How do I rebalance my 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 these posts and page where I shared some of my favourite 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.
Since 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 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.
How do you rebalance your portfolio?
I try and rebalance my portfolio by buying new Canadian assets that have been beaten up in price to realign with the sector breakdown of the TSX 60 or whatever iShares ETF XIU holds in various sector weights.
Mind you, I do this with a few caveats:
- 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.
- I believe it’s best to own more telcos and utilities in my portfolio (than currently weighted in the ETF XIU) given the long-term / juicy dividend histories of those companies. Investing this way, I believe, will deliver some steady income in semi-retirement.
Looking at XIU as a proxy then for my Canadian portfolio guidance:
- I would own <30-35% financials (think banks and life insurance companies) (Aside: In fact, I would like to get Canadian banks to eventually just 10% of my overall portfolio at some point. I’m working on that by buying more assets in other sectors.)
- I would own <20% energy (think Enbridge, Suncor and a few more)
- I would own some materials, again, <20% weight (think mostly mining companies), and
- I would own a lesser amount of industrial (think CNR stock and railroads).
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.
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 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.