Reader Questions – How do you rebalance your portfolio?

I receive a number of emails every month about my approach to saving and investing.  I’ll be the first person to acknowledge my investment strategies are not perfect but I feel, over time, the plan is good and the plan is working for us.  Here are some recent questions I received and my answers to them.

I recently read you want to have more “core” for your “explore”.  What does this mean?

You are probably referring to this post where I discussed my favourite equity Exchange Traded Funds (ETFs).  For us more “core” means a higher percentage of indexed ETFs in our registered accounts and relying less on dividend paying stocks in those accounts going forward.  Given I have no idea what the future holds I think my best bet for a successful financial future is consistent saving, a broad diversification in stocks, and keeping my investment costs super low. That means keeping the stocks I own for passive income but also making contributions into indexed ETFs for total equity market returns.

Given you are embracing indexing more are you going to sell your dividend paying stocks?

No, largely thanks to the Canadian dividend tax credit along with the fact we are sitting on some capital gains.  I am making use of the dividend tax credit now and likely always will. I have no short-term plans to sell any of our dividend paying stocks and will continue to reinvest all dividends paid.  Besides I like writing these reports.  I will be relying on some passive income from our investments to help fund our retirement lifestyle.

How do you rebalance your portfolio?

Good question!  I try and rebalance my portfolio by buying new assets to align with the sector breakdown of the TSX Composite Index.  Take the ETF XIC as an example of that.  The TSX Index and XIC has a breakdown of roughly 35% financials (think banks and life insurance companies), 20% energy (think Enbridge, Suncor, Canadian Natural Resources and more), 12% materials (think mostly mining companies) and a lesser amount of industrials and telecommunications companies.  I don’t worry about rebalancing my U.S. assets very much, I’m 100% U.S. and international equities, I simply buy more indexed ETFs when I have enough money to do so.  I don’t hold any bonds in my personal portfolio anymore and some investors might disagree with this approach.  The way I see it stocks have always outperformed bonds over the long-term and if, rather when stocks tank in price, I just buy more stocks either directly or via indexed ETFs.  I have learned to celebrate falling prices and I think you should too although I can appreciate this is unconventional thinking.

In the end, I believe investors will be successful if they can do the following things:

1.keep a modest and consistent savings rate,

2.keep their fees low, and

3.diversify across sectors, companies and countries as much as possible.

If you do this via stock selection, great.  If you do this via indexed investing, maybe even better because it’s easier for most investors to do so.  As you invest more and learn more, consider thinking about your assets as a single portfolio, a portfolio that spans multiple investing accounts and even includes your pension if you are lucky enough to have one.  I also encourage you to seek out financial professional help if you’re unsure about what to invest in, where and how.  Thanks for reading and keep the questions coming.

27 Responses to "Reader Questions – How do you rebalance your portfolio?"

  1. “I have learned to celebrate falling prices and I think you should too although I can appreciate this is unconventional thinking.” Being an investor became a lot more fun when I was able to wrap my head around this unconventional thinking. I am fortunate to have a long time horizon before I need to use funds from my investment portfolio so investing has became a win/win when prices go up or down. Definitely happier to see them go down in value.

    Thanks for sharing,

    Robbie

    Reply
    1. Your “unconventional thinking” should become more conventional. My 89 year old mother has been investing this way for 50 years. It has worked well for her. I invest this way and it is working great for me.
      Keep at it.
      Regards,
      John

      Reply
  2. I rebalance my portfolio as I make new purchases. I never purposely buy and sell to rebalance. I maintain 20 – 30 stocks diversified across sectors. I hold all stocks & REITS. I don’t like “funds” of any type. Time is on your side to reap the superior returns of stocks.

    Reply
    1. Same John: I plan to buy and hold and keep and collect dividends and distributions for the rest of my life; 30-40 stocks across sectors and countries.

      I will use a couple of ETFs to diversify further.

      Again, I appreciate the comment!

      Reply
  3. There are so many ways to re-balance a portfolio I have come to the conclusion over the years that there is no one right way. I’ve read so many white papers on the topic that is seems to be as much art as science. Investors need to research their options and find out what works best for their portfolios and risk tolerances.

