Why Do Allocations Change?

Good question and one asked frequently by experts and clients alike.  When should asset allocations change in a portfolio?  The when, why and how of allocation changes should be as transparent as indexing itself, and it is.

When Life Changes

Although it can be tempting to tinker with asset allocations to try to outsmart the markets, there are really only two reasons to make changes. The first and most important reason is a significant change in your personal life. Examples include:

• Sale of the company
• Marriage or divorce
• Births and deaths
• Kids headed to college
• Retirement
• Major health events
• Making a big real estate transaction
• Revising wills/trusts to pass money to next generations

There are certainly other reasons.  What they all share is that they are tied to your long-term personal and financial goals, and your tolerance for risk. These examples reinforce my belief that goal-based asset management is the center point of one’s investment strategy and should anticipate and incorporate the normal changes that families go through over time.

When Markets Change

The second reason to make a change is really to keep things unchanged. When different asset classes rise or fall at different rates the overall asset allocation of your portfolio may get significantly off target. Rebalancing brings allocations back in line with your goals. A dramatic example, and opportunity, was the stock market crash of 2008. It might have been painful, but those who kept their allocations balanced by buying more stock and selling bonds in 2008 were amply rewarded in the following years, as stocks plunged but then soared from the depths.

Most rebalancing over time is not so dramatic but does require attention and adjustment.  In our experience, portfolio changes run 5-15% percent per year.  Note that transactions for rebalancing need not trigger taxation as there are often losses in a portfolio that can and should be used to offset gains.  Attention to detail is important.

Small Changes, Big Impact

It might be tempting to “set it and forget it” when it comes to allocation but over time that can result in a portfolio that has little connection to your financial reality and plans. Keeping your allocation finely tuned is essential. So what’s an appropriate asset allocation? Some investment advisors base allocations on rules of thumb that may or may not have anything to do with your own situation or goals. At Osbon Capital, we calculate.

For any individual, there is a compound rate of return that allows one to go from A to B over time, while doing things like providing income, funding retirement, paying for college, allowing peace of mind, and many others. Think of it as your safe and sound number. Ask us and we can walk you through our methodology.