I’m a big fan of investing. I get excited when I invest more money into the stock market and I get excited when I complete my net worth every month to see how I’ve bettered my financial situation. I even make it a point to sit down every quarter and total up all of my investments and complete an asset allocation, just to make sure I am where I want to be.
Why do I do this? Because over the long run, it helps me to make sure I am on target to reach my goals.
If you aren’t running an asset allocation review on your investments, you are putting yourself at great risk. In this post, I’ll review why you need to review your asset allocation and provide some tips to make changes to your asset allocation models.
The Importance Of Reviewing Your Asset Allocation
When you first set out investing, you should create an investment plan and then determine where you are going to invest your money and what percentage of your money will be in stocks versus bonds. Sadly, many investors ignore this step when investing.
This is a problem because you may be taking on too much or too little risk for you goals. Take the last 5 years as an example. The stock market has been crushing it and the bond market has been just steadily moving about.
If you started with a portfolio of 80% stocks and 20% bonds, you might now be closer to 90% stocks and 10% bonds.
This is not good because you may be taking on too much risk. If the stock market crumbles, you will lose more money because you have more allocated to stocks than you are comfortable with. This increases the chance that when you start losing money, you will let fear take over and sell out of the market entirely.
Of course, there is a flip side to this as well. Let’s say the market does crumble and you are left with a 60% stock and 40% bond portfolio. This too is not good because you might not earn the return you need to enjoy a comfortable retirement.
After all, bonds usually return less than stocks. So if you were banking on an annual return of 8% with your 80% stock, 20% bond asset allocation model, you are now looking at maybe a 5-6% return with a 60% stock, 40% bond asset allocation model.
The lower return doesn’t seem like much, but it makes a huge difference in the long run.
As you can see, with an 8% annual return over 35 years, you end up with over $70,000. But earn just 5% annually over that same period and you end up with less than $30,000. That’s a difference of more than $40,000!
Review Your Asset Allocation
You don’t have to be as picky as me when it comes to reviewing your asset allocation. Quarterly is excessive. I just love doing it. You should do it annually. In fact, now is a great time to check. Here are the steps for you figure out your asset allocation: