How do you rebalance your portfolio?

How do I rebalance my portfolio?

I receive a number of emails every month about my approach to saving and investing. One of them is:

How do I rebalance my portfolio?

I’ll be the first person to acknowledge my investment strategies are not perfect but I feel, over time, the plan is very good and the plan is working for us. 

Here are some recent questions I received and my answers to them.

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

You are probably referring to these posts and page where I shared some of my favourite ETFs:

ETFs

For us more “core” means a higher percentage of indexed ETFs in our registered accounts over time 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 and extra diversification over time. 

You can read about the dividend paying stocks I own for income and growth here.

You can read about my favourite low-cost ETFs to own here. 

Reader: Since you are embracing indexing more are you going to sell your dividend paying stocks?

Heck no!

Largely thanks to the Canadian dividend tax credit along with the fact we are sitting on some very large capital gains, I have no intention of selling my stocks. I am making use of the dividend tax credit in my taxable account and likely always will.

I have no short-term plans to sell any of our dividend paying stocks and will continue to reinvest may dividends paid. Besides I like writing my juicy dividend income updates! 

I will be relying on some passive income from our investments to help fund our retirement lifestyle. I think we have an outside shot of earning close to $20,000 per year from our non-registered portfolio alone. 

Dividends

Reader: How do you rebalance your portfolio?

Good question!

I try and rebalance my portfolio by buying new Canadian assets that have been beaten up in price to get back to my personal targets.

I use the breakdown of the TSX 60 or whatever iShares ETF XIU holds in various sector weights as a guide with a few caveats:

1. While the TSX Index has had a long-term sector breakdown of many financials and energy stocks, I try and ensure no one sector has more than 20% weight. The only exception to this might be Canadian financials. I own all Big-6 banks and the top life insurance companies. 
2. I believe it’s best to own more telcos and utilities in my portfolio than XIU given a) the long-term / juicy dividend histories of those companies and b) the fact they can and do increase prices to hedge inflation. 
3. I own more REITs than XIU would ever hold. My target is about 10% REITs.

Looking at XIU as a proxy then for my own Canadian portfolio guidance:

• I would own <30% in the financial sector.
• I would own <20% in the energy sector (think Enbridge, Suncor and a few more).
• I would own up to 20% tech or any other sector. 
• I would own some industrials given these are stable, recession-proof companies (think railroads (CNR) and waste management (WCN)).

I have a bias to low-volatility stocks in my portfolio so I tend to own more telecommunications and utilities than the TSX would weigh near the top right now.

So, for those companies, I tend to own BCE, Telus, Emera, Fortis and a few other companies in greater weights than the current ETF XIU would as part of its top holdings. Again, I do that for juicy dividends AND lower-volatility. 

Finally, I try to maintain a 5% rule. Meaning, I try to have no more than 5% of my total portfolio value in any one stock to reduce individual stock risk. From time to time, do I let a few winners run? Yes, for sure, but generally speaking I try and stick to my “5% rule” to manage portfolio risk. 

What about rebalancing my U.S. assets?

I don’t worry about rebalancing my U.S. assets very much, if at all, I just buy more U.S. indexed ETFs over time when I have enough money to do so inside my RRSP. 

I don’t hold any bonds any longer in my personal portfolio – for this reason – although some investors might disagree with this approach.

The way I see it stocks have always outperformed bonds over the long-term. I just buy more equity ETFs (like VTI) when I can and learn to live with stocks.

I have learned to celebrate falling prices and I think you should too although I can appreciate this is unconventional thinking.

How do I rebalance my portfolio summary

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 (passive or actively managed), 
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 invest this way and they will make less investing mistakes by indexing. 

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. Only do that via a fee-only planner. Thanks for reading and keep the questions coming everyone. 

Mark