By Tom Bradley

I just came out of a team meeting in which the question was asked - How are client conversations going with regard to re-balancing?

For clients who have not touched their portfolio in a year or more (and aren’t in the Founders Fund), it’s likely that their portfolio is out of line with their long-term asset mix. The stocks in their portfolios were up 25-30% last year, while the bonds were relatively flat. A portfolio that started 2013 at 60% equities/40% bonds will have crept up to somewhere around 66/34 by year-end.

Many of our clients are using their RRSP and TFSA contributions to bring their portfolios back into line, but just as many are resisting. In some cases, there are good reasons for not re-balancing (changes to their personal situation or other assets, or they’re still not fully invested). For others, the reasons are not as well grounded. The stock funds have been awesome and they want to stick with them. And/or the outlook for the Income Fund is more subdued, so they don’t want to go there.

Long-time clients and regular readers know how important it is to have a plan, be disciplined about executing it and to look forward, not back. For those who are ‘letting your portfolio run’ (i.e. not re-balancing), we encourage you to ask yourself the following questions:

  • Is there any reason I should be changing my long-term asset mix? Has my situation changed?
  • Are there compelling reasons why I want to take more short-term risk with my portfolio today (i.e. owning more stocks)?
  • Am I comfortable holding more stocks than this time last year, even though valuations are higher and the medium-term potential is lower?
  • Am I looking to hold more of the Global and Small-Cap Equity Funds because of their strong performance over the last year or two? If 2014 turns out to be a down year in the stock markets, am I ready to accept a larger negative return than my plan calls for?

We’re being noisy on this topic because it’s times like these when investors are most inclined to stray from their plan. When we talk about behavioural challenges, we usually focus on weak markets. But the discipline we demand in bad times is also required when markets are good.

As we say in our report, The Five Essential Elements to Being a Better Investor, “Re-balancing will enhance returns in some market environments (choppy, non-trending markets) and detract in others (long-running, consistent trends), but the risk management benefit is all-weather. If you re-balance consistently, you won’t set yourself up for a fall by getting too carried away in good markets, or too discouraged in down markets such that you miss out on the inevitable recovery.”