Monday, March 2, 2015

Market Hits New Highs! Time to Rebalance

The equity markets and the bond markets keep hitting new highs in the US.  Good for stocks, not so good for bonds as the yields keep getting lower and lower.

Asset allocation is the division of your investments into various types like bonds and stocks in order to give you diversification and fit your needs for return and risk.  Asset allocation is a very important determinant of your investment success and risk.  If you use passive (index) investing, asset allocation drives over 90% of the variability in your investment returns.

People often ask how to determine your asset allocation?  It does depend on things like:

  1. Your goals - do you need money in the short (1-5 year) or long term (25 years)?
  2. How much risk can you tolerate?
  3. How much return do you need?
This website has a simple calculator that can be useful, or you can consult other online information or your financial adviser.  My asset allocation and deviation from target are shown below.




It is time to look at your asset allocation again - are you on track or off target?  Likely your equity percentage is high and you may want to reduce it.  There are a few ways to do this with advantages and disadvantages

  1. Buy and sell stocks or mutual funds to rebalance.  If this is done in a tax deferred account like an IRA, 401K, or RRSP, then there are no tax implications.  If you buy and sell in a taxable account, you may trigger capital gains and increase your taxes.
  2. If you have an automatic investment deducted from your paycheck, like a 401K or RRSP contribution, you can change the investments that are purchased.  For example, if you are over your target on stocks and low on bonds, you can change the contribution to be 100% bond mutual funds.  This will over time bring your allocation back on target, but it takes time.
  3. If you are regularly withdrawing form your investments, say to fund your retirement, you can change your withdrawal strategy to bring your allocation back to balance.  For example, if your stock percentage is high, then sell stock funds whenever you want to withdraw money, but beware of tax implications.
As always, beware of what you read on the Internet, like this blog.  Not everything is the truth like the US faked the moon landings.  Talk to your financial adviser before making financial decisions like this.

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