May 22, 2003

Growing a Balanced Portfolio (and the rules)
by Marcel Chartier

This topic is one I have struggled with in the past, and still do to a certain point. Why? Because there are a number of ways to do this, and each of them are valid. The first way is to buy a balance mutual fund - period. Buy one fund that does it all and just contribute. Easy on the fees and not a big worry. Having a balanced fund may hold back on returns, but overall, if you choose a fund with a good track record, you will do well. The second way, is to buy funds that diversify in style. You buy a value fund, a growth fund and an international fund, making sure that you don't buy funds that overlap. Or, you buy 15 - 30 stocks in different sectors and an appropriate percentage of bonds - monitor and rebalance as you go along and everything is fine.

But, along come the rules. You have to ensure that you are investing according to the "rules". For example, in Canada, we must invest 70% of our Registered Retirement Investment Plan (RRSP)in Canada, the rest (30%), is allowed as foreign content. That means you need to buy Canadian funds, stocks or bonds in the 70%. That forces a geographical restriction that then needs to be counter balanced by buying non-Canadian investments. For most Canadians, that means buying American and/or international investments. And this is were the simple gets complicated. The way the rules are structured, they force a sectoral way of thinking about investments such as, this much is Canadian, this much not Canadian. So, you end up buying a Canadian fund or funds, usually and American/international or global fund(s), and for those who have maximized their contributions, additional investments that are outside your RRSP. Usually, those investments end up being non-Canadian as a majority of the RRSP must be Canadian. Additionally, many people are concerned about the non-RRSP investments being taxed, as an RRSP is tax sheltered, and are looking for tax effecient investments due to income considerations.

So, what do you do to maximize investment returns and to ensure that a balance portfolio is built? One strategy is to ensure each area is balanced, the 70% Canadian portion and the 30% non-Canadian portion of your RRSP. Then if you add investments outside your RRSP you then ensure it is balanced. Another way is to look at everything you hold and try to ensure it is balanced in the end. But, how you do that is another debate. Do you rebalance by selling high gainers and buying what you need to have to rebalance, or just buy in the areas where you need to in order to rebalance what you have?

Well, the answer depends on how much you have. The more you have in investments, the more you need to rebalance what you have as your regular contributions will generally have less affect. Contributing $10,000 a year to a $50,000 portfolio is significant. Contributing that same a month to $500,000 is not signficant.

If I was to start investing over again, I would probably have kept things as simple as I could and begun by buying a Canadian value oriented, equity weighted, "balanced" type of fund to start with, and an international fund for the foreign content. In this way I would minimize fees and minimize headaches. As the amount grew, I would then add additional funds that complemented the holdings I had. For stocks, I am a firm believer in averaging into stocks, and not putting alot of money in at one time. This way you get to know more about a company and can re-evaluate the holding on and ongoing basis, and rebalance your holdings buy buying on price dips. Then again, when you have a large amount in stocks, the only way you may have available to you to to rebalance, is to sell some stocks and buy others.