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By Steve Lowrie
Special to the Financial Independence Hub
2018 was a tough year for many investments: including equities, which delivered negative returns.” As we covered here, periodic negative returns are nothing new. But it’s been a while since they’ve lined up with a calendar year: not since 2011 here in Canada.
I suppose it’s human nature to want to try to avoid the dive by heading for higher ground. So, when markets trend down, this FAQ heats up: Is it time to change my asset allocation?
In past posts, like this one here at the Hub, I’ve generally advised sticking with your investment plans, including your asset allocation, rather than reacting to market volatility. But that doesn’t mean you can’t ever change your asset allocation. Today, let’s cover three times you may want to.
1.) If you’ve built your portfolio on shaky ground
If your current “allocation” is actually just a random assortment of investments, there’s never a bad time to establish an underlying plan to guide the way, and to alter your allocations accordingly. Especially if your current portfolio is high-priced and premised on active management (trying to dodge in and out of winning/losing markets or securities), the sooner you can transition into a solidly built portfolio, the better. In this piece, I covered how to determine and document your asset allocation with an Investment Policy Statement.
2.) If your financial circumstances have changed
What if you receive a financial windfall such as an inheritance, or you encounter a hardship such as losing your job? If your financial “landscape” changes, it makes sense to revisit your asset allocation and adjust it if needed, to reflect any changes in your personal financial goals, and any increased or decreased capacity to take on investment risks.
3.) If your life has changed
Even if your financial circumstances haven’t changed, your life may. Marriage, divorce or widowhood; the birth of a child; a career change or retirement. These are the sorts of events that might call for a fresh look at whether your current asset allocations continue to reflect your evolving needs.
You may have noticed a theme here: If particulars in your own life change, it can make good sense to alter your asset allocation to reflect your revised circumstances.
The flip side of this coin holds true too: Avoid changing your asset allocation just because the markets are heading up, down or sideways.
So, if your annual performance reports had you seeing red at year-end, please ask yourself: Has anything in your own life changed, or are you reacting to market mood swings? If you’ve built a plan and it still reflects your goals, your best bet is to stick with it. That still doesn’t guarantee success, but it still gives you your greatest odds.
Steve Lowrie holds the CFA designation and has 25 years of experience dealing with individual investors. Before creating Lowrie Financial in 2009, he worked at various Bay Street brokerage firms both as an advisor and in management. “I help investors ignore the Wall and Bay Street hype and hysteria, and focus on what’s best for themselves.” This blog originally appeared on his site on Dec. 1, 2018 and is republished here with permission.
