Is Your Investment Allocation Right?
Here’s an interesting thought experiment from Carl Richards over on the NY Times “Bucks” blog…
Imagine that your investment portfolio somehow got liquidated overnight, such that when you wake up your holding are 100% in cash. If you were give the opportunity to buy back into the market at no cost, would you re-create the same portfolio that you’re currently holding?
If so, great. But if not, then why aren’t you already making changes? Perhaps your portfolio is too risky, or maybe it’s not risky enough. If that’s the case, then you should be taking steps to correct your allocation.
Sure, there are costs associated with re-configuring your portfolio. But there are ways of minimizing these costs. And there are also potentially huge costs association with hold the wrong mix of investments.
I would argue that a big reason that people don’t make changes is inertia, and Richards agrees. It takes time and effort to evaluate your goals and determine whether or not your portfolio fits your needs. It’s far easier to ignore your portfolio than it is to re-evaluate it.
But just because it’s easier to maintain the status quo doesn’t mean that’s the right decision. Do yourself a favor and take some time to reconsider your options. Sure, you may find that you’ve already dialed in the perfect solution. Then again, maybe not.
Source: NY Times Bucks via MyMoneyBlog
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Modified on February 6th, 2012 - 4 Comments
Filed under: Saving & Investing
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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February 4th, 2012 at 12:17 pm
Great to see this post. Coincidentally, I just rebalanced our portfolio last night, as I always do this time of year. Since I used the same template every year, the whole process took less than half an hour this year. A lot less work than I was anticipating, and I have the peace of mind of knowing that I have the correct asset allocation that we want.
February 5th, 2012 at 12:05 am
Perhaps another reason that people do not reallocate is the fact that their financial adviser has steered them to funds for which they are most highly compensated. Although the fund choices inside my company’s 401k are definitely less than optimal with high expense ratios, the platform allows for an extremely easy auto-rebalance.
February 8th, 2012 at 2:37 pm
Rebalancing is still ‘timing the market’ — because your choice on when to rebalance (like now) is being done when the NASDAQ has just hit its 11-year high.
So, how do you avoid the ‘timing the market’ problem? When you purchase (like on payday) you can try only buying investments that brings your portfolio more into balance. Since there is no ’sell’ being done, you can do this every time you contribute to your retirement with no tax consequence or 401k administrators getting mad at you.
This is tedious though, as you need to manually figure out how much of what to purchase many times a year — the next best thing is to just use the automatic rebalance feature in most 401k plans (use automatic quarterly or yearly rebalancing) as Sterling said.
Or, just put 100% of your investments into a (good) Target Date Retirement fund (preferably of the Vanguard variety), and not have to worry about balancing.
February 9th, 2012 at 7:37 pm
I would keep my current dividend investment portfolio exactly the same, but I have a random trading account that I would get rid. I don’t know if it is inertia as much as there is no real need, the companies are eh, and I have an ok profit on some and underwater on others.