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The do's and don'ts of portfolio allocation 

For many investors, putting away money consistently into their investments is a major achievement on its own. Having the time and know-how to pick from a dizzying array of investment products, allocate assets, and diversify your portfolio provides another set of challenges entirely. However, knowing what kind of portfolio allocation you need is essential. So too is knowing what allocation is best for you depending on your life stage and goals.

There are several common do’s and don’ts to consider for portfolio allocation. These best practices and potential pitfalls are easy to spot and implement into your portfolio once you know how to spot them. This piece will offer some useful information to consider about what investors could do when looking to better allocate their investments.

Do: Rebalance your portfolio frequently 

It’s crucial to review your portfolio’s positioning every year. Knowing that your individual investments are performing adequately is an important part of your overall financial health, but so is keeping track of where your overall investments are within the broader markets. For instance, a portfolio consisting of mostly stocks might be right for someone in the early stages of saving for retirement but could be too risky for someone later into their career. Changes in the market may also require investors to rebalance their portfolio to meet current conditions.

Portfolio rebalancing means realigning how your portfolio is weighted, typically by shifting the ratio of stocks and bonds within your holdings. This helps ensure that your portfolio is designed for the right amount of risk tolerance, which may change as you get closer to retirement or if financial markets move in ways that don’t align with your current portfolio allocations.

For example, some investors who are younger may take a more aggressive investment balance that favors stocks over bonds. People nearing retirement age may pursue a more conservative portfolio balance that emphasizes fixed income and bonds, lest they expose themselves to risk without much time for investments to rebound.

Even if your risk tolerance has not changed, rebalancing your portfolio can still help ensure you’re in alignment with your goals if the markets have shifted. Market moves may end up changing your portfolio percentages; rebalancing can help correct for this.

Rebalancing on a regular basis helps ensure that you’re on track for your own investing goals and helps build positive habits for the future as you make alterations to your stock and bond ratio. Plus, a yearly review of your portfolio balancing can help you identify underperforming assets.

Don't: Diversify through overlapping investments

Diversification is a key component to a balanced portfolio. When you diversify, you’re incorporating investments in a variety of sectors, financial products, and even the duration of your investment itself. This is designed to help mitigate risk across your holdings.

Diversification can be mistaken by many for a portfolio composed of a large number of different assets. For example: if you own shares of several stocks in the same industry in order to diversify, you’re actually creating less portfolio diversification if that industry loses value across the board. The same is true for owning mutual funds with overlapping goals; this can leave you with the same amount of risk as you’d have by just investing in one of the two funds.

It's important to note that neither asset allocation nor diversification ensures a profit, nor do they guarantee against market loss.

Do: Stick to your strategy

The temptation to change your investment strategy tends to pop up often—especially when you’re close to retirement if the economy is volatile. Making sure your investments are working for you is important, of course. Making sure your changes still fit within your overall investment strategy is as well.

By the time you’re close to retirement, you may have already put much of your investment assets into low-risk holdings. This strategy is designed to help retain portfolio gains should the market get volatile.

Sticking to your strategy can help ease fear, uncertainty, or doubt when markets are turbulent. Investors may end up making poor investment decisions when panic causes them to change course abruptly.

Don't: Take on too much risk (or too little)

Investing means picking out a portfolio that has the right amount of risk: that means the payoff opportunity is right sized against what might happen if that payoff never happens. Investors each have their own appetite for risk. Making sure we have the right amount of risk in our portfolio isn’t driven entirely by emotions, however. Our life goals and age also play significant roles in helping to pick out the right amount of risk.

If you incorporate more risk into your portfolio than you’re comfortable with, you may end up inflicting stress on yourself that you could avoid with a portfolio that matches your risk tolerance. An overly aggressive portfolio during the mid- to late-career years may end up eating away at long-term gains while an overly conservative portfolio in your early years may limit your growth potential.

On the other hand, some risk is unavoidable—especially if you are looking to incorporate stocks into your portfolio.

Investors should make sure that their portfolio allocation matches their risk tolerance—within reason, that is. The right amount of risk in your portfolio can avail you to returns that more conservative investments can’t.

Do: Conduct thorough research

It’s not enough to simply diversify your portfolio: you have to make sure you’re picking out the right investment opportunities across the right sectors. You’ll also have to think about other implications, such as your timeline to retirement and the tax implications of your investments now and in the future.

Before you make or change portfolio allocations, be sure to do your homework. For example, a volatile set of stocks may present an opportunity for above-market returns but may also come with more risk of losses than your strategy allows for. As another example, consider how including a new investment fund might overlap with existing holdings, and whether or not including it could introduce unnecessary redundancy.

Don't: Be afraid to seek out professional help

Going it alone with investing can feel overwhelming and, worse yet, may even result in not making the most of your money. Working through your own portfolio allocation without a helping hand can also be a challenge for some of us. That’s where bringing in a financial professional can be an excellent call for your long-term financial health.

A financial professional can help you in a variety of ways. First, they can help you develop an investing strategy tailored to your needs. This can provide more peace of mind that you’re on track to hit your investing goals. You won’t have to go it alone when building your portfolio. If or when it’s time to shake things up with your strategy, a financial professional can help identify when the time is right and what changes make the most sense.

Making the most of your portfolio

Your portfolio may feel like an intimidating project, particularly if you’re worried about reviewing your allocation. So long as you keep a few best practices in mind, avoid common mistakes and know when to reach out for professional advice, you can handle investing with strength and confidence.

Don’t hesitate to reach out to a financial professional to help guide you on your investing path. They can help you identify opportunities that might otherwise be overlooked and can guide you on when to reallocate your portfolio to capture new opportunities.