Changes in the markets can make different
assets grow at different rates. Over time, the ones that
grow more quickly will make up a greater percentage of
your portfolio than you originally planned. For instance,
an asset class that initially made up 25% of your portfolio
might, at some point, increase to 40% while another asset
class may shrink from 25% to 10%.
For
example, investors who had lots of money in small technology
companies in 1998 watched the value of those investments
balloon in 1999 to a disproportionately large percentage
of their portfolios. But when these stocks plummeted in
2001, holdings in these small companies represented a substantially
smaller percentage of their portfolio. Provided your goals
and your risk tolerance haven't changed, having a lopsided
allocation can interfere with your plans for meeting your
financial goals. Without reallocating, you may find yourself
with a portfolio that has more risk or a smaller long-term
return than you're seeking.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates
Whenever your investment
goals change, you should review your asset allocation to
make sure it will continue to help you reach your financial
goals. For example, after you've been investing to help
make your down payment on a house, you may want to switch
your focus toward saving for college and retirement. You
should make sure your investments and allocation reflect
this change in goals.
For
example, investors who had lots of money in small technology
companies in 1998 watched the value of those investments
balloon in 1999 to a disproportionately large percentage
of their portfolios. But when these stocks plummeted in
2001, holdings in these small companies represented a substantially
smaller percentage of their portfolio. Provided your goals
and your risk tolerance haven't changed, having a lopsided
allocation can interfere with your plans for meeting your
financial goals. Without reallocating, you may find yourself
with a portfolio that has more risk or a smaller long-term
return than you're seeking.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates 