Skip navigation

Weekly Insight

Portfolio rebalancing

TORONTO (GlobeinvestorGOLD) — When it comes to mutual funds, there is no such thing as a one-size-fits-all asset allocation. There are too many variables involved such as objectives, time frame, risk tolerance, cash flow needs, tax status, etc.

However, I know from the many e-mails I receive that readers appreciate guidance on the difficult issue of asset mix. So several years ago, I created a Model Balance Portfolio for my Mutual Funds Update newsletter to help people work out an allocation that is suitable to their circumstances.

This model portfolio is composed of two parts. The “Model” column represents the neutral position. This is the mix I would suggest for balanced investors if there were no distortions or aberrations in the financial world. Of course there always are, hence the “Current” column. This is the portfolio weighting I recommend at the present time. The figure will never vary by more than five percentage points from the model weighting.

The current recommendation is arrived at by analyzing existing financial and economic trends and projections and adjusting the weightings accordingly. Here are the main factors we are currently looking at.

Higher interest rates: The Bank of Canada raised its key rate by a quarter-point in September and again in October. This could have the unwelcome effect of further boosting the value of the loonie but Bank of Canada Governor David Dodge is becoming increasingly worried about rising inflation, fed by high energy costs. Rising interest rates will mean better returns on low-risk money market funds.

Continued rise in the dollar: The loonie seems unstoppable right now. Increasingly, it is seen throughout the world as a petro-currency so as long as oil prices stay high our dollar will experience upward pressure. But oil isn’t the only thing we have going for us. Last month, Finance Minister Ralph Goodale reported that the Government of Canada recorded a $1.6-billion surplus in fiscal 2004-05, the eighth consecutive year we have been in the black. No other G-8 country can come closer to that record of fiscal prudence. Moreover, it appears the 2005-06 surplus is going to be much higher. A U.S. 90c loonie is a distinct possibility in the next six months, which would erode the value of any profits on U.S. dollar securities.

A strong Canadian stock market: The first three quarters of 2005 were very good for Canadian stocks. While the pace is likely to slow, we should continue to see decent gains for Canadian equity funds in the coming months as long as the energy sector remains strong.

A slowing U.S. stock market: The TSX has outperformed the major U.S. indexes by a wide margin so far this year, and there is no reason to expect a reversal of that situation soon. U.S. markets are being weighed down by a number of factors including the huge government deficit, which was exacerbated by the costs of hurricanes Katrina, Rita, and Wilma, a sharp drop in investor confidence, and growing unrest over Iraq. Accordingly, I will continue to underweight U.S. equity funds in our model portfolio.

Weakness in Europe: European funds have been something of a conundrum this year. Despite major economic problems in Germany and France, the great majority of European equity funds are in the black for 2005. I don’t think this can continue much longer and advise underweighting Europe.

Strength in Japan: Japan has almost dropped off the radar screen for most investors. Small wonder – for more than a decade, the Nikkei went nowhere. But every Japanese equity fund listed on Globefund has made money this year. There is growing evidence that Japan is finally turning around, although many bargains still exist.

Emerging markets: This has been the powerhouse category of 2005. Most emerging markets funds are showing double-digit advances so far this year, in some cases in excess of 30 per cent. But we’ve seen this before – big gains followed by equally big losses. So when you’re considering your international weighting, be cautious with these funds.

Against that background, here is my revised Model Balanced Portfolio. If you’re an aggressive investor, reduce the bond fund and money market fund weightings and add to the equity fund positions. Conservative investors should do the opposite.

Model balanced portfolio
Type of Security Model Current
Canadian Money Market Funds 5.0% 5.0%
U.S. Money Market Funds 5.0% 2.5%
Canadian Bond Funds 15.0% 17.5%
U.S. or Foreign Bond Funds 15.0% 10.0%
Income Trust Funds 10.0% 12.5%
Canadian Equity Funds (value) 12.5% 17.5%
Canadian Equity Funds (growth) 12.5% 17.5%
U.S. Equity Funds (value) 10.0% 7.5%
U.S. Equity Funds (growth) 10.0% 5.0%
International Equity Funds (value) 2.5% 2.5%
International Equity Funds (growth) 2.5% 2.5%
TOTALS 100.0% 100.0%

This article first appeared on If you'd like to profit from the insight of more than 30 financial experts and columnists, including Gordon Pape — sign up for a free trial to

© 2007 The Globe and Mail. All rights reserved.

Search Fund News

Advanced Search

Only GlobeinvestorGOLD combines the strength of powerful investing tools with the insight of The Globe and Mail.

Discover a wealth of investment information and and exclusive features.

Free E-Mail Newsletters

  • Morning news headlines
  • Morning business headlines
  • Financial highlights
  • Tech alert
  • Leisure

Sign-up for our free newsletters

Back to top