A solid foundation for investing begins with an understanding of the individual investor’s goals, time horizon to meet those goals and risk tolerance. And while no one can disagree with the proposition that there is no sure thing as a guaranteed return on an investment, there is a great deal of disparity as to what is acceptable risk in attempting to achieve the desired rate of return. Additionally, each investor will likely experience varying levels of risk tolerance during their investing life. It’s important to recognize this reality and work to rebalance your portfolio accordingly.

Asset allocation

The primary way risk tolerance is managed is through spreading your investments across various asset classes. A typical mix includes some combination of stocks, bonds and cash or money market securities. What percentage each category of asset will comprise determines if the portfolio is deemed conservative, moderate or aggressive. 

How the balance in a portfolio can change

Assuming the proper balance is achieved at the onset, over time, market conditions can change the asset allocation. One asset class can show considerable growth and another may experience unexpected setbacks. If no external changes are made to the portfolio, the balance of assets may grow to be significantly different than when began and out of sync with the investor’s goals.

Rebalancing the portfolio

If it is determined the original balance was optimal, there are two ways to again reach this level. You can infuse new money into the portfolio, and buy the amount of the under-performing asset necessary to achieve the desired balance. Or, you can sell sufficient quantities of the asset performing well and buy a corresponding amount of the down asset. By opting for the second method, you are employing a sell high, buy low plan. 

Changing circumstances

Of course, any number of circumstances may arise in your life that alters your investment goals and consequently your risk tolerance. Major life changes should always trigger at least a review of your portfolio and, perhaps, an adjustment as needed.

At Spinnaker, we believe strongly in our fiduciary role as our clients’ financial advisor to do what is in their best interests. Clients are best served in an environment with full and complete transparency, where they have continual access to the information necessary to make well-informed decisions. Our brand new online assessment tool Spinncycle™ was created to provide you, the investor, a quick methodology to see just how satisfied you are with your current investment environment. Click here to get started

Disclosure

The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities mentioned. The information contained herein, while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.