When it’s time to rethink your asset allocation

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Unless you happen to be an average-size person with perfectly balanced proportions, the clothing you buy may or may not fit perfectly

Unless you happen to be an average-size person with perfectly balanced proportions, the clothing you buy may or may not fit perfectly. A skilled tailor can make a wardrobe seem almost custom-made by taking up a hem, adjusting a cuff, or making a few nips and tucks here and there.

The same applies to your portfolio. A standard asset-allocation mix (such as a  model portfolio ) may work well for the “average” investor, but one size doesn’t always fit all.

Here are some of the situations in which you might want to consider adjusting your portfolio for a better fit.

The “bucket approach” is a great way to tailor your asset allocation to better fit your specific needs.

The general idea is to keep one to two years’ worth of expenses in highly liquid securities to help meet short-term cash needs (plus an additional five years’ or more worth of living expenses in high-quality fixed-income securities to provide income and stability). That way you won’t have to scramble to sell securities to meet your ongoing expenses. In effect, this approach is a way of building a tailored asset allocation from the bottom up.

Similarly, make sure your asset allocation accounts for both longer- and shorter-term goals.

If you have upcoming events on the horizon such as a home purchase, college tuition, a wedding, or a big vacation, make sure you have enough of your portfolio in moderate-risk assets (such as high-quality short- or intermediate-term bond funds ) to fund these goals.

It’s far more likely for a single stock to have large losses than a diversified mutual fund, so it’s wise to  prune any stock holdings