RRSP Season is the time to Rebalance!

It is RRSP season and it is time for our annual determination of how much to contribute.  It also becomes a time for us to determine what we should buy in the RRSP.  This is a great time to revisit what we need to rebalance within our RRSP as well.

Portfolio rebalancing is largely about risk management.  It is the act of realigning the weightings of one’s portfolio back to a desired or targeted level.   It is required over time as each element of our portfolio can shift in value, both up and down.  That may place us in a different portfolio weighting altogether, and expose us to much more risk/reward than we initially sought.

For example, let’s assume a person is a “balanced” investor with 60% Equity and 40% Fixed Income.  Two years ago this investor made their initial contribution to an RRSP that matched this targeted allocation.  Two year later, we find out that Equities have gone up 20% per year, while Fixed Income has been relatively flat.  As result of this growth pattern, the portfolio is now 70% Equity and 30% Fixed Income.

The investor should be happy as the portfolio has experienced healthy growth.  But the new portfolio weighting is more suitable for a “growth” investor, whereas the investor was assessed as more “balanced”.  If the portfolio is not rebalanced to a 60% Equity and 40% Fixed Income mix, the investor could face larger downside risk to a market correction than they initially preferred, as more of the portfolio is Equity based.

Also remember the investor is 2 years older.  For some, that may be two years closer to a retirement decision in the near term.  Having too much exposure to Equities when you need to start drawing amounts from your RRSP is a dangerous combination.  Imagine needing to start supplementing your retirement income with an RRSP over-exposed to Equities during the technology boom/bust of the early 2000s, or the financial crisis of 2008/2009!!

Rebalancing is not just confined to Equity versus Fixed Income.  It can also be between sub allocations therein.  For Equities, you should consider your geographic (Canada versus US versus International Exposures) and industrial concentrations (financial services versus materials versus information technology versus consumer staples, etc.).  Similar consideration should be done with your Fixed Income portfolio where you invest in more than one type of instrument (government debt versus corporate debt versus other higher yielding options).

Also, don’t forget when you rebalance, you should be considering all of your investments!  A look at just the RRSP may not be appropriate when you have investments in your Tax Free Savings Account, or your spouse has their own independent RRSP investment.  I believe proper asset allocation and rebalancing can only be done from a family viewpoint, taking into account all investment accounts.

Finally, remember that rebalancing is emotionally difficult.  We are effectively forcing ourselves to sell what has performed well, and buy things that haven’t done as well.  This is not to be confused with trying to “time” the market.  We are simply righting the ship back to a preferred weighting for our circumstance.

So don’t forget to rebalance during this RRSP season! 

Contact me for a review of your current RRSP at marco@mgfadvisory.ca or 604-789-3888