Based on the last year and a half we’ve had in the market, from the drastic drop to the rapid recovery, I really want to spend some time today talking about reallocation – what it is and why it’s important in your portfolio. But, before we can talk about reallocating your portfolio, we need to talk about what asset allocation is.  

In simple terms, asset allocation is just how you have stuff in your portfolio spread out between all the different asset classes. If you have investment statements, you’re probably used to seeing the pie chart full of colors that represents where all of your investments are. For simplicity’s sake, today we’re just going to assume there is 25% in each piece to represent just a general diversification in the portfolio. And, you can think of your portfolio similarly to how your doctor would talk to you about a salad – the more color in the salad the healthier it is for you! When you are looking at diversification, the more diversification (color in your pie chart), the better it is for your portfolio. So that, is asset allocation, where everything is.  

Reallocating is making sure that every once in a while, you look at your portfolio and bring everything back into alignment. As these pieces of the pie either grow or shrink, taking up bigger portions of the overall pie, every once in a while you want to look at your pie (portfolio) and readjust everything back to what you originally had it set for. A good reason for this is taking last year into example – we had the massive drop in the market early on in 2020, and you were going to see things like the large cap stock (pie piece) really shrink as the market fell. At the same time, your bonds/fixed income, which are meant to be more stable, end up taking over that portion of the pie (from large cap stock). When we look at the bottom of the drop in 2020, instead of having 25% in each piece, the bonds took up a bigger portion of your portfolio, so you end up being a little bit more conservative than you might have thought. But, when we turn around and then have the rapid recovery we’ve experienced over the last 12 months or so, the flip side happened – those large cap (growth) stocks really took off and have been what’s driving most of that recovery! So now your large cap (growth) stock piece has started to take up much of your portfolio and has even eaten into a piece like international stock to where if you haven’t touched anything, that’s now something like 50% of your portfolio (for example) instead of 25%. And, now you may be a lot more aggressive than you intended to be.  

It’s even more important if we look back at say five years earlier. If you did the same 25% simple portfolio in 2015, because we basically have had a straight shot up from 2015 to the correction in 2020, your portfolio may have been way out of whack and looking something like we just discussed, where you have 50% of the pie in large cap and you’re taking a lot more risk than you intended to. Then, when you had that massive correction start off 2020, you experienced a lot more of a drop in the portfolio than you may have ever intended. You may have intended your downside to be a lot lower drop, but because you are holding that much in equity, you (unintentionally) saw a huge increase in the risk that you were taking on. 

So, it’s important every once-in-a-while, whether it’s quarterly (at least yearly) just to look at where your allocation is at and see if you need to rebalance, see if you need to bring everything back into alignment to where your pie is the even 25% and back where everything is supposed to be. This way you know your portfolio is doing what you have it built for and is going along with your goals and your risk tolerance. Y’all have a good one!