investment mix still makes sense for your age and possibly sell the investments that have grown to the point of throwing your allocation out of alignment. Then, reinvest those funds to bring your investment mix back where you want it.
Also, don’t worry about perfect allocation. A CFA Institute study found that rebalancing is only necessary if your asset allocation is more than 5% off its mark. In other words, if your target allocation is 60% stocks and 40% bonds, you don’t need to rebalance until you get to 66% stocks and 34% bonds.
Scheduled rebalancing will help you follow the most often given – and most often ignored – advice of “buy low and sell high.”
Are you getting ready to retire? Confused about investing? Need someone to point you down the right path, money-wise? Contact Holdfast Wealth today – we can help.