At least once a year, it is a good idea to take stock of progress on investments and plan any required adjustments. The beginning of a new year offers a convenient time since account statements and year-end market statistics are available for review, and since many funds and ETFs distribute cash that can or should be reinvested and new contributions to RRSPs and TFSAs may be made. Here is a suggested process to follow. This first part deals with general investment planning while the second part to follow talks about tax-related matters.
1) Review Investment Goals
Are the objectives set in your plan (see Setting Investment Objectives post on how to do this) - retirement, house purchase, vacation, vehicle, education etc - still valid as to dollars required and timing? A new child, a death, an illness, or some other life event may trigger changes to financial priorities and the investment plan must adjust. Money that will be needed within the next few years should be in highly stable, secure and liquid forms. like cash, money market funds, T-bills, or perhaps GICs if the spending date is far enough away and fixed.
2) Tally Performance and Total Savings or Withdrawals The next step is to see how the year has gone towards meeting investment goals by taking all year end account statements (RRSP, Regular taxable, LIRA, TFSA etc) and summing account value. The grand total portfolio is what matters not the performance of individual holdings or accounts. Compare 2009 not just against 2008 since the huge down then up swings cannot give an accurate picture of the longer term trend. Go back four or five years to compare.
For people in savings mode, there should be an increase, perhaps not since 2008, but certainly since 2005. One way to benchmark is to compare your own portfolio performance with those of simple, standard portfolios, as described in this previous post. Refine this by removing inflation to see if there has been a real after-inflation increase (get inflation figures from the Bank of Canada Inflation Calculator). Check also the net contributions to accounts against what was planned in last year's review. The idea is to decide how much you need to put aside in the coming year to attain goals and to make adjustments to current spending and savings rates.
For people in retirement pulling money out of accounts, multi-year totals that show the portfolio increasing are very reassuring as that indicates long term sustainability. Where there is a net portfolio reduction, the key is to have kept the amount of withdrawals as close as possible within the sustainable rate e.g. for a portfolio to last indefinitely, taking out about 4% a year is sustainable as this previous post discusses.
3) Alter Portfolio Structure (if required) Major changes to financial fortunes or life circumstances during the past year may either increase or decrease the capacity to take on investment risk and consequently the mix of investments. A large inheritance may suggest a shift to a more stable, less risky and lower return portfolio since higher returns are no longer required to reach investment goals. A new job with a high salary, enabling a higher savings rate, but which is in a volatile sector, may also suggest a shift to a lower risk portfolio with no connection or correlation to the industry of the job.
4) Rebalance Portfolio to Target Asset Allocations The next step is to plan the purchase and sale of securities in the portfolio to get back to the target allocations as originally set up, or as newly modified. Previous posts on Asset Allocation and on Rebalancing discuss this in detail and give examples of how it is done.
Rebalancing can be quite simple during saving and investment accumulation years. During retirement years, when cash is being withdrawn, it need not be much more complicated. A portfolio can be designed from scratch to produce income - see the example in Generating Cash form the High-Yield Couch Potato Portfolio. Or, it may be done as part of asset allocation - see Generating Cash with Global Couch Potato Portfolio.
Disclaimer: this post is my opinion and for information only and should not be construed as investment advice or recommendations.