Three tips to help tune up your portfolio for the year ahead
1. Review your investment goals and your “roadmap” to achieve them
Your investment portfolio should support what you are trying to achieve through your saving and investing efforts. Ask yourself:
“Have my goals changed over the last year?”
Like many people, you may be reassessing your goals in life due to the pandemic. If retirement is your goal, perhaps you are considering remaining employed or keeping your business longer. On the other hand, you may be considering an earlier retirement or lifestyle changes post-pandemic. Maybe your health outlook or elder care needs have changed. Changes like these may necessitate the need to update your investment goals, in turn leading to changes in your investment portfolio.
“Have my financial circumstances changed over the last year, or since I last reviewed my goals?”
Life can deliver rain and it can deliver sunshine, and changes in our financial circumstances – from receiving a substantial inheritance to losing a job – can require changes to our investment plans. These types of changes can also lead to a change in your “risk capacity” – your financial ability to withstand losses in the pursuit of achieving higher returns within your portfolio.
If meaningful changes to your goals have occurred, it’s an ideal time to speak with us to ensure your investment plan and your portfolio are structured in the right way for you.
2. Realign your portfolio to correct for drift
Your investment portfolio should reflect your personal investment profile, from “very conservative” to “aggressive growth.” Your investment profile guides your “strategic asset allocation” – or the weighting between the major asset classes of cash, fixed-income and equities.
As the value of the assets in your portfolio fluctuates over time, your portfolio can “drift” from your strategic asset allocation. This can result in an over- or under-allocation to a specific asset class, and lead to your portfolio being overly risky, or, conversely, too conservative.
The example here shows a long-term strategic asset allocation that is conservatively balanced: 55% bonds, 40% equities and 5% cash. Over time, however, the portfolio’s equities outperform its bonds and cash components, and it has gradually drifted to be 50% equities, 45% fixed income and 5% for cash. The portfolio may now be too risky or “aggressive” for the conservatively balanced investor, and may now represent a more growth-orientated portfolio.
Canadian equities: S&P/TSX Composite Total Return Index. Fixed income: FTSE Canada Universe Bond Index. U.S. equities: S&P 500 Total Return Index. All performance in C$. Source: RBC Global Asset Management.
Taking the time to correct for this portfolio drift can help keep you on track to long-term investment performance that aligns with your risk tolerance and return expectations.
3. Check the “nuts and bolts” of your portfolio
The individual investments – like bonds, stocks of publicly traded companies, exchange-traded funds and mutual funds – you hold in your portfolio each have unique characteristics that can change over time. What was once the appropriate investment to own five years ago may not be the right one for your portfolio today. These changing characteristics – for instance, a company that once paid a steady and dependable dividend that no longer does, or a bond that once had a stellar triple-A rating but is now below investment grade – can result in a change to the inherent risk and performance within your portfolio.
Taking the time to do a quick review of your holdings can help ensure that your portfolio is holding investments that properly support your investment profile, and are helping you achieve your investment goals.
To help ensure your portfolio is tuned up and ready for whatever the year ahead has in store, talk to us today.
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under license.