Scary Financial Mistakes: Overlooking Asset Allocation

By Ashlee Ogrzewalla, CFP®, Vice President and Manager of Financial Planning & Marketing Scary movie month is in full swing. With scenes set up to keep us on the edge of our seats and lose sleep at night, some of our scariest fears can seem real when engrossed in a movie. In reality, not much is scarier than thinking you are doing everything right only to find out you missed a crucial detail and things aren’t as expected. Missing essential details can be time-consuming and significantly impact many areas of our lives. When it comes to investment decisions, details are crucial. Investing is such a dynamic process. Everchanging due to market fluctuations, changes in risk tolerance, and updates to financial goals, an individual’s asset allocation is one of those crucial details that can sometimes get overlooked and put investments at risk. Below are some examples of how improper allocation can lead to scary results for your investments. Investing too much money in a single stock can lead to a concentrated position and throw off your overall asset allocation. The industry typically defines a concentrated position as having more than 10% of your overall wealth in one stock position. Some examples of when this typically occurs in a portfolio would be:

• An employee is awarded company stock as part of their incentive plan at work
• An inheritance after a loved one’s passing
• Investing in a start-up that has found lots of success

No matter how the concentrated stock found its way into the portfolio, its presence increases the likelihood of increased volatility. There are many ways to dilute concentrated stock positions in a portfolio:

• Gift to a family member or charity
• Sell in a tax-efficient manner and diversify
• Introduce hedging strategies
• Offset the position with investments in other sectors

Putting off rebalancing investments within accounts and becoming over/under-weighted in specific sectors is another scary way improper asset allocation can add additional risk to a portfolio. As markets change and specific sectors go in and out of favor, an individual’s investments will fluctuate, often resulting in an overall allocation change to the portfolio. Setting aside a specified time to rebalance is crucial in minimizing the amount of risk in a portfolio. While taking the time to rebalance, it’s essential to ask if the overall strategy still makes sense. Does the risk exposure in the portfolio still align with the overall financial goals and objectives used to create the plan? If not, updating risk preferences and investment objectives and revisiting your financial plan can all be addressed simultaneously with a financial advisor. Avoid the scary financial mistake of overlooking the potential for additional risk in a portfolio and recognize the importance of asset allocation to the overall success of an investment strategy. As you’re on the edge of your seat watching scary movies this month, remember that these movies are typically a reflection of what audiences fear at the time the movie is made (diseases, invasions, nuclear testing, etc.). In many of those movies, the overlooked crucial detail is integral to the plot. While scary financial mistakes are not on the standard list of fears for movies to be made about (yet), keep in mind the potential, and don’t let the details derail your goals.