As an investor it’s important that you periodically rebalance your portfolio. This is the process by which you make sure your portfolio allocation stays in approximate alignment with your original diversification strategy. In other words, it’s a reevaluation of your investments to ensure they’re still meeting your financial goals. There are different ways to rebalance your portfolio, based on life events and personal needs.
For example, you can commit to rebalancing once or twice per year. With some investment platforms you also have the benefit of continuous rebalancing.
But if you don’t use any such methods, you should understand that there are specific life events that require investment rebalancing.
The occurrence of such milestones should provide the motivation for rebalancing your portfolio, even if you haven’t been religious about it in the past. What kind of life milestones and changes am I referring to?
Here are the main life events that require you to take inventory of your investments and rebalance your portfolio.
1. Getting Married
As a single person, it can be easy to ignore rebalancing, or your entire portfolio altogether. When you’re single and there’s no one else to worry about but you, it’s more tolerable. After all, if your portfolio suffers any consequences as a result of neglect, the only person who will suffer for it is you.
But once you get married, you are suddenly put in the position of being responsible for another person’s welfare. Making sure your investments are adequately balanced takes on greater importance. Not only do your financial goals have to line up, but your retirement needs as well.
Once you get married, make it a point to rebalance your portfolio so all of your allocations are propelling your life and financial goals forward.
2. Having a Child
The birth of a child is a real game changer in life. It’s not just that you are responsible for another human being who is completely dependent upon you, but it’s also a time factor. Once a baby is born, time has a way of getting away from you. That’s because babies demand an incredible amount of time and effort, which takes your focus away from other things in life (and rightly so).
It can be very easy to neglect your portfolio following the birth of a child. It may even be many months before you’re even remotely interested in your portfolio again. Sleepless nights, and experiencing the many changes that occur in a child in the months following birth can leave you with little time or energy for anything else.
You should want to rebalance your portfolio shortly before or after your baby is born, and then plan to do it at a set date in the future.
3. Preparing to Retire
Rebalancing can get complicated as you approach retirement. We’re talking about the last couple of years — or even months — leading up to retirement.
There are two potential issues that can get in the way of rebalancing:
- As you move into retirement, your asset allocation will likely change and probably become more conservative.
- If there is a bull market leading up to your retirement, you may decide to try to squeeze out as much growth in your portfolio as soon as possible just before retiring.
Either situation can make rebalancing a higher priority. For example, if a bull market is running up just before retirement, trying to enlarge your portfolio at the eleventh hour could run the risk of a sudden reversal in the market that could interfere with your retirement plans. Better to rebalance and be safe.
4. Losing a Job
This can be an absolutely critical time to rebalance your portfolio — even though it will hardly be the first thing that will come to your mind. But if you lose your job and with it your primary cash flow, liquidity in your portfolio will become more important than ever. That will mean you’ll want to make sure your bond allocation, and especially your cash allocation, are fully intact.
The loss of your primary income should be a signal to pull back on equity investments. After all, equities are higher-risk investment vehicles, and your situation will suddenly require a more conservative investment approach — at least until you find a new job and replace your income.
5. Going Through a Divorce
Divorce can affect virtually every area of your life, including your investments. Since divorces are usually protracted and often hostile, it can be very easy to neglect your investment portfolio during this time. This fact makes it doubly important that you rebalance your portfolio to ensure your allocations are where you want them to be.
Before finalizing the divorce process, you also need to separate out your assets from your ex-spouse’s and create a new financial plan for your life. While you’re putting your future back together and reevaluating everything, make sure you look at your portfolio too and make any necessary changes.
6. Periods of Extended Distraction
In truth, any time in your life where you’ll be distracted for an extended period of time should be a signal to rebalance your portfolio. The above five specific examples are more obvious distractions, but these life events can really take any form.
For example, if you go through a period of time in your life where you are dealing with a medical issue — or even simply trying to lose a significant amount of weight — you may find yourself distracted to the point where you simply have little interest or money to invest in your portfolio.
If you sense you’re in one of those periods of extended distraction, it will be very important for you to step back and keep an even closer eye on your portfolio. While you are busy putting out the fires of life, a new fire could be starting with your investments that you are completely unaware of, with your attention drawn in other directions.
Better yet, set up your portfolio to have either periodic or continuous rebalancing. That way you won’t have to worry about your portfolio at all, and you’ll have all the time you need to deal with your life events.
Readers: How often do you rebalance your portfolio? How do you deal with life events that distract you?