    In your example, you have 100% stock. I’m not sure everyone could handle a 30-40% drop in their portfolios. Those who can, and have resources to buy more, will do well in the long term if you can weather the storm.

    Reply
    1. Yes, 100% stock if you exclude pension. I have seen parts of my portfolio go down 40-50% at times, I’m not too worried since the dividends keep rolling in. Well, for the most part they do 🙂 When I can, when prices do drop like this I buy more! Thanks for the comment Neil.

      Reply
      1. The pension is an interesting point. I had one client with a sizable DB pension and when you did the math it was worth about $700k. So his $400k or so portfolio we decided to go fully equity, since the pension is easily considered a fixed income asset. I thought the strategy was sensible and he had been wanting to do an all dividend stock type strategy for quite some time. Cheers,

        Reply
        1. A DB pension of $700k coupled with an all-equity personal portfolio of about $400K makes total sense to me. There are some people though that seem convinced to hold lots of bonds even though they have a sizeable pension plan at work. This I do not understand personally, unless of course their risk tolerance dictates this 🙂

          Thanks for the comments Neil, nice insight.

          Reply
  4. I never liked the idea of selling, I have been re-balancing by buying more funds. Have a re-balance spreadsheet helps me determining which fund and how many shares I need to buy.

    Reply
  5. Hi Mark,
    In my opinion, if you are afraid to sell a stock or reduce a position which has become too large, then you are not managing your portfolio at all.
    I believe you need hard and fast rules (in writing) to manage a stock portfolio. This is one area that DIY investors are totally lacking.
    Personally, I can own a maximum of 39 stocks at any one time, although I follow approximately 50 stocks. Each position must be a minimum of 2% and a maximum of 4% of my stock portfolio. If the position goes above 4% I sell enough to get me back to 3%. If it drops below 2% I must re-evaluate the stock to see if it is worth keeping in the portfolio. If it is, I must purchase enough stock to bring me back to more than 2%. If it is no longer a good investment it is sold.
    I have found over the years that this helps me buy low and sell high as stocks go up and down. In addition, no 1 stock is too large of a position to hurt me too badly and it stays large enough to be meaningful.
    Many investors use 5% minimum and 10% maximum. I feel this too wide and prefer the smaller range.
    I also have rules to keep my sector allocation in balance.
    Just my way of dealing with a tough problem of rebalancing.
    Regards
    John

    Reply
    1. Thanks again for writing John. There is more work associated with my portfolio than what I wrote, although not much. In terms of selling, I don’t since that incurs costs so to help the rebalancing act I simply buy. I also use an approximate 5-7% maximum for any one holding and I make sure that holding never exceeds the % held by my indexed ETFs.

      Reply
  6. I don’t understand why some keep on defending bonds while the numbers say it all! I prefer dividends over indexed, but I understand why you want some. Could be a good move for many.

    Reply
    1. Bonds are “parachutes for portfolios” to paraphrase Andrew Hallam. They cushion the blow when the stock market tanks. If you need the capital to live from then this cushion is likely essential. If you have enough capital or passive income, and you can manage your behaviour accordingly, I really don’t see the need for bonds myself as part of a long-term financial plan. Especially at these interest rates.

      Reply
  7. I don’t do much re-balancing. I have weightings in some stocks (26% and 11%) that many counsel against. If I like a stock, I usually buy and hold it for a long time. I don’t focus on the value of my portfolio but rather the “income” it produces now, and can produce in the future. Case in point, over the last couple of days the overall value is probably down over 15K but the income is unchanged. Furthermore, BAM will be DRIPped at a lower price therefore increasing yield. Once again though, we do have two indexed DB plans for our pensions.

    Reply
    1. Hey Lloyd, this is where we focus as well – I care about cash flow vs. portfolio value. My portfolio value since the start of the year is down but my monthly cash flow is up. This is why I’m not totally sold on a total return approach; I’m biased to my hybrid approach that uses the best of both worlds: dividends and capital appreciation using ETFs.

      If you have two indexed DB plans for your pensions; you are largely set! 😉

      Reply

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