Mid-Year Financial Checkup Mini-Series Part 3: Investment Changes

Mid-Year Financial Checkup Mini-Series Part 3: Investment Changes

In part 1 I discussed the importance of reviewing your financial goals and tracking your progress. In the end, everything we do should be tied into reaching some type of goal. In part 2 I then talked about the importance of reviewing your tax situation halfway through the year. Careful tax planning now can save you from an ugly surprise come tax time. Today the topic is about mid-year investment changes.

One of the questions I’m frequently asked is when is the best time to make investment changes in a portfolio. As with most financial decisions there isn’t a concrete answer that works for everyone since each individual scenario will determine what course of action to take. I know some people who make adjustments on a monthly basis while others will leave things alone for decades. Whether you make frequent changes or rarely touch your investments this is a good time of year to at least do a checkup to make sure things on still on track.

Asset Allocation and Target Date Funds

If your core holdings are in an asset allocation or target date fund you have a pretty easy review. Since these funds are designed to keep a specific allocation and/or to adjust their holdings automatically over time there is a good chance that you won’t have to make any changes. What you do want to do though is to take a look at your holdings and make sure nothing has changed. Here are some things to look for:

Expenses: Has the fund kept expenses steady from last year or have the managers made changes?
Portfolio: The mutual fund business is competitive and managers can sometimes take measures to try and boost performance. This is a good time to check and be sure the fund is still investing in the way you thought it was.
Performance: How has the fund performed relative to its peers? If you are noticing significant under performance or if it is significantly outperforming its peers that should be a red flag to check and find out why.

If your core investments consist of target date or asset allocated funds you generally don’t want to make frequent changes to them. They were designed to minimize risk while maximizing returns over the long term so trying to make frequent adjustments will diminish their effectiveness. Use this mid-point in the year to analyze the above points and spot potential problems with those funds and then act accordingly.

Creating Your Own Asset Allocation

Many people take a more hands on approach to investing and pick and choose various individual funds, ETFs or stocks to create an appropriate investment portfolio. This is certainly acceptable, but with this method comes the requirement to pay a little closer attention and possibly make more regular changes.


The most common portfolio changes are in the form of rebalancing. This simply means that you have selected a specific investment mix, let’s say a 70% stock and 30% bond mix. Over the course of time, depending on the types of returns of the underlying investments your target mix will change. If stocks are returning 15% and your bonds are returning 2% you can find that over the course of a year or so your portfolio is now 90% stocks and 10% bonds, far from your initial target.

So, the question then is how frequently should you rebalance your portfolio? There are two main schools of thought about this and they are:

1. Periodic Rebalancing: A specific interval is set (monthly, quarterly, semi-annual or annually) and rebalancing is done regardless of performance at these intervals.

2. Threshold Rebalancing: Unlike adhering to specific intervals the rebalancing occurs when when the asset mix deviates from the target by a certain amount.

So which one is better? There is no right or wrong answer but rather you should simply use the one that works best for you and that you can stick to. Some brokerage accounts and retirement plans actually have built-in options to set periodic rebalancing intervals. This is a surefire way to make sure it is done on a regular basis. If you do go with periodic rebalancing what is the most appropriate interval?

In my opinion I think that rebalancing more frequently than quarterly is akin to trying to time the market. When you get into making changes on a monthly basis you are operating on a short time frame that is going to be relatively volatile. This could mean from month to month you are buying and selling investments that are experiencing wide swings either up or down. While you will be keeping your portfolio very close to your target allocation at all times, you could also be missing out on realizing some longer term gains.

What is probably more appropriate is quarterly, or semi-annual rebalancing. This longer time frame of 3-6 months is long enough that you can realize some growth in the stock market yet frequent enough that you can make changes that keep your allocation in line with where it should be. Once you move to a year or longer you could find yourself exposed to more risk as your portfolio has become overweight in the outperforming areas of the market, and a quick drop in the market could force you to give up all of those gains you spent so long accumulating.

Threshold Rebalancing

If you’re like me and have a little more time to keep up with your investments you may want to consider threshold rebalancing. With periodic interval rebalancing you are at the mercy of timing. If you choose to rebalance on a specific date each year your timing could be off by just a few days or weeks that could have a significant impact on your overall performance. Although over time this would be virtually insignificant I prefer to let performance dictate my rebalancing, not arbitrary points in time.

With this method you set the deviation from the target as your rebalancing trigger. It may be 5%, 7%, 10% or anything you are comfortable with. This could mean you rebalance every month, once a year, or maybe not for five years or more since it is driven by the underlying performance and the effect it has on your asset allocation.

Determining What is Right For You

This is a great time of year to check in on your investments and see if any changes need to be made. Maybe you haven’t rebalanced in a while and noticed your portfolio mix isn’t what it should be, or maybe you realized your target date fund just changed their investment strategy or increased the expense ratio. Whatever the case may be, use this time to evaluate how your investments are doing, determine if any changes need to be made, and ultimately tie everything back into your goals. Make sure that whatever your investments are that they are a reflection of how you plan on reaching a goal such as retirement, college savings or even buying a house.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

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