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Maybe you’ve heeded the usual personal finance advice to avoid looking at your 401(k) balance during market volatility, and when stocks are slipping or headlines are screaming, you’re calm.
By and large, that attitude will serve you well. Over the last century or so, the S&P 500 Index has produced an average annual return of 11%.
However, there are points in an investor’s journey when it would actually serve them better to pull out their map and make tweaks to their plan, experts say.
That reassessment may be especially important after the long run-up in the market: The S&P 500 has had a cumulative return of more than 250% over the last 10 years, and during that time a $500,000 investment in the index would have grown to more than $2.3 million, according to an analysis by Morningstar Direct.
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“There are several instances when adjustments are warranted,” said Mark Mirsberger, CEO of Dana Investment Advisors in Waukesha, Wisconsin, which came in at No. 1 on CNBC’s FA 100 list in 2021.
If your short-term cash needs have changed, your allocation may need to, as well, Mirsberger said.
For example, perhaps you’re getting close to needing a down payment on a house, are expecting a major medical expense or have learned you’ll soon experience a reduction to your income.
In any such case, you may want to pull out the requisite money from your investment account and reallocate it to cash, Mirsberger said.
On the other hand, if you’re pushing back a goal, it can be time to amp up your stock exposure, said Nick Holeman, a certified financial planner and the head of financial planning at Betterment.
“If you were planning on retiring next year but have to delay that five years, your longer time horizon probably means you can afford to take slightly more risk in your retirement portfolio,” Holeman said.
Another reason to change your allocation is if your risk tolerance has changed, experts say.
If you’re obsessively checking your accounts or losing sleep at night, Mirsberger said, that may be a sign that you need to tilt your money away from equities and more toward bonds, certificates of deposits or even cash.
Just keeping your investment plan on track can require frequent amendments, said Allan Roth, CFP and founder of financial advisory firm Wealth Logic in Colorado Springs, Colorado. After a long bull market, many investors will find that stocks take up a larger share of their portfolio than they planned for.
“I believe in keeping a relatively constant asset allocation,” Roth said. “This means when stocks go up, one must sell to rebalance.”
“When stocks tank, one must buy,” he added.
At least once a year, investors should make sure their intended allocation is still intact, said Carolyn Wegemann, senior public relations manager at Vanguard.
If you find your desired allocation to any asset is off by five percentage points or more, “consider rebalancing,” Wegemann said.
After a couple of years of strong markets, some retirees may want to take a second look at their portfolios, said Alex Doll, CFP and president of Anfield Wealth Management in Cleveland, Ohio.
“We tend to be way ahead of where we planned on being,” Doll said. In some cases, he’ll reduce their stock as a result.
“This allows us to stay on track while de-risking the portfolio a bit,” he said.
