Finance How to do it: rebalancing in four simple steps Now that you’ve decided on an approach to rebalancing, how exactly are you supposed to do it? Instead of trying to tackle the job all at once, it makes sense to break it down into four relatively straightforward tasks. The following four-step rebalancing process will make it easier to analyze your holdings and determine which of themneed attention, nomatter how large or small your portfolio happens to be: Review holdings against baseline allocations Start by taking a look at your portfolio in broad strokes. Break your portfolio down into a baseline allocation of stocks/bonds/cash, and compare your current positions to the target allocations which you’ve established in your broader financial plan. Calculate the difference between those allocations to determine what’s out of whack, and what’s not. (Don’t know what your target allocation should be? Don’t have a detailed asset allocation plan for your portfolio? Unless you’re a veteran, experienced investor, it’s a good idea to stop right here and speak to a wealth professional before rebalancing.) Once you know the “distance” between your current allocation and your target allocation, you should have a general idea of which assets you need to pare back, and which you need to bump up. As we discussed above, it’s probably not a big deal if things are out by a couple of percentage points. If they’re out by muchmore than five per cent, however, you’ll probably want to take action and bring things back in line with your original targets. Dig into your sub-allocations Next, you’ll want to take a closer look within the major asset classes and check your sub-allocations to specific market sectors, geographic markets and investment styles. Again, your goal is to understand the difference between your current allocation and your long-term target. Pay particular attention to your geographic diversification here; as noted above, U.S. stocks have enjoyed a remarkably long bull run, while Canadian stocks have lagged behind, particularly over the past year or so. This may have caused a considerable overweighting of U.S. equities within your portfolio, and a relative underweight of Canadian equities. Another thing to take a look at is your allocation to growth or “riskier” assets. This year, high-growth stocks (including many well-known technology stocks) have seen a remarkable run. While there’s no denying the quality of these businesses, many of them are currently trading at very expensive valuations. Depending on your personal tolerance for risk, it may well be time to take some money off the table and reallocate; that way, you’ll be protected if the growth end of the market returns to more reasonable levels. How have things changed with you? Perhaps the most important step in the rebalancing process has nothing to do with the actual assets which you hold ‒ rather, it’s how your personal circumstances may have changed since your last rebalancing, and how that may (or may not) impact your portfolio. You’ve gotten older, obviously, but has that changed your tolerance for risk and your appetite for equities? Are you looking for more income from your portfolio now that you’re retired ‒ maybe you need more bonds? Are there specific expenditures on the horizon that necessitate a shift from, say, equities to cash? Asking some of these simple questions now, while you’re rebalancing the rest of your portfolio, is one more way to ensure that your portfolio is aligned with your risk tolerance until the next time you rebalance. Prune and reallocate as necessary Once you’ve determined which of your holdings need to be pared back, go ahead and start the selling process. It’s best not to get cute here; once you’ve made the decision to rebalance, don’t try to time the market by waiting for a slightly higher price before you sell. Same goes for the buys which you do when you reallocate effort; once you’ve trimmed back your top performers, it makes sense to reallocate to other assets relatively quickly, rather than waiting to eke out a few more pennies from a slightly lower price. Remember: the goal of rebalancing is to minimize risk. The longer it takes you to execute on that rebalancing, the more risk you’re exposed to. CSANews | FALL 2017 | 31
RkJQdWJsaXNoZXIy MzMzNzMx