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As equity markets show signs of growth - perhaps
it's time to review your portfolio for signs of drift?
Adopted from material provided by TD Waterhouse
and Mackenzie Financial
A Companion Advisor Article
Over time your original portfolio weightings may change
as some investments perform better than others and as such the new weightings
may distort the overall risk and style balance you initially set out to
achieve. This phenomenon is called Portfolio Drift.
What's happened?
Global and domestic equities, fixed income and/or cash equivalents - can
perform very differently in the same market environment. Any difference
in performances may cause your asset mix to move away from its ideal balance.
Ideally your portfolio was structured to meet both your
investment risk tolerance levels and long term goals. However over time
any one of the core elements as mentioned above, could have grown in value
while another, as a percentage of the total portfolio, shrank. To illustrate:
when the asset allocation was decided say in 1989, your portfolio my have
contained 50% Global Equities 15% Canadian Equities and 35% fixed Income.
As time and market shifts have their effect, the combined equity positions
may have increased to say 72% and fixed income reduced to 28%. By the
year 2000 equities may have risen to 80%, while fixed income was further
reduced to 20%. Looking at the mix today however after a severe equity
correction, we might see 60% equities 40% fixed income.
Your portfolio's asset allocation is considered by experts
to be the most important contributor to your long-term investment success.
It is considered that 90% of the variability of portfolio returns can
be attributed to asset allocation decisions, rather that specific securities
or market timing.
What to do:
- Review your current situation. Have your goals and
needs changed? Does your portfolio need re-balancing to accommodate
newer objectives, goals or obligations? It's also wise to keep this
type of record for future comparisons and reviews -. Does your investment
mix coincide with your time horizon and risk tolerance? Take
our online quiz to get an idea.
- Review your asset
mix in concert with the original investment plan. Has the portfolio
become more conservative or more aggressive? See asset model mix
- Consider separate objectives for retirement and non-retirement
investment plans
- Plan to review your investment plan (with your advisor)
or at a particular time of year. A significant life event such as a
change in marital status - in or out, a change in income or the birth
of a child are ideal opportunities for reviews and making any appropriate
changes.
Staying on top of changing market conditions can be
a challenge even for the seasoned and disciplined investor. Portfolio
drift is a natural occurrence over time and in dynamic markets. However,
if it is left unchecked it will lead you offside from your original plan.
You can adjust the portfolio yourself or with the help of an investment
advisor.
What are the options
While in the process of reevaluating or rebalancing your investments,
it may be worth considering an asset allocation program (AAP). These programs
are designed and customizable to almost every type of investor from conservative
to aggressive. Once you've established the plan objectives, the type and
mix of assets and suitability - the program does the rest. AAP's are a
convenient way to leave the ongoing decision-making, research and allocation
of asset to money managers and investment professionals.
AAP's are designed to automatically rebalance, thus maintaining your target
asset mix even as market conditions change - So you don't have to be concerned
about Portfolio drift.
By optimizing the foreign content exposure of RSP-specific portfolio AAPs
you can enjoy better long-term growth prospects.
AAP's offer investors optimal diversification across management styles,
geographic regions and types of asset classes and reduced portfolio volatility.
Useful site resources: We have prepared a series of articles that
describe and help remind investors of the risks and rewards of investing
entitled Cornerstone Planning.
Note: The statements contained
are based on material believed to be reliable, but are not guaranteed
to be accurate or complete. All investment or trading strategies should
be evaluated prior to implementation for suitability. This newsletter
article is not intended to provide individual, financial, tax or investment
advice. (See our Mutual
fund disclamier.)
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©
, Fiscal Agents Money Management Newsletter
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