Does your asset allocation fit your current life situation?
They say you should diversify your assets. Turns out, "half of your money in a checking account and the other half in Venmo" doesn’t count. Diversifying your assets also known as your asset allocation is the mix of stocks, bonds, and cash in your investment portfolio. And it’s one of the key decisions you’ll make with your financial advisor.
Asset allocation matters because it impacts both the potential growth of your investments and how much risk you're taking on. But how does your advisor decide the right balance for you? Let’s take a look at how your risk tolerance plays a role and when your advisor might advise an adjustment to your portfolio.
Understanding Your Risk Tolerance
Managing risk means understanding how comfortable you are with the market's ups and downs. Some people are okay with their investments bouncing up and down, hoping for bigger gains in the long run. Others prefer a steadier, more predictable approach. Your advisor uses your risk tolerance, timeline to retirement, and cash flow needs to help decide how much of your money should be in stocks versus bonds.
Stocks offer the potential for higher returns but also come with more risk. If you're okay with some market fluctuations and are investing for a goal that's many years away (like retirement), your advisor may recommend a higher allocation to stocks.
Bonds, especially shorter-term bonds, are typically safer, with lower returns, but they can help keep your portfolio more stable. If you're more risk-averse or closer to a major life goal (like retiring in a few years), your advisor might suggest a higher bond allocation to help protect your money.
When to Reconsider Your Investment Mix
We regularly review your portfolio to ensure your stock-bond mix aligns with your needs and goals. Here are a few situations where your advisor might recommend your investments:
Big Life Changes: If something major happens—like a new job, marriage, or the birth of a child—your advisor may suggest changing your allocation to reflect new financial priorities or responsibilities.
Approaching Retirement: As you approach retirement, your advisor will likely recommend reducing your stock exposure and increasing your bond allocation to make your portfolio more stable and focused on protecting the wealth you’ve built.
Changing Risk Comfort: If your feelings about risk change—maybe you’re no longer comfortable with a more volatile portfolio, or you want to take on more risk for potential growth—we can adjust your investments accordingly.
Keeping in touch with your advisor can help your investments stay on track with your lifestyle and risk tolerance. We recommend checking in at least once a year to ensure that your investment mix stays aligned with your changing life and financial situation.