Jul 2, 2021
Mid-year portfolio check could call for a rebalance
By Dale Jackson
Investors should look outside of the U.S. for opportunity at this time: Portfolio manager
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Pandemic. What pandemic? The first half of 2021 will surely be a head-scratcher for market historians trying to explain why major global indices posted double-digit gains as the world locked down for (hopefully) the worst of COVID-19.
And growth is expected to continue in the second half as the economy finds a new normal, and businesses and consumers ramp up spending.
That’s the backdrop for long-term investors taking stock of their own portfolios at the halfway point of a year that has no comparison. Here are a few things to consider, or speak with a qualified advisor about, for this year’s mid-year portfolio check.
How did my equity portfolio measure up?
Diversifying the equity portion of your portfolio means taking a stake in a vast array of sectors and geographic regions to spread out risk and be positioned for opportunities wherever they may be.
It also means a diversified equity portfolio is correlated with the broader markets and should reflect their overall performance so far this year. If your portfolio lagged, fees could be taking a big bite out of your returns, or you might not be as diversified as you think.
Compare the performance of each of your equity holdings with their benchmarks and determine if there is a good short-term reason for their under-performance. Some are late bloomers. Some are dead weight.
Is it time to rebalance?
If your equity portfolio managed to outperform the broader indices you either managed to pick the best companies in most sectors, or you might not be as diversified as you think.
As an example, commodities made a roaring comeback in the first half of 2021 after getting crushed in 2020, taking the resource-heavy S&P/TSX Composite Index from last year’s laggard to a year-to-day total return of 15.7 per cent.
Another example is technology stocks, which have been outperforming the broader indices since the onset of the pandemic in early 2020.
Too much of either sector, combined with big gains over the past six months, could be putting your portfolio off kilter. A rebalance could be in order by trimming or selling the winners and buying into under-represented sectors in your portfolio, or sectors that have been lagging during the pandemic like emerging markets.
For Canadians with too much Canada in their portfolios, a strong loonie will go further when buying foreign equities; either directly on U.S. exchanges or through foreign mutual or exchange-traded funds. Consider creating or bulking up your U.S. dollar trading account.
Has my risk tolerance changed?
A diversified portfolio also calls for some fixed income, such as guaranteed investment certificates (GICs) or government bonds, to offset the risk from volatile equity markets.
No matter how the equity portion of your portfolio performed in the first half of 2021, the fixed income portion likely dragged it down. Yields are rock bottom because interest rates are near rock bottom.
The relative size of the fixed income portion of your portfolio should reflect a balance between the returns you need to get to retirement, and how much risk you are prepared to take.
Younger investors don’t need much fixed income because they likely won’t need to withdraw money for a long time, they can get better returns from equities, and they can recover from short-term market corrections.
Older investors with shorter time horizons need reliable cash when they retire, so it might be a good idea for them to use equity gains to boost their fixed-income holdings.
As the potential for inflation builds, interest rates could be heading up. Be sure to keep investments in short maturities to ensure plenty of opportunities to get higher yields as they come.
Are my investments tax-efficient?
Many Canadians are still facing work disruptions as a result of the pandemic. If it looks like your income will be lower in 2021 it might be a good idea to take a pass on your regular registered retirement savings plan contributions for the rest of 2021. Here’s why:
RRSP contributions can be deducted from income, which is taxed at the plan holder’s highest marginal rate. The smaller the income, the lower the marginal rate, and the smaller the tax savings from an RRSP contribution.
Since RRSP contributions and any gains they generate over the years are fully taxed when they are withdrawn, better tax savings could be achieved in a tax-free savings account. You can’t deduct TFSA contributions from income but withdrawals are never taxed.
Having a significant portion of your savings in a TFSA will allow you to make smaller withdrawals from your RRSP at a lower taxable rate in retirement, and withdraw any other income you need tax-free.
