Asset allocation is one of the most important parts of investing and It refers to the ‘weighting’ of different asset classes within your portfolio. When building a portfolio, you can choose a mix of investments from different asset classes: cash, fixed income and equities, for example. You set the portion or “weight” of each type of investment based on your investor profile and tolerance for risk.

 

Market impact on your asset allocation

 

Market fluctuations can change the value of your investments. Let’s say the equities in your portfolio grew by 10% in value, your portfolio is now starting to take on more of a growth-oriented profile.

 

This change over time is called portfolio drift. It can happen to every investor. Why is it a concern? It can expose you to more risk than you originally planned. In other words, you’re no longer tracking to your original plan. By rebalancing your portfolio you can correct the drift, and return to your original asset mix.

 

When to rebalance your portfolio

• The 5% rule: This ‘rule’ suggests that investors rebalance when any part of your portfolio drifts beyond 5% of its target range. For example, if equities are meant to comprise 40% of your portfolio, you consider rebalancing if they exceed 45% or fall below 35%.
• Tax-loss selling: If you have a taxable investment account (not an RRSP or other registered account), you may want to rebalance near the end of the year. This allows you to use any losses to offset your gains, which can reduce the taxes owed.
• Regular reviews: Annually, monthly or quarterly – the timing depends on you and market conditions. If markets are changing a lot, you may need to rebalance more often.

 

Tips to make rebalancing simpler

• Dollar Cost Averaging: This is where you invest on a regular basis, across all market conditions. You can direct each new investment to help rebalance your portfolio as needed.
• Professionally Managed Portfolios: This is a turn-key solution where your asset mix is managed by professional portfolio managers. You choose the type of portfolio that’s right for you and they will correct for drift when necessary.
• Work with an Advisor: Partner with a professional investment advisor to help you determine an asset mix that’s right for you. They can monitor your portfolio to help you stay on track.

Remember to reassess your investment plan if your investment goals, time horizon or risk tolerance change. And sometimes, changes in markets may also prompt you to review and rebalance. Staying informed about the markets and the economy can help you monitor your portfolio drift and determine if and when action is necessary.