How Often Should You Adjust Your Investment Portfolio?

Whether you did it yourself, consulted an advisor, or used your company’s 401(k) online planning tool, you had to answer some basic questions, including: what’s your risk tolerance? 

Do you remember your answer? 

Most of us invest for the long-term. We save to prepare for life’s big-ticket items, such as buying a home, starting a family, paying for college, and securing our retirement. While those priorities aren’t likely to change, our tolerance for risk probably will. 

So, whether you remember your answer or not, it makes sense for you to revisit your risk tolerance and adjust your investments accordingly. But how often should you do that? 

As with most financial questions, there’s no clear-cut answer. However, there are some guidelines to help you make the best choices for your situation. 

What does it mean to balance your portfolio? 

A portfolio’s ratio of stocks to bonds is directly related to risk and reward: the higher the percentage of stocks you hold, the more risk you take on in order to increase your chances for higher returns. Over time, the stock market will probably outperform the yield on bonds, but not without some fluctuations along the way. 

Generally speaking, younger investors are willing to take on more risk. While there’s no standard rule of thumb, a mix of 80% stocks and 20% bonds is aggressive, but not overly so. With time on their side, a younger investor can feel confident that the rewards of stocks outweigh their risks. 

But for someone close to retirement, that same 80/20 mix may be too risky. If there’s a downturn in the market, there may not be time to rebound, especially as the investor will be drawing down that portfolio when they retire. In that case, a ratio closer to 60/40 would more closely align with the investor’s risk tolerance. 

Takeaway #1: 

It’s logical to assume less risk as you get older. 

But the question remains, how — and when — should you adjust your portfolio? 

Sell high and buy low or play the hot hand? 

Suppose you have a portfolio with 80% stocks and 20% bonds. And let’s say that one of your stocks is doing so well that your ratio is now 85% stocks and 15% bonds. Should you reassess your position? 

If you want to maintain your original ratio — and don’t forget, those aren’t just numbers, they reflect your risk tolerance — the answer is yes. The conventional wisdom on how you do that may surprise you: sell your high performing stock and put that money into bonds to get back to your 80/20 balance. Yes, you read correctly: sell what’s making you money and buy more of what isn’t. 

There's a solid rationale behind this strategy. If that one stock represents too much of your portfolio, you’re putting yourself at risk if the price plummets — the “too-many-eggs-in-one-basket” problem. This tactic also forces you to practice the “sell high, buy low” philosophy that many of us agree with but few of us follow. That high-performing stock is going to peak at some point, it’s just a matter of when. 

This is a different way to think about risk and reward. What would make you feel worse: selling a stock that continues to perform well, or holding onto a stock that starts to drop? 

Takeaway #2: 

The gains you make with your investments are literally money in the bank. Focus on that and not on what could have been. 

Practice oversight, not micromanagement 

Like being a good parent or a successful boss, avoid micromanagement when it comes to your investments. Even in the best of times, financial markets fluctuate. Events will occur that you have no control over, from pandemics to political upheavals. Unless your livelihood depends solely on the stock market, don’t pay too much attention to the short-term bumps in the road. 

A smarter approach is to monitor significant changes in your own life. If you win the lottery, you should definitely take a hard look at your asset allocation. The same holds true for more realistic occurrences such as a change in marital status, an unexpected inheritance, or a sudden change in your health. 

You can also take solace in a Vanguard study of stock and bond performance since 1926. While it’s true that stocks historically outperform bonds, allocation shifts don’t make that big of a difference in the long run. For example, a 60% stock/40% bond allocation during that period yielded an 8.6% average annual return, while an 80%/20% split yielded 9.4% — not significant enough to keep you up at night. 

Remember it’s a marathon, not a sprint 

While we all want to get the most from our investments, we’re better off taking the long view. Riding a rollercoaster can be thrilling, but it’s not without cost and it’s certainly not for everyone. 

It’s fine to set up a regular schedule to review your portfolio. Most financial advisors meet with their clients at least annually. You can go over your position, ask questions, and discuss your options. If your portfolio’s balance shifts 5% or more, that’s a signal to take a look at your allocations, but you may or may not decide to do anything about it. 

Don’t worry about quick wins or big payoffs. Instead, enjoy the peace of mind that investing in your future brings. 

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