As the value of your investments increases or decreases, or your life changes, you may want to modify your initial asset allocation. In fact, there are several situations when that’s likely to be the case:
1.
As you get closer to retirement, you may want to shift some of your assets out of potentially volatile growth investments, such as stocks, into income-producing investments with more stable values.
2.
You may want to rebalance your plan in response to major life events that have an impact on your financial situation, such as getting married or divorced, having children, or changing jobs.
3.
If market performance increases or decreases the value of one asset class so that your actual portfolio allocation is significantly different from the allocation you selected, you may want to realign your holdings to get them back in balance.
How asset
values change
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.
