3 signs your investment portfolio needs a makeover
It would be great if we could choose our investments once, set up a contribution schedule, and come back in a few years to a fortune. But being that hands-off usually isn't practical. Your finances change, as do your goals and the companies whose stock you've invested in.
You need to update your investing strategy periodically to keep up with these changes. Here are three times you ought to give it a shot.
Changes to your finances affect how much you can afford to invest. A pay raise or an inheritance might allow you to set aside more every month, while a job loss or emergency expense could prohibit you from investing for awhile.
When something like this happens, you should rethink your contribution schedule. If you have more money than you did previously, you probably won't have to do much other than raise your contributions to your investment account.
Those with less money than they had previously will have to do a little more work. First, they'll have to decide how much, if anything, they can feasibly afford to invest. Then, they must either look for alternative ways to make up for the lost funds, like starting a side hustle, or reevaluate their plans.
If you're saving for retirement, for example, and you lose your job, you will likely have to push back your retirement date or plan to save even more per month once you secure a new job to keep yourself on track.
Changes to your family and household can also seriously affect your finances and your investment goals. Marriage requires couples to work together to prioritize their personal and family goals. Then, they have to decide how much money to devote to each one. But it can be a positive thing because many married couples can now count upon two incomes to help cover expenses rather than just one.
Divorce, on the other hand, usually complicates saving and investing because each ex-spouse needs to get used to saving for financial goals as an individual. Some might even have to give up some of their personal or retirement savings to a soon-to-be ex because of a court order.
The birth or death of a family member can also affect how much money is coming in or going out. Certain expenses, like college education and caregiving, are particularly draining.
In these situations, you need to step back and reevaluate what you have and where you want to go. Design a new budget and allocate a portion of this money for investing if you're able to. When necessary, rethink your timeline for long-term goals, like retirement, so you understand what you need to save.
When you first began investing, you probably decided what proportion of your money you wanted to invest in certain securities. But over time, these proportions can become skewed. As a simple example, let's say you have $10,000 to invest and you put $5,000 in stocks and $5,000 in bonds.
After a year, your stocks are worth 10% more, or about $5,500, but your bonds only grew by 6%, so they're worth $5,300. So out of $10,800 total, you have about 51% in stocks and 49% in bonds rather than the 50/50 split you had before. That small difference might not bother you, but over a few more years, it could grow larger.
The same thing can happen with your individual stocks. If one is performing exceptionally well, it will eventually become overweighted in your portfolio. This can become a problem if left unchecked. If that stock's price later falls, you'll lose more money than you would have if you'd rebalanced your portfolio to adhere to your desired asset allocation.
Some brokerage accounts have automatic rebalancing tools to help you keep your asset allocation where you want it to be. But you should still take a look at your portfolio at least once per year. Your risk tolerance changes over time, so you probably won't want the same asset allocation forever.
Checking in on your investments doesn't have to be arduous or time-consuming. Take a look once per year or whenever you experience a major financial or lifestyle change. Making some simple changes to your asset allocation or your monthly contributions shouldn't take long at all, and then you can forget about your investments again (for a little while).
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