A retail client approaching retirement, with a moderately conservative risk profile, holds 70% in Canadian equity ETFs and 30% in Canadian aggregate bond ETFs. Over the past year, equity markets have performed exceptionally well. The client's portfolio is now 80% equity. What action should the portfolio manager consider regarding strategic asset allocation?

Question: A retail client approaching retirement, with a moderately conservative risk profile, holds 70% in Canadian equity ETFs and 30% in Canadian aggregate bond ETFs. Over the past year, equity markets have performed exceptionally well. The client's portfolio is now 80% equity. What action should the portfolio manager consider regarding strategic asset allocation?

Answer options:

• Increase equity allocation further to capture momentum if the market trend continues. ✅ Rebalance the portfolio back to the original 70% equity / 30% bond allocation.
• Shift the bond allocation into higher-yield corporate bonds to boost overall returns.
• Advise the client to withdraw the excess equity gains to reduce risk and realize profits.

Correct answer: Rebalance the portfolio back to the original 70% equity / 30% bond allocation.

Explanation: Strategic asset allocation involves setting long-term targets and rebalancing when market movements cause drifts. Given the client's risk profile and the asset drift, rebalancing back to the original target allocation is crucial to maintain the intended risk-return profile.