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Ask yourself these questions before making changes to your investment portfolio

A CFP weighs in on important questions to consider before making a portfolio change.

jacoblund | iStock / Getty Images Plus | Getty Images

Experts generally advise investors to leave their portfolios alone and invest for the long haul to best maximize their returns. But there may be an instance when you want to make adjustments to your investments — maybe you risk tolerance or investing goals have changed.

Before making any changes in your portfolio, however, it's worth first asking yourself a series of questions to ensure you're making sound decisions. When you're playing with money invested in the stock market the risk-return tradeoff is high, so you want to make sure any modifications to your investments are smart financial moves.

Here is what to ask yourself when making investment changes.

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Questions to consider before making a portfolio change

Select asked Paul Deer, a Denver-based CFP and vice president of advisory services at Empower (formerly Personal Capital), about the questions he typically asks his clients before they adjust their investments. Here's what he had to say:

  • What's causing you to consider a portfolio shift? Ask yourself why you want to make a change. Deer suggests thinking if there has been anything in your personal circumstances that have changed? Your risk tolerance? Your future goals and objectives? If these have considerably changed, it may make sense to update your investment portfolio. It's also important to take a step back and pinpoint if your emotions or logic are driving your actions? Experts advise refraining from making changes to your investments during emotional times in your life.
  • How dramatic of a shift are you considering? Before making a measurable move with your investments, consider speaking beforehand to a financial planner who could help advise what the best move is for you and your money.
  • Is your portfolio currently positioned for unexpected market outcomes? "How concentrated is your portfolio?" Deer adds. Diversification, or not concentrating your portfolio to one asset, is key to minimizing any unforeseen risk.
  • How will you react to unexpected market outcomes, if they occur? As much as experts try to predict the market, the truth is nobody actually knows how it will move. Be emotionally ready for market outcomes you may have not anticipated so you don't react. Bracing yourself in advance for market collapses is an effective way to avoid emotion-based investing.
  • How much conviction do you have in your action plan? "Otherwise said, have you defined in what circumstances you would — and importantly, wouldn't — shift your portfolio a second time?" Deer adds. One change can lead to making many others soon after, so it's important to define upfront what circumstances qualify for making more adjustments in the future. This is because experts generally advise leaving your portfolio alone for the long haul to really maximize your returns over time.

Using a robo-advisor can help take the guesswork out of deciding whether or not to adjust your investments as the top robo-advisors will regularly rebalance your portfolio for you as needed.

Betterment adjusts your portfolio automatically whenever you make a deposit, withdraw funds or change your target allocation. Betterment's algorithms will also check your portfolio drift (how far you are from your target allocation) once per day and rebalance if necessary.

The automated investing platform through SoFi Invest® automatically rebalances investors' portfolios as well, but on a quarterly basis. SoFi is a good option for investors also looking for lending products as SoFi members receive a 0.125% interest rate discount on SoFi's student loan refinancing and personal loans.

Bottom line

The market moves fast, but you don't have to. Before making a change to your portfolio, walk yourself through the above series of questions to ensure that you are making the best decision for your money and future wealth.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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