We often talk about rebalancing our life-work-play priorities and activities.
But when is the last time you rebalanced your investments? The main balance factors involve diversification, liquidity, income need and risk. For example, do you have the appropriate amounts (for you at this time) in (1) the variety of your investments, (2) the investments which can be turned quickly into cash without penalty, (3) the income-producing instruments and (4) the risk categories (as in, "don't invest past your sleeping point")?
(1) The variety in the stock market, for example, should cover the major parts of the economy - manufacturing, consumer, financial, resources, property and so on. The over-all variety in your portfolio could include GICs, bonds, equities, real estate and perhaps a business (plus possibly niche areas like precious metals, jewelry, antiques, art, stamps, etc.).
(2) As well as actual cash in savings accounts, you can also access cash quickly and without penalty from money market funds and Canada Savings Bonds. While GICs, term deposits and other bonds are liquid, redemption could involve penalties.
(3) Rent, interest, dividends and business cash flow can provide regular income; Canadian dividends receive preferential tax treatment.
(4) Risk tolerance will depend on your personality as well as your time horizon and stage in life.
When one investment or sector does well or poorly, that will alter your investment balance. You then might sell what has gone up and/or buy more of what has gone down or another instrument in that category.
However, this could trigger capital gains (outside your RRSP/RRIF) and also involve transaction costs.
So another rebalancing strategy is to choose future investments in the category that has gone down in value to bring it back up to the appropriate balance.
Note that rebalancing forces you to sell high and buy low - something you might otherwise struggle to do.
Bottom line: Your financial balance is as important as your personal one. Review both at least once or twice a year and adjust as required.
Mike Grenby is a columnist and independent personal financial advisor; he'll answer questions in this column as space allows but cannot reply personally. Email [email protected].
