Even in the most casual of workplaces, managers review their employees annually. And for good reason: Employers compensate employees for performing well, and employees need to know how well their supervisors think they’re doing and whether they’re on track to meet their career goals.
Similarly, your investment portfolio requires regular reviews too. You need to supervise it, just as your manager supervises you, to make sure its on track and working to meet your goals.
You need to analyze your portfolio periodically because market and economic movements may cause your initial allocations to change.
The other factors that are likely to change over time are your financial inflows and outflows, future needs and risk tolerance.
If these things change, you may need to adjust your portfolio accordingly. If your risk tolerance has dropped, you may need to reduce the amount of equities held. Or perhaps you’re now ready to take on greater risk and your asset allocation requires that a small proportion of your assets be held in riskier small-cap equity.
Changes in personal circumstances and wealth
Changes in circumstances and wealth often affect your investment plan. Events such as changes in employment, marital status, and the birth of children may affect income, expenditures, risk exposures, and risk preferences.
Each change may affect an individuals income, expected retirement income, and perhaps risk preferences. The responsibilities of marriage or children have repercussions on nearly all aspects of a financial plan. Such events often mark occasions to review your overall financial plan.
Wealth or net worth is another factor that is central to an investment plan. Changes in wealth result from saving or spending, investment performance, events such as gifts, donations, and inheritances.
Increase in wealth allows investors to increase their level of risk tolerance, accepting more risk for greater returns. However conservative investors may be unprepared to increase their risk tolerance even with a substantial increase in their wealth.
Changing liquidity requirements
A liquidity requirement is an immediate need for cash for a specific event, either anticipated or unanticipated. You may experience changes in liquidity requirements as a result of a variety of events, including unemployment, illness, court judgments, retirement, divorce, the death of a spouse, or the building or purchase of a home.
If you have a major cash requirement in the near term, you may need to hold some part of your portfolio in low-risk asset such as liquid bonds or fixed deposit.
Changing time horizon
Reducing investment risk is generally advisable, as an individual grows older and his investment horizon shortens; bonds become increasingly suitable investments for such scenarios. For example, as you tend to approach your goal, you should start allocating more towards less volatile asset such as bonds and fixed deposits to maintain liquidity and safety.
As you can see, there are quite a few aspects of your life which are dynamic, hence you must assess your portfolio allocation regularly to make sure it matches your risk tolerance, time horizon and financial goals and needs.
Select your financial advisor carefully – Good financial advisors know their clients well and hence can proactively suggest recommendations for balancing a portfolio as needs change.