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
 
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