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Invest Well. Live Well: It's about balance

Everything in moderation — investing needs balance, as well
Invest Well Live Well2

Much of life is about balance. Too strict of a diet tends to lead to its failure. Too much indulging in one area can lead to complications in another. As my wife Amanda puts it, she works out to stay healthy and to say yes to dessert.

Everything in moderation.

Investing needs balance, as well. Eric and I have created our own Investment Philosophy and 10 Core Beliefs that we use to help manage money. We believe these are 10 evidence-based strategies that can help reduce risk and enhance returns.

One of our core beliefs is to rebalance portfolios on a regular basis.

Asset allocation is the proportion of investments traditionally invested across cash, bonds and stocks. It is seen as the cornerstone to investing (also a core belief we can discuss in greater detail another time). For us, investors should align their portfolio and asset allocation to their personal investment objectives, risk tolerance and time horizon. Extensive research has shown that asset allocation accounts for roughly 90 per cent of a portfolio's return. Over time, investment returns for stocks, bonds and cash will vary and can skew one's portfolio, highlighting the need to rebalance.

Let's assume Jane has a $500,000 portfolio invested in 60 per cent equities (stocks) and 40 per cent income (bonds). Assuming that the estimated return for stocks is seven per cent and bonds is four per cent, without factoring fees, taxes etc., Jane would have a projected return of 5.8 per cent a year. After five years, her portfolio would grow to $652,620. Because of the stronger performance in equities, it has grown to become nearly 65 per cent of Jane's investments.

Positive performance is a good thing, but if left unchecked, it can unintentionally push Jane outside her desired objectives and risk tolerance.

The solution is to rebalance a portfolio back to its original asset allocation target. That means trimming five per cent off equities and adding five per cent to bonds, thereby returning Jane's portfolio back to original 60/40 objective.

A few benefits to rebalancing:

• Outperforms buy and hold: According to research by Morningstar in July 2020, an annually rebalanced portfolio outperformed a buy-and-hold portfolio through the last three major market crashes: The Tech Wreck in 2000, the 2008 Global Financial Crisis and the 2020 COVID SellOoff.

• Lowers risk: The same study found that annual rebalancing lowered the risk, or standard deviation, by 16 per cent more than the buy-and-hold strategy over the past 15 years.

• Forces discipline: Investing is an emotional process and we can be reluctant to trim our winners. Systematic rebalancing removes emotion and keeps a methodical process to managing one's portfolio. Emotions often are the biggest downfall to an investor's success.

• Takes advantage of market volatility: Rebalancing can potentially enhance returns during market volatility. During a correction, this would mean buying more assets that have fallen in value and selling those that have held up well. Or put in other words, one would increase potential to buy low and sell high.

The past year has been a rollercoaster ride for investors. As market volatility increases, so does the possibility of one's portfolio potentially straying from their objectives. It may be time to review your portfolio and see if any adjustments are needed. As always, we encourage consulting with an investment professional.

Until next time, Invest Well. Live Well.

Written by Keith Davis.

The views expressed are those of Eric Davis, senior portfolio manager and senior investment advisor, and Keith Davis, associate investment advisor, TD Wealth Private Investment Advice, as of May 17, 2023, and are subject to change based on market and other conditions. Davis Wealth Management Team is part of TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc. which is a subsidiary of The Toronto-Dominion Bank. For more information: 250-314-5124 or