Being Overweight/Underweight in Certain Asset Classes Alters Your Risk Profile

Scott Kahan |

Article written by Scott M. Kahan in Stroll Chappaqua - March 2024 Magazine

With all the talk last year of the oncoming recession that never materialized, overall, most asset classes performed better than expected. So far, as of this writing, 2024 has gotten off to a good start. It will be tempting to focus on how well the markets performed. But it would be a safe bet that many investors need to consider rebalancing because they might now be overweight or underweight in certain asset classes – and therefore positioned in a way inconsistent with their risk tolerance and goals.

The reality is that the market moves all the time, and your investments should evolve with the changes.

It is important to rebalance your investments periodically to keep the desired allocations. In simple terms, rebalancing is reviewing and possibly changing your current mix of investments in your investment accounts.

Without rebalancing, some components of your investment assets can become too large (or too small) a part of your total portfolio, exposing you to more risk than you can afford. Below are a few steps that we can use as we evaluate whether you should rebalance.

Step One
Assemble all the information about all your accounts. This includes gathering statements from all your bank accounts, all retirement plans, all brokerage accounts, and other investment-related accounts. The key is to have a complete picture of your investment health so that you can ensure your investments are allocated in a way consistent with your risk tolerance.

Step Two
Next, break down your overall positioning into four categories – cash, bonds, stocks and other. (Real estate or other non-stock and non-bond investments will go into other). From there, break down stocks into U.S. Large Cap, Small Cap, and International. Add up each category of items separately and divide that amount by the overall total. This will give us your current ratio of how your assets are allocated.

Step Three
The right asset allocation depends on factors like your age, when college funds are needed, the number of years until retirement, your income, your savings, your debt, your health, and your housing status, to name a few. This is where financial planning comes in. Working with a Certified Financial Planner™ professional can assist you in determining your goals and what is needed to be successful. Once you know the appropriate asset
allocation, compare that to your current allocations and make needed changes.

Step Four
Repeat Steps 1-3. This should be done at least twice a year. You may not need to make changes but keep an eye on your allocations.

Final Thoughts
With the proper guidance, you can be on track to reach your goals and be ready for any roadblocks that come up. We offer a free consultation to discuss how we can assist you in this process.


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