Rebalancing Your RRSP

Having the right mix of stocks, bonds and cash is a key to sensibly managing your RRSP. Properly diversifying your investments works to shield your portfolio from the market’s ups and downs and can help grow wealth over time.

But don’t be surprised if your asset mix slowly drifts from where you would like it to be. Why? Not all investments respond the same way to changes in the economy either in interest rates or other unexpected events. Some grow in value while others lag. Ignore your holdings and you could wind up with a portfolio that is overly volatile, or one that’s too conservative to reach your goals. This is when rebalancing can help.

How rebalancing works

Rebalancing works hand-in-hand with diversification. It lets you re-establish your portfolio to once again fit your original risk tolerance and growth objectives. Because it’s a disciplined process, rebalancing helps you adjust your holdings logically, not out of fear or greed.

Say you started out with a blend of 50% stocks, 40% bonds and 10% cash. After a good year in the equity markets your portfolio has shifted to 65% stocks, 30% bonds and 5% cash. Stocks now account for a greater share of your portfolio than you’d like. In this case you rebalance by selling some equities, and then adding enough bonds and cash to get your asset mix back on track.

Rebalancing has two important advantages. It lets you ‘sell high’ and lock in profits on investments that have done well, and ‘buy low’ by adding to assets that are out of favour and on sale.

Market movements aren’t the only reason to rebalance. Your willingness to take on risk might change, particularly as you age. So can your savings goals. Either way, you’ll need to redefine how your investments should look and adjust your portfolio to match.

When should you rebalance?

Letting the financial market’s gyrations tempt you into rebalancing too often can lead to excessive trading costs which can hurt your returns.

A better approach is to choose a rebalancing rule you can stick to. You can rebalance on a set schedule, say annually. Or, only do so when investments grow, or shrink, beyond certain limits. For example, you might want your portfolio to hold no more than 70% in equities, but at least 30% in bonds, at all times.

What’s the next step? Speak with your Weyburn Credit Union representative. We’ll help you find the right balance for your RRSP.