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Is It Time to Re-Balance Your Investment Portfolio?

Is It Time to Re-Balance Your Investment Portfolio?

July 9, 2021

Re-balancing your investment portfolio is needed when stock and bond values fluctuate, writes Peter Watson.

Do you own too much stock?

Recently, because of the rising stock values as opposed to bond values, your asset allocation between stocks and bonds has likely shifted.

Let’s look at a simple example.

The starting point of developing a portfolio is to articulate your objectives and account for your financial circumstances. That leads to the decision of asset allocation.

How much to invest in stocks and how much to invest in bonds. That is the foundation for your portfolio.

For example, you might have decided on a 60/40 split. 60 per cent in stocks and 40 per cent in bonds. Depending on when you last rebalanced your portfolio, those values could have changed.

For this example, we will assume the stocks have appreciated by 50 per cent and there has been no change in the value of bonds. Now your asset allocation has increased to close to 70/30.

If you decide to rebalance to the initial 60/40 allocation, you have to sell some stocks and buy bonds. Easy concept. There are some complexities to consider.

Should you complete these transactions within a registered account like an RRSP or RRIF? Or do you want to complete the transaction within your non-registered investment account?

Transactions completed within your non-registered account are subject to capital gains. Meaning if you sell some stocks that have increased in value there is most likely going to be income taxes paid on those gains.

Most often the decision to re-balance to the original asset allocation is done. If your financial objectives or circumstances have changed it could be appropriate to adjust your target asset allocations.

It is widely accepted the most significant aspect of portfolio performance, both volatility and returns, is based on asset allocation.

We recommend that you monitor your portfolio as the value of stocks and bonds change and re-balance when needed.

Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments.