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Rebalance your portfolio for the long term

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(Special) - Following a great year in 2013 when many equities posted double-digit returns, investors need to step back, re-examine and rebalance their portfolios based on current market conditions and trends for the future.

"When markets are good it's natural to think that they will continue, but the fact of the matter is that volatility will return," says Arthur Azimian, a financial adviser with Edward Jones in Mississauga. "Volatility is part of the market, and when the downturns come is the time when you need a disciplined approach to investing and downside protection."

Last year was a spectacular one for equities. U.S. large cap stocks in 2013 achieved returns of 32.4 per cent followed by overseas developed large cap stocks at 26.9 per cent, 13 per cent from Canadian large cap stocks and 3.4 per cent from stocks in emerging markets.

History shows, however, that the good times don't last forever.

Since 1977, for example, the TSX has had a dip of five per cent or more on average three times a year, or 108 times in total during that time. It has had a correction of 10 per cent or more 29 times during that same period and becomes a bear market and goes down 20 per cent or more 10 times every 3.6 years.

Azimian advises investors to take a disciplined approach to their portfolios and financial goals, particularly after a period of growth and success, by asking themselves the following questions - where are you today, where do you want to be in the future, can you get there, how do you expect to get there and how can you stay on track to your goals?

"These are questions based on Edward Jones' investing philosophy which is basically long-term and conservative - buy and hold good quality but diversify among investment classes, sectors and regions," says Azimian. "The key is to determine the risk tolerance for each client depending on their situation and stage of life. This will have a lot to do with how the portfolio is built and allocated."

The company recommends investors build their expectation around long-term, not single-year, returns. It is predicting that stocks will yield average long-term returns of seven to nine per cent and bonds four to 4.25 per cent.

It anticipates the global economy will continue to improve helped by expansion in the U.S., Europe and Japan and recommends a weighting of up to 35 per cent in international investments, 50 per cent of that in the U.S. and 50 per cent overseas.

Reduce long-term bond allocations to about 25 per cent of your fixed income portfolio. As interest rates rise bonds with maturities of six to 15 years will be attractive.

It also recommends diversifying among market sectors and reducing weightings in financials and materials for technology, health care and consumer staples stocks.

"It's important to understand that different investments serve different roles," Azimian says. "Stocks offer the potential for growth and rising income. Increasing stock dividends are good criteria for growth and income. Bonds can help provide income and price stability while GICs provide flat income but they are 100 per cent guaranteed."

Investors need to make sure their expectations are aligned with their portfolio. Inappropriate expectations such as seeking higher returns from low-risk investments of chasing gains from investments that are riskier than you're comfortable with can produce disappointing results.

"Use discipline," Azimian says. "Have a plan, use a process, do your due diligence and avoid emotions. The market will be volatile but discipline will help you get where you want to go."

Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.

Copyright 2014 Talbot Boggs

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