Why do portfolios drift? The silent nature of drift
You built your portfolio and did not touch it. Years later it may have turned into a portfolio riskier than the one you chose. Why?
#You did not touch it, but it changed
You built your portfolio carefully. You set your target mix, left it alone, said "let it grow."
Years later, it is no longer the portfolio you chose. It drifted even though you did not touch it. Why?
#The mechanics of drift
A simple truth: the assets in your portfolio do not move at the same speed.
- A rising asset grows its share of the portfolio.
- A lagging asset shrinks its share.
Even if no one intervenes, after a few years the biggest-rising asset takes up far more room than you originally set.
In the representative example above, stocks rose a lot and their share went from the 50% target to 68%. You did nothing - but your portfolio is now much more stock-heavy, that is, much riskier.
#The silent rise in risk
Here is the dangerous part: drift raises risk but does not tell you.
As the winning asset grows, your portfolio's fate becomes increasingly tied to that single asset. The portfolio you built as "balanced" quietly becomes a "bet on one thing."
#Drift harms in both directions
Drift does not only make you "too risky"; sometimes it makes you "too cautious":
In either direction the result is the same: your portfolio now reflects the random move of the market rather than your deliberate decision.
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