Having the right mix of stocks, bonds, and other investments in your portfolio is an important part of meeting your financial goals. The problem: It's easy to have too much or too little of key components.
About a quarter of millennials are off course, with either too much or too little stock in their retirement accounts, according to a recent report from Fidelity Investments, the largest provider of workplace retirement plans. The analysis compared workers' asset mix against that of a target-date fund geared to someone their age, and the data shows that millions of Americans overall would likely benefit from rebalancing their portfolios.
Here's why it's risky to let your portfolio get off-balance, and how you can easily get back on track.
Nearly a quarter of all investors have more stock in their portfolio than recommended for their age group, according to Fidelity's report, which looked at allocations for more than 16 million portfolios. The difference is even more pronounced for older investors or those who are nearing retirement, with almost 38% of baby boomers more heavily invested in equities than recommended. But even younger workers are off-balance: Among millennials and Gen Xers, 12% and 11%, respectively, are overinvested in stocks.
On the other side of the spectrum, some investors don't have enough stocks in their portfolios. By Fidelity's estimates, around 9% of millennials and 12% of boomers have less stock than recommended — and 1% of millennials and 5% of boomers have no equity exposure at all.
Being overexposed or underexposed in certain types of investments can make it harder to reach your goals. For example, millennials who don't have much in stocks, or who don't have much money in the market, period, run the risk that their earnings won't outpace inflation — meaning they could actually lose money over time.
On the other hand, older workers who have too much stock could see much of their wealth evaporate during a stock market downturn — with little time to recover those losses before they retire, says Katie Taylor, vice president of thought leadership at Fidelity. For investors close to retirement, she says, there's a risk that portfolios could take a significant hit in the event of a downturn. And though the market's been trending up, there's no guarantee it will continue to climb. "The problem is that we don't know what the market is going to do next year," she says.
The good news: There's an easy fix that gets your portfolio mix back into alignment. It's a process called rebalancing, and it can take roughly 15 minutes. All it means is that you periodically buy or sell investments to maintain your chosen mix.
Financial professionals recommend that investors "diversify" their portfolio — meaning that they invest their money not only in stocks, but in bonds, cash, real estate, and many other things. By diversifying, you reduce risk: If the stock market were to drop, for example, the value of your stocks may drop too. But your other investments likely wouldn't depreciate, at least not to the same degree, meaning that your overall portfolio wouldn't lose as much value.
Your exact allocation will depend on variables like how much risk you think you can handle and your age. If you're nearing retirement, you should back away from stocks and invest more in bonds. But if you're young with time on your side, experts recommend investing more heavily in stocks.
Video by Jason Armesto
Baltimore-based money managers T. Rowe Price suggest these goals:
Most importantly, experts recommends that investors take the time to check their allocations and, if necessary, rebalance their portfolios every year. The markets change and your life situation changes, and your portfolio's allocation should shift to reflect those changes.
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