5 reasons to consider changing your asset allocation

Any financial planner or investment adviser will tell you that your asset allocation – the proportion of your money you invest in stocks, bonds and other instruments – is one of the most crucial decisions you need to make in order to ‘make your money work for you’. It is true that asset allocation needs to be done carefully keeping in mind factors such as your risk profile and financial goals. But what do you do when these factors themselves change over a period of time– your tolerance for risk lowers as you grow old, financial goals change as you get married and have a family or your income levels change?

Stated below are the top 5 reasons why you should consider changing your asset allocation:

  1. Career change or retirement

Often, when you decide to be self-employed or you near retirement, your income and risk profile changes and you need to revamp your portfolio and direct it towards more appropriate channels of income generation and risk tolerance. Appropriate asset allocation strategies need to be followed in each stage of life’s journey.

  1. Change in risk tolerance levels

A sudden loss of income due to a layoff will affect your financial goals and security and thus also change your risk and liquidity profile. In such cases, portfolio management becomes critical as your capacity to take on risk in your investments can go down substantially. On the other hand, a promotion and salary increment in your job will allow you to buy certain items or make certain additional investments based on your financial goals. Thus, analysing your portfolio and performing course correction to get optimal returns from investments is important.

  1. Sudden windfall gains

Situations may arise when you encounter certain unexpected windfall gains which can help you meet the needs as per your financial goals. Thus, the need-based wealth may be invested as per the current risk profile and the additional surplus windfall can be invested in a more aggressive profile for future generations. It may also be parked in risk-free assets for acute emergencies.

  1. Non-performing investments

Sometimes, certain investments may not perform or underperform with respect to expectations or their benchmark returns, despite holding them for an appropriate time period. In such cases, it is better to perform immediate course correction and reduce your losses instead of waiting around for the investment to rebound over a longer time period.

  1. Financial goals

In goal-based investing, as you near your targeted financial goal, it becomes important to rebalance your portfolio by securing your gains and allocating the rest of the wealth in more less-risky investments. This will ensure that your money remains invested and continues to work for you even after you have achieved your financial goal successfully.

Human psychology is attuned to adopting and following fixed methodologies and when it comes to investment portfolios, most of us tend to follow the ‘set it and forget it’ portfolio construction strategy without performing any changes. While this may work for some time, eventually course corrections at various stages in one’s life are required as in the long run we can encounter any number of unexpected twists and turns. It is better to ‘be prepared’!

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