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Annual portfolio review keeps assets on track
4/20/2019 7:05:10 AM
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By Robyn K. Thompson  | Monday, January 21, 2019


Concerns about the health of the global economy, the effects of the U.S.-China trade and tariff dispute, rising interest rates, and the flattening yield curve combined to make the stock market slump of the fourth quarter of 2018 one of the worst in a long time. Toronto’s benchmark S&P/TSX Composite Index dropped 11% in the quarter, as a 38% drop in the price of crude oil weighed on energy producers. The index ended the year with an annual loss of 11.6%. Similarly, New York’s blue-chip S&P 500 Composite Index plunged 14% in the fourth quarter for an overall 6.2% loss in the year. So is it time to sell stocks and re-set your portfolio with a heavier weighting to cash?

Stick to your plan

The key problem, always, is that no one knows precisely whether what’s going on now is in fact a healthy “correction” following a bull market of nearly unprecedented length, the beginning of a “bear market,” or a temporary momentum-driven market triggered by a shift in investor sentiment combined with a surge in year-end tax-loss selling, option resets, and window-dressing by big funds (including mutual funds, hedge funds, and active ETFs).

My advice at this point is to stick to your investment plan – if you have one. The silver lining can be found only if you stay invested in a well-diversified portfolio. Fear is the impetus for bad investment decisions. If you have made a well-considered asset allocation, made solid individual investment choices, and have done your research – whether fundamental, technical, or quantitative – and your investment objectives remain intact, then ride out the volatility. If you have a cash reserve, be prepared to snap up bargains when they appear, especially in the Canadian energy and financial sectors.

So far, the New Year has seen markets continue their volatility, with yet more steep losses seen in the early days of trading in January. But this won’t last forever. There will be a major buying opportunity, and astute investors will be well positioned for it.

Instead of pushing the panic buttons, those with well-constructed portfolios that take into account your true tolerance for risk, would be well advised to conduct their annual portfolio review to see if any rebalancing is needed.

An annual portfolio review not only tells you how your portfolio has performed against your benchmark, but whether it’s time to make changes to your holdings. This could happen, for example, if some investments in your portfolio have done exceptionally well or have not met expectations, and have consequently tilted your asset weighting in that sector beyond your optimal target level. To conduct a portfolio review, at a minimum you need to look at four key areas.

1. How assets are allocated

Assets fall into three key groups: safety, income, and growth. The weight that each group commands in your portfolio largely determines the return you can expect and the risk that you’re accepting over a given time. If that allocation is skewed by extraordinary gains or losses in one class or another over the year, your risk profile will change. For example, steep losses in equities may have underweighted that asset class and unduly skewed the weighting of your fixed-income holdings. But because fixed-income is considered more defensive than equity, that means your overall risk profile has become more defensive, perhaps much more than you wish.

2. Are you diversified?

Diversification is at the heart of risk mitigation. It doesn’t make a lot of sense to hold only one bond and one stock. Ensure individual asset classes contain a sufficient number of diversified individual securities to provide good diversification. For example, you’d hold a mix of federal, provincial, and corporate bonds, further diversified by yield and duration. And in equities, you’d diversify by sector, by region, by capitalization, and so on, to achieve your desired risk level.

3. Review individual securities

With proper research, your individual stock and bond holdings work in harmony to achieve a specific objective, say a minimum dividend yield or a specific target price gain or a specified yield to maturity. When that target has been achieved, the position is usually analyzed to determine whether a switch or change within the portfolio is needed.

4. Review investment funds

If you’ve diversified by investing in mutual funds or exchange-traded funds, review your funds’ performance over the past year and compare it with your investment rationale. Have there been changes in fund management or mandate (in the case of mutual funds) or to index methodology, liquidity, or ownership (in the case of ETFs)? Investment funds are frequently closed, merged, and renamed. Make sure such funds still deliver what you expect. If not, consider switching.

5. Beware of tax consequences

Bear in mind that rebalancing portfolios through asset sales may have unintended tax consequences or other unwanted effects. And remember, your objective is not to remake your portfolio but to restore it to a state where it continues to meet your time horizon, risk tolerance, and return objectives. If your portfolio has outgrown your ability or desire to manage it, consider consulting a qualified independent financial planner to help you work through the review process.

Watch Robyn discussing how to protect your finances when you’re going through a divorce on CTV’s “Your Morning.”

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at for a confidential planning consultation.

Notes and Disclaimer

© 2019 by the Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.

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