Why you should take a hard look at your investments now

All eyes were on the Federal Reserve even though the central bank essentially did nothing in its latest meeting but hold interest rates high to fight inflation, just as it has done for many months.

- Jeff Sommer

To be fair, there was a little news: The Fed did appear to affirm the likelihood of rate cuts starting in September, and that's important. But so are the big performance shifts in the market, away from high-flying tech stocks like Nvidia and towards a broad range of less-heralded, smaller-company stocks. In fact, there's a great deal to think about once you start focusing on the behaviour of the markets and the health of the economy in an election year.

But what is perhaps the most important issue for investors rarely gets attention.

In a word, it is rebalancing.

I'm not talking about a yoga pose, but about another discipline entirely: The need to periodically tweak your portfolio to make sure you're maintaining an appropriate mix of stocks and bonds, also known as asset allocation. If you haven't considered this for a while and if nobody has been doing it for you it's important to pay attention now, because without rebalancing, there's a good chance you are taking on risks that you may not want to bear.

The rise in the stock market over the last couple of years, and the mediocre performance of bonds, have twisted many investment plans and left portfolios seriously out of whack.

I found, for example, that if you had 60 per cent of your investments in a diversified US stock index fund and 40 per cent in a broad investment-grade bond fund five years ago, almost 75 per cent of your investments would now be in stock. That could make you more vulnerable than you realise the next time the stock market has a big fall.

The Securities and Exchange Commission (SEC) defines asset allocation as "dividing an investment portfolio among different asset categories, such as stocks, bonds and cash". It's an important subject, but it's not as straightforward as that description seems.