Should I rebalance my investments or stay put?
Scenario:
Jackie and Todd are a couple in their late 30s. Both have good jobs as high-school teachers that they enjoy and provide them with an adequate income, a nice lifestyle, and a decent pension.
However, ongoing market volatility has brought with it a real shift in the asset mix of their portfolio. What started out as an appropriate balance between equities and fixed income has shifted very much to an underexposure to equities and an overexposure to fixed income given their age, goals, and time horizon to retirement.
Gaétan Ruest*, Manager, Strategic Investment Planning and Myron Knodel*, Director, Tax and Estate Planning say:
A portfolio assessment would be conducted for Jackie and Todd. Through our proprietary strategic investment planning approach, rebalancing would occur automatically. If not, this rebalancing would be done through a portfolio approach, or conversely by resetting investments to targets established in advance with clients through careful planning with an Investors Group Consultant.
A rebalancing strategy is important because a passive investment approach is often not enough. When left alone, an investment portfolio can assume completely different characteristics from what was first implemented. The chart shows how a moderate investment profile can get taken off track.
For example, in the recent bear market, equity investments in particular were punished while fixed income provided a reasonable return and stability. As a result their portfolio had taken on characteristics more closely resembling a moderate conservative portfolio and drifted away from initial targets and their goals.
The primary objective of rebalancing is to better position the portfolio for future market growth. However, Myron points out that the tax implications of rebalancing non-registered investments should not be overlooked and planning strategies that maximize the tax benefit need to be considered. Rebalancing involves the disposition of securities which gives rise to a capital gain or loss. Capital losses realized in a given year must first be offset against capital gains realized in that year. Should capital losses exceed capital gains, the excess may be applied to reduce net capital gains in any of the three preceding taxation years. Any loss excess may be carried forward, and applied against net capital gains realized in future years. The ability to utilize a capital loss is denied when an identical investment is purchased within the 30-day period before and/or after the date the original investment was disposed of.
With this in mind, Jackie and Todd should review their prior three years of income tax returns to determine if they have realized net capital gains to which capital losses incurred in the current year on rebalancing could be applied. If specific investments have accrued capital losses, consideration should be given to realizing those losses by disposing of them and acquiring similar (but not identical) investments so that the tax benefits of the capital loss can be utilized. For example, a mutual fund unit trust investment could be sold and replaced by a corporate class share investment within the same sector, resulting in the realization of a capital loss but remaining invested in that sector.
Working through all of the above with an Investors Group Consultant will help Jackie and Todd determine an appropriate course of action.
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Gaétan Ruest, B. Sc., FSA, FCIA
Manager, Strategic Investment Planning
Gaétan is an actuary in our Strategic Investment Planning unit and assists Consultants with solutions to complex investment planning issues.
Myron Knodel, B.Admin., CA, CFP®, TEP
Director, Tax and Estate Planning
Myron is a chartered accountant specializing in tax and estate planning. His primary role is the delivery of education and support to Investors Group Consultants on complex tax matters.
This article, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
