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Dear Nancy

I’m five to 10 years away from retirement and because of the rapid rise in equity prices, my portfolio is weighted about 80% in stocks and only 20% in bonds. That’s a lot more equity exposure than I envisioned at this point in my life. But with the outlook for bonds so poor (not only are yields tiny, but bond prices are sure to fall as interest rates eventually go up) I’m not convinced I should rebalance into something more like the classic 60/40 portfolio.

What is your advice for portfolio balancing at this juncture, and are there any bond alternatives that you recommend?

Thanks

Mort

Dear Mort,

Often the rule of thumb to help set a guideline for asset mix for a person’s portfolio is 100 less your age is your equity exposure. This is just a guideline. Over the past several years I as a portfolio manager have strayed from this guideline, primarily because of the exceptionally low interest rate environment we have had. The Bank of Canada has a target inflation rate of 2%. Any investment that does not yield that or more, I am effectively losing you money as an investment manager.

Now, there are often exceptions to the rule. The need for capital preservation is the primary one of course. As long as the investor is aware that there is a loss of buying power of those funds then I’m okay with it. One has to be reminded that yields impact the market price of fixed income products such as bonds, except for GICs. GIC prices do not change from purchase to maturity but they do not provide easy liquidity.

I am not surprised that your asset mix has gradually increased the equity exposure over time. It was probably your reluctance to invest your money with a less than 1% yield in bonds. As long as the quality of your equity is high (example banks and utilities) and well diversified across sectors, then I don’t think your portfolio is inappropriate for your current timeframe.

It may even be suitable once you retire because of the income it provides. It might even be more appropriate than getting paid interest income because dividends are taxed at a lower rate than interest, which is 100% taxable. Canadian-sourced dividends even have the benefit of a tax credit.

In these ever changing times, you as an investor need to be willing to adapt to the current investing environment. If it means having a higher than expected equity weighting then it may actually be the right thing for you. Have a discussion with your financial advisor regularly to make sure that your asset mix, objectives and more importantly, your risk tolerance is being met.

All the best,

Nancy

Nancy Woods is a Vice President, Portfolio Manager and Investment Adviser with RBC Dominion Securities Inc.

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