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Rebalancing your portfolio potentially increases returns
(This article discusses financial issues and uses fictitious names of people for illustrative purposes.)
When we last visited with Rhonda and
Steve Baker, they were discussing the positive impact of Asset
Allocation on their portfolio with their son Adam.
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Adena Franz
Portfolio Manager
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The Bakers are only a few years away from a well planned-for early
retirement and will be continuing to support their son even after their
departure from the work force; while he finishes school. Adam,
who is studying at the University level, had learned about the concept
of asset allocation in his Economics class and was interested in
learning more. Today, the Bakers are en route to visit
Steve’s mother 3 hours outside of the city; a perfect opportunity
to continue their discussion.
“Mom,” Adam began, “the last time we spoke about
asset allocation, you said that it’s an approach that distributes
an investment portfolio among different asset categories based on an
investor’s willingness to trade off risk and returns. You
told me that by not putting all your eggs in one basket so to speak,
you are reducing your risk for a variety of market conditions, but you
said there was more to it than that. What did you mean?”
“Well, I guess what I was trying to say is that there is a great
deal to consider when thinking of using this strategy. It’s
about more than just investing your money, leaving it where it was put
and watching your investment grow.” Rhonda answers as she adjusts
the sun visor. “In managing your portfolio, you not only
have to take into account your tolerance for risk and the amount of
time the investment will be held, but it has to be regularly evaluated
and rebalanced considering these factors as well. ” The
share of the various assets in a portfolio can vary as a result of the
cyclical fluctuations of the market over time. Rebalancing is the
act of returning your portfolio to its initial balance of assets, and
therefore its established risk level. The goal of most
experienced investors is to take some of the gains from assets that are
doing well and reinvest them in the areas that are
underperforming. A portfolio may also be rebalanced by adding
fresh money to the undervalued portions. Rhonda pauses and chuckles to
herself.
“What are you laughing at?” Steve asks his wife taking his eyes off the road to scrutinize her.
“I’m remembering the first time our money manager spoke to
us about rebalancing.” Rhonda replies “Remember how
resistant we were?”
Steve smiles, “We couldn’t understand why we should sell
the assets that were doing well and buy more of the ones that were
performing poorly.”
“Why would you?” Adam asks.
“Well there are a number of reasons, not least of which is that
by doing so you are implicitly following the adage of buying low and
selling high” Rhonda responds, “Luckily our money manager
was there to explain it to us. By not rebalancing our portfolio,
we were also allowing our risk level to shift to a point with which we
were not comfortable. And since you can’t predict how the
market is going to behave from one day to the next, you don’t
know if the securities that are performing well, and now compose a
larger portion of your portfolio, are going to continue to do so.”
By taking the time to find the right person to manage their money, the
Bakers discovered that rebalancing if done properly has the potential
to increase their returns while maintaining the risk level of their
portfolio. They also learned that there are many factors to take into
account when considering rebalancing. Steve pulls into his
mother’s driveway and continues, “Having someone there to
take the time to explain these concepts and their consequences and to
help reinforce the necessary level of discipline has been crucial to
the success of our investing.”
Adena Franz
is a Vice President and Portfolio Manager at MacDougall MacDougall
& MacTier Inc. She can be reached at 514-394-3771. The information
contained in this article is for general information purposes only. It
does not account for specific investment objectives or the financial
situation of any person reading it. Opinions expressed are those of the
author and do not necessarily represent the opinions of MacDougall,
MacDougall & MacTier Inc. Investors should seek professional advice
regarding the appropriateness of investing in any securities discussed
or recommended here and should recognize that statements regarding
future prospects may not be realized.
 MacDougall, MacDougall & MacTier Inc.
The Franz Group
1010 de la Gauchetiere Ouest, Suite 2000
Montreal, Quebec H3B 4J1
www.3macs.com
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