Author: Brian Kurrus, CFP®
As markets shift and personal goals evolve, it’s important to periodically review your investment allocation. A well-balanced portfolio today might not serve your needs tomorrow.
What is your investment allocation?
Your investment allocation — the mix of stocks, bonds, cash, and other investments — is the single biggest factor in determining both your risk exposure and your potential return. Before evaluating if you need to rebalance, you need to first understand how you are allocated.
Have you heard of an 80/20 or 60/40 portfolio? The first number represents the total percentage invested in stocks with the second representing the portion in bonds and cash.
Investment Allocation
100/0 – Aggressive
80/20 – Moderately Aggressive
60/40 – Moderate
40/60 – Moderately Conservative
20/80 – Conservative (or lower stock percentages)
Within TSP, the total percentage invested in the C, S and I funds represents the stock portion with the F and G funds representing the portion in bonds and cash. If investing in a Lifecycle fund, I recommend reviewing the underlying holdings to understand your overall allocation.
Next, evaluate what investment allocation you are most comfortable with based on your time horizon and risk tolerance. This is ideally completed through a risk tolerance questionnaire. With a longer time horizon and more aggressive risk tolerance one can invest more aggressively, a shorter time horizon and lower risk tolerance leads to a more conservative allocation.
How often should you rebalance?
I recommend reviewing your investment allocation quarterly and rebalancing when your portfolio has drifted 2-3% or more from the target allocation. Some quarters may call for rebalancing while others do not. You can also consider rebalancing at set dates or in response to life events.
Your target allocation may also change over time. It typically makes sense to consider reducing stock exposure as your time horizon shortens. Lifecycle funds follow this approach and reduce stock exposure as the target date approaches.
What else should be considered?
While evaluating total stock exposure is an important part of the equation, it’s not the only part. You should also consider your investment in U.S. stocks vs. international, large cap vs. small cap, etc.
The Lifecycle funds can provide a good baseline for these allocations, although I recommend reviewing the path each is on to reduce risk over time. You may prefer a more hands on approach to customize your allocation.
In summary, reviewing your investment allocation helps identify the total amount of risk you are taking for each investment account and your overall assets. By understanding your investment allocation, you can then evaluate if rebalancing is needed based on market movements or changes to your time horizon and risk tolerance.
Brian Kurrus, CFP® specializes in working with families and small business owners; his mission is to provide his clients with a diverse range of wealth management ideas and solutions. His specific areas of focus are estate conservation, business succession strategies, retirement funding, long-term care issues, life insurance, and disability income insurance. Brian has been an instructor for NITP since 2017.
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