Advisors Report

As the markets continue to climb in recent months, the process of portfolio rebalancing is becoming a hot topic among investors and advisors.  Rebalancing is primarily about risk control, or making sure your portfolio isn’t dependent on the success or failure of one investment, asset class or style.  Rebalancing is the process of restoring your portfolio to its original asset mix or objective. 

You don’t have to do anything to your portfolio for it to change. That’s because some of your investments will go up as other investments go down.  This is the market as we know it. Those investments that have done well will begin to take up more of your portfolio than those that haven’t done so well. And you don’t have to do a thing for that to happen.

But every so often, you need to readjust your portfolio to restore its original balance or mix.  If your investment goals haven’t changed, your portfolio’s mix shouldn’t either. But thanks to market forces it almost certainly will. Hence the need for rebalancing.

And this doesn’t have to feel like pulling teeth.  Follow these steps to an easy rebalance:

Step 1: Figure out your target portfolio mix

This was the blend of asset classes and investment styles that were going to allow you to reach your investment goal.

Step 2: Compare your target mix to your current mix

Compare you cash and bond holdings to your equities.  Evaluate if you’re still on course, comparing risk and returns, as well as types of income for tax purposes. 

Step 3: Determine where your investments are out of line with your original target

Begin by seeing how your cash and bond positions have shifted compared to your equities. Very often, your positions in these areas will shrink relative to equities because, in general, equities as a group outperform cash and bonds.

Then, consider your sector exposure. Although you may not have built your portfolio with a specific sector in mind, you want to be sure that you aren’t overexposed to one industry.

Finally, look at your investments, one by one. Which ones have performed the best? These investments may now be taking up more of your portfolio than you originally intended.   

 Step 4: Readjust

Remembering your target mix, line up your risk and return blend to match your goals and objectives.  Sitting down with your financial advisor can help ensure the proper allocation of assets.

Effective rebalancing doesn’t mean keeping daily tabs on your portfolio. Instead, follow these guidelines:

Guideline 1: Rebalance every year or so. We’re not saying you should only look at your portfolio once a year. But resist the urge to tinker when you do. You’ll save yourself unnecessary labour and possible administrative costs.

Guideline 2: If you rebalance just one thing, make it the equity/cash split. Your cash and bond stakes are vital to keeping your portfolio in check. So if you don’t want to rebalance your entire portfolio on a regular basis, at least restore your cash and bond positions to their original levels yearly.

Guideline 3: Be a tax tactician. Keeping your portfolio in line isn’t satisfying if it means you also wind up with poor after-tax returns.  Try rebalancing less frequently, to avoid gains taxes.  Use new money to top up the holdings that are down, rather then selling the ones that are up.  And if you have the choice, switch securities in the same fund family, rather then selling to avoid capital gains taxes and administrative fees.

Rebalancing can become difficult and ineffective without proper knowledge of the markets, so make sure you understand what you’re doing before making any rash decisions.  A financial planner can help you make the right choices that will help you reach your goals quicker and more efficiently.

Adam Myers
Financial Advisor, Ottawa
PFIP-IPG
Email: adam@pfip.ca
Phone: 613-224-5511   X108
 
www.pfip.ca
www.joinipg.com

As of 2009, you have a new tax-sheltered option for saving money, thanks to the new Tax-Free Savings Account (TFSA). The TFSA allows you to save or invest your money without paying tax on income, dividends or capital gains earned inside the account. You can also withdraw funds tax-free at any time. That’s a great incentive to save money!!!

It is important to know: The TFSA is not an investment! It is not like a Canada Savings Bond, sold by the government. Rather, it is more like an RRSP (Registered Retirement Savings Plan), or a savings account. Think of it as a vehicle to hold investments. The difference being that you DON’T pay taxes on any income earned with in it!

The TFSA is suitable for everyone, whether you are just starting your savings plan or you are an experienced investor. And it couldn’t be easier to set one up.

Any Canadian resident who is 18 years of age or older and has filed a tax return can establish a TFSA. You can open one at your favourite financial institution, threw your financial advisor, or even on line. Initially, your annual contribution room is $5,000 per calendar year. You do not have to contribute the maximum every year, as the unused contribution room can be carried forward to future years. This number will grow by $5,000 annually, and will be indexed to keep pace with inflation in $500 increments.

You can withdraw funds from your TFSA at any time, for any reason, with no penalties. It could be for a new car, to renovate your kitchen or to take that dream vacation you always wanted. You could even use it as security for a loan. Withdrawals are not subject to any taxes, so any growth experienced over the year is yours TAX FREE.

The amount withdrawn during the year will be added to your contribution room the following year, so you don’t lose contribution room by withdrawing – you get it back in the following calendar year. Most investments that can be held in an RRSP will also be eligible for your TFSA, including GICs, mutual funds, segregated funds, stocks and bonds. This is a huge opportunity to earn investment income and not pay taxes.

Unlike an RRSP, you won’t be able to deduct your TFSA contributions on your income tax return. But don’t think of this as an RRSP which is a tax deferred savings account that still taxes you when you withdraw. Think of this as an opportunity to grow your savings tax free, and with draw them TAX FREE.

Money withdrawn out of your TFSA doesn’t affect federal income-tested benefits and credits like Old Age Security, the Goods and Services Tax Credit and the Canada Child Tax Benefit. You can also transfer your TFSA assets to your spouse or common-law partner upon death without any impact on the survivor’s existing contribution room. It also offers income-splitting opportunities.

There’s a lot to like about the Tax-Free Savings Account. Maybe too much to cover in one article, but I can tell you this: The introduction of the TFSA has taken the importance of financial planning up another notch. For some, it may be wiser to use the TFSA in your investment plan. For others, the RRSP may make more sense. And for some, a combination of the two. Now is the time to review your situation to see how to best plan ahead.

So whether it’s a short term goal like a new car or a dream vacation, or a long term goal like a new home, the tax free savings account may be the perfect strategy to get you there faster. If you have any questions or comments, please feel free to contact me and I would be happy to discuss the benefits of the TFSA and how it can fit into your financial plan.

Adam Myers

Independent Planning Group

202-223 Colonnade Road South

Ottawa Ontario, K2E 7K3

Phone: (613) 224-5511 x 108

Email: adam@pfip.ca