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 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. 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 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, telecommunications companies; some utilities and information technology.
I don’t worry about rebalancing my U.S. assets very much, I simply buy more indexed ETFs when I have enough money to do so.
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.