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THE REBALANCING ACT

Back to the drawing board

When should you readjust your investment holdings? Often, and with a serious eye on your goals and tolerance for risk

Dianne Maley

Two months ago, Carol sat down with her financial adviser to reassess the contents of her RRSP portfolio after a year of stock-market disasters bent it out of shape.

"I wanted to get everything straightened out," says the Calgary investor, who asked that her surname not be published.

The adjustment to her portfolio's asset allocation - technically known as portfolio rebalancing - meant changing the proportion of stocks, bonds and cash in her RRSP to better reflect her goals and her tolerance to risk.

"I'm a conservative investor. I wanted to make sure things aren't risky," the 55-year-old says. "I'm not going for the big bucks. I just want to make sure there's a nice little nest egg for me when I need it."

When it comes to a retirement portfolio, personal details are critical, and Carol's adviser, Patti Dolan, a certified financial planner with Capital Research Corp. in Calgary, says her client had several reasons to take action.

First, and most importantly, Carol was on the verge of retiring from a job with the Alberta government and Ms. Dolan wanted to prepare her portfolio to generate income.

Secondly, like many Canadians, Carol made no investments in the past year as she waited out the volatile markets, but she had continued to contribute cash to her RRSP account. And finally, the drop in global equity markets in the past year had upset the balance of assets in the portfolio.

"We had a high cash position in the account, and we needed to look at her RRSP more long-term so we added to her bond position," says Ms. Dolan, referring to an exchange traded fund that follows a Canadian bond index. "It acts as a stable anchor for the account [compared to the volatility of equities]."

Also, equities in the portfolio would now be tipped heavily toward dividend-paying stocks that produce income in the RRSP, which Carol can either reinvest or withdraw as needed.

After the rebalancing, Carol's portfolio now contains 40 per cent in blue-chip equities, 40 per cent fixed-income investment, and 20 per cent cash.

At the nitty-gritty detail level, portfolio balancing is a bit of an art, building on a framework that you should amend or change on a periodic basis.

Ms. Dolan says investors should rebalance their RRSP, and their overall investments, at least once a year to take account cash infusions such as an inheritance, salary bonuses, or changes to the stock and bond markets.

Lifestyle changes such as retirement, marital status, the birth of a child, should also trigger a portfolio rebalancing, she says. "It's an ongoing project and you should always try to invest with your objectives in mind that you set originally."

Setting the correct asset allocation is a critical part of the process, and it's a financial adviser's job to ask all the right questions to determine that approach, says Dan Hallett, a chartered financial analyst in Windsor, Ont., who owns an independent financial consulting practice.

It involves getting the facts straight - not only the investor's age and goals, but also having a clear understanding of his or her attitudes toward risk. As a result, asset allocation is highly personalized.

However, the Ontario Securities Commission's Investor Education Fund website (www.investored.ca) includes several model portfolios that can provide guidance, such as one for a person aged 35-to-55 who has a moderate tolerance for risk. That example recommends a balance of 60 per cent in equities, 30 per cent in fixed income and 10 per cent in cash and equivalents.

Mr. Hallett says investors nearing retirement, and even those already retired, may find that holding a minimum amount of equities is reasonable. "That's where you'll get the added returns and provide the growth in income," he says. "But it's a very delicate balance between taking enough risk but not too much."

That's why it's critical for investors to understand their own tolerance for risk, and make sure their financial adviser knows it, too.

In the absence of an adviser, "there are questionnaires online that people can try themselves but they're quite limited in terms of the insight you get," Mr. Hallett says. "You're not likely to ask yourself the same questions [as an adviser], and no one will challenge you."

Mr. Hallett says he tells advisers that no matter how rigorous the profiling quizzes they use for their clients, they should assume the investor's risk tolerance is lower than it appears to be.

Adrian Mastracci, a portfolio manager and owner of KCM Wealth Management Inc. in Vancouver, says that, in general, most investors don't have a good understanding of their portfolios.

Based on results from a 20-question survey he gives to investors (Do you know your investment profile? Do you rebalance your portfolio? Are you following a prudent asset mix?), he says most people need to do work at a fundamental level. While portfolio balancing can be demanding, and sometimes tedious, it can be rewarding when you get it right, Mr. Mastracci says.

The most important thing is to know your goals and remember that your investing horizon - how long you have until retirement - should guide your asset allocation.

Special to The Globe and Mail

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