It takes a lot of work to set up a new investment account, get your budget right, and automate your investments. For those of us that are new to investing or just uncomfortable with making changes, it can be easy to leave all of your hard work and decisions made to initially set everything up in place. While investing one way or another is better than not investing at all, one of the biggest mistakes you can make is to have a “set it and forget it” mentality when it comes to your portfolio. Your portfolio and investing needs will change as you get older so leaving things the way they are for 30 years is going to hurt you in the long run even if it is easier.
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Leaving your portfolio alone for long periods of time is bound to lead to problems. Here are three specific reasons you should monitor your portfolio more closely.
Your asset allocation is the breakdown of what percentage of your portfolio you want invested in a certain investment category. You might have 50% of your money in S&P 500 index funds, 25% in overseas index funds, and 25% in a large bond fund. Even if you continue to add money to your portfolio in this specific breakdown, your ratios will be thrown off by the performance of the funds you hold. Over a few years you might find your allocation shifting from 50 / 25 / 25 to 60 / 30 / 10. Where you had wanted 25% of your investments in bonds, only 10% are now invested in bonds because your other investments have performed so well.
To fix this problem you need to periodically rebalance your asset allocation. Most people rebalance once per year. The process is simple: you decide if you want to keep your target asset allocations, and if so, you sell some shares in the well performing funds and buy some shares in the underperforming funds. In our example above you would sell some S&P 500 shares as well as the international shares and buy bond shares instead. Set it and forget it investing would never do this and your asset allocations could be thrown off significantly.
Set it and forget it investing would like it if nothing ever changed with a mutual fund. Once you’ve made your selection it stays the same (except for performance) throughout its life.
Reality gives us something much different. Mutual funds are not stagnant. Underperforming funds are regularly closed by mutual fund companies and rolled into more successful funds. The team of managers and analysts that decide when to buy and sell individual stocks in the fund retire, resign, and are replaced as they move along in their careers. Funds can change their expense ratios in a way that costs you money over the long term. All of these changes can have a negative impact on your portfolio and cause you to seek a replacement mutual fund. You need to be aware of the changes to be able to make adjustments, so set and forget it doesn’t work.
One of the biggest reasons set it and forget it investing doesn’t work is that your personal situation and risk tolerance will change over time. If you are in your 20s you are likely more risk tolerant with your investments considering you have decades for your portfolio to recover from any drops in value. The same is not true if you are 55 years old. The 25 year old version of you and the 55 year old version shouldn’t have the same portfolio.
As you age your portfolio should adjust with you to get more conservative. You will want fewer stock funds and more bond or fixed-income investments. A common rule of thumb to determine what allocation you should have is the 120 minus your age asset allocation. As you get older the allocation to stocks gets lower and thus your bond investment allocation goes up.
There is one type of set it and forget it investment that will adjust with you as you age: target date retirement funds. These funds are a decent fit if you really don’t want to worry about adjusting things yourself, but they aren’t perfect. Many target date retirement funds with the target retirement date less than 5 years away had more than 70% of assets in stocks right as the financial crisis hit. Many of those investors lost a huge chunk of their portfolio and likely do not have time before retirement for their nest eggs to rebound. You don’t want to hand the keys to your retirement completely over to some faceless company. Use their advice as guidance, but make your own decisions to avoid financial disaster.