The Learning Centre:
The top 3 benefits of reallocation in your investment portfolio
When the Ontario Teachers’ Pension Plan (OTPP) shifted its entire portfolio into global markets and inflation-sensitive investments in August 2018, many educators asked, “Why?”.
As one of the 323,000 active or retired educators in Ontario that pays into/draws income from OTPP, you’re probably thinking, “Okay, great—but why the shift? And more importantly, what does it mean for me?”
Adjustments are typically made to a portfolio when it needs rebalancing, or reallocating.
“Rebalancing” is called for when the original percentages of different asset classes inside your portfolio change over time, so they no longer are in line with your investment objectives. (You can find more about it, here: <https://educatorsfinancialgroup.ca/learning-centre/portfolio-risk-tolerance/) On the other hand, “reallocating”- which we’re discussing here – is changing your investments because of market conditions or to reflect a change in your objectives. (For example, investors would typically reallocate their portfolio as they approach retirement – reducing the percentage of higher-risk investments like equities in their portfolio.)
Here are 3 reasons why reallocating your investment portfolio is both essential and beneficial:
#1: It ensures your level of risk reflects your current objectives
Asset allocation is all about balancing risk and reward. Depending on the direction of market fluctuations that occur naturally within any given time period, you could end up taking on risk that is either far greater (or smaller) than is right for you. Checking your portfolio regularly to see if it requires reallocation will require you to check in on yourself on how much risk is appropriate for you now, and ensure the investments you hold are appropriate.
#2: It provides the opportunity to review fund performance and make any necessary changes.
Some asset classes will naturally perform better than others. Reallocating provides the perfect opportunity to evaluate the performance of all mutual funds in your portfolio and make adjustments as needed.
As an aside – keep the tax implications in mind when reinvesting any profits incurred when selling your investments. While there are no tax benefits for reinvesting capital gains in taxable accounts, any capital gains on any mutual funds or stocks held in a retirement account are not taxed. This means you can reinvest those gains, tax-free, in the same account.
If you sell off underperforming stocks, you can take advantage of ‘tax-loss selling’. This enables you to minimize tax obligations by generating capital losses. However, if you suddenly feel seller’s remorse and decide to buy back the underperforming investment within 30 days of selling it—you won’t be able to take advantage of tax-loss selling. That’s due to the superficial loss rule, which states that if an investor, their spouse (or a company they control) buys back a mutual fund within 30 days of selling it, they are not permitted to claim the capital loss for tax purposes. Failing to obey the 30-day rule will result in the capital loss being disallowed.
Tip: Using dollar cost averaging, you can lower investment costs and reduce the impact of market volatility on your portfolio. Learn more.
#3: It enables you to adjust your investment strategy to accommodate for any life changes.
Getting married. Having kids. Getting divorced. Having grandkids. Getting remarried. The only thing constant in life is change—which means your investment goals will also change and evolve over time. In addition to any life changes, there is also your life stage to consider. While you may have been willing to take greater investment risks early in your career, as you approach retirement, you may want to get a little more conservative with your money (especially once you start collecting your pension).
Reallocating your portfolio enables you to factor in any major or minor changes, so that your financial plan is always current and follows the right investment strategy (e.g. appropriate asset allocation, risk tolerance, etc.). This will keep you on track to achieving your financial goals within your desired time frame.
Click here for educator-specific ways to put your financial plan into motion!
Are you ready to reallocate your investment portfolio, but not quite sure how or where to start?
With over 40 years dedicated to helping education members achieve their financial goals, Educators Financial Group has investment advice that is appropriate for your specific life stage and financial situation. No matter where you are on the pay grid or what your pension income is in retirement, we can take a look at your current investment portfolio to ensure you’re on track to realizing your financial dreams.
Have one of our financial specialists connect with you about rebalancing your portfolio.
Did you know? With Educators Monitored Portfolios, you don’t need to worry about reallocating your investment portfolio. Learn more.
The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy. Commissions, trailing commissions, management fees, and expenses mall all be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed. Their values change frequently and past performance may not be repeated.