Rebalancing your portfolio potentially increases returns The Montrealer June 6, 2008 4779 (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. 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