Has your portfolio experienced drift? If you're not sure, you could be missing out on important growth in your investments and taking on more risk than you know about. Here's what you need to know about portfolio drift and how to correct it.
What Is Portfolio Drift?
Drift is a slow process where an object is moved by natural forces, such as wind or waves on the sea. In a portfolio, these natural forces are the changes in the overall market. Drift, then, occurs when your mix of assets slowly and organically moves away from your original target as various investments do better or worse.
For instance, consider an investor who starts with a 50/50 mix of stocks and bonds. In a strong economy, those stocks may do better than the bonds, resulting in more growth on that side of things. After a year or two, the actual dollar value of the owner's stocks and bonds could be more of a 60/40 split — or even 70/30. The investor hasn't made an intentional decision to shift their mix, but natural forces were at work.
Why Should You Correct Drift?
Drift is a natural occurrence, so why should you correct it? The right portfolio mix of investments is important to protect yourself from unnecessary risk and keep receiving good returns. If your drift has increased the number of bonds in your portfolio, for instance, you now may be overly invested in assets with lower returns. This could reduce your earnings for years to come if you don't rebalance.
If some assets are doing better than others, though, should you just stay more invested in them? There are two dangers in doing so. First, you may no longer be carrying appropriate levels of risk for your age, timeline, or goals. If retirement withdrawals are looming, being over-invested in high-risk stocks opens you up to bigger losses if the market turns. Second, past performance doesn't mean these stocks will continue to win.
When you chose your mix of assets, you did so intentionally. You and your advisor looked at your risk tolerance, financial position, and investment goals to find the right ratios. Those decisions are still sound — unintentional drift should never override your informed choices.
Where Should You Start?
Do you want to rebalance your portfolio to correct for drift? If so, the best place to begin is by meeting with an experienced investment advisor in your state. With their guidance and your own understanding of your needs, together you'll get your investments back into the right balance. Contact a company like Greer Financial Group to learn more.
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