How to find the best portfolio balance

An expert sheds light on how Canadian advisors can help their clients rebalance portfolios most effectively

How to find the best portfolio balance

Tony Mahabir, CEO of Canfin Financial Group of Companies, sheds further light on how Canadian advisors should be rebalancing portfolios

Is rebalancing necessary for all taxable and tax-favoured accounts to hit targets or can it be confined to tax-favoured investments?

Rebalancing is necessary regardless of the type of portfolio or its tax structure. Obviously, the cost benefit analysis should always be factored in. Investors need to decide whether it makes more sense to rebalance simply by re-shuffling existing assets within the portfolio or whether it’s more prudent to add new funds.

By adding new funds, taxes on the capital gains are avoided and distributions from existing units are still captured. This can be accomplished by simply making new deposits and/or redirecting distributions from one asset class to the next. In addition, trading fees and redemption fees may be minimized if the shift of assets is within the same class or fund family.

If the capacity to add new funds isn’t an option, then consider shifting existing assets within the portfolio.

What should an investor look for when using a calculator or survey to determine risk tolerance and set asset allocation goals?

Using a calculator is a good place to start, but sometimes these tools can over simplify a very complex portfolio. These calculators or tools come with the disclaimer “use at your own risk”, and the supplier assumes no responsibility for any unpleasant outcome. In a general sense, choose these tools if it comes from an asset management company, portfolio manager, broker-dealer, or a reputable third party in the asset management business.

How can you be sure your funds do not overlap too much, creating undesirable concentrations?

Diversification not “di-worsification” should be the objective. Simply put, diversification can be achieved in three ways:  by asset classes (stocks, bonds and cash), by geography (USA, Europe, Asia, Latin and South America), and by industry (healthcare, transportation, energy, financials). Reviewing the portfolio holdings with the aid of online tools can make this task easier but they don’t substitute for knowledge. Rebalancing is not as simple as it sounds, and may require going beyond asset classes for optimum performance.

What else is there to know?

It all boils down to KYC. By their very nature, investments are not designed to keep investors awake at night. The experience on the investment journey is equally as important as the destination.

The job of the financial planner is to make sure his or her clients are aware of the good, the bad and the ugly about portfolio management in order to make decisions with eyes wide open. Sometimes, feeling safe and secure trumps tax efficiency or low fees can be more important than finding the highest return. It is qualitative for the most part.

Investments change all the time as financial markets swing up and down. Companies go through periods of growth and profitability, and periods of contraction. Interest rates shift. Each of these factors and many more can contribute to shifts in the value, as well as the allocation of portfolio investments. As some asset classes grow and others sink, the weighting of each asset class in a portfolio changes. A portfolio that is rebalanced on a regular basis will produce a higher return than the weighted average return of its components.

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