Weekend Reading – Rebalancing your portfolio edition

Weekend Reading – Rebalancing your portfolio edition

Hi All!

Welcome to a new Weekend Reading edition highlighting some rebalancing portfolio ideas to consider – including an update about how I’m managing our portfolio and rebalancing assets (or not).

Before that theme, a few recent reads to check out just in case you missed them!

I posted our latest income update:

“We earn over $126 per day, every day, even in our sleep. (income/8,760 annual hours)”

June 2024 Dividend Income Update

And I link to this popular, updated post about major retirement planning mistakes I’m trying to avoid including incorrect asset allocation which relates to this Weekend Reading theme. 

Weekend Reading – Rebalancing your portfolio edition

Image Source: Pexels, Sebastian Voortman.

Every investor’s goal is to buy low and sell high and make lots of money – that would just make sense. The challenge lies IMO in how to always sell high. 

I’ve been on record many times to share I have no idea what the future might hold. Sure, I like to make some predictions for fun but the truth is: my guess and your guess is just as good as any expert since those experts cannot predict the financial future with any accuracy either.

Here are a few fun examples:

1. “Dow 36,000: The New Strategy for Profiting From the Coming Rise in the Stock Market” was a book by James Glassman and Kevin Hassett. Published in 1999, it is an unmistakable product of a time when a bursting dot-com bubble was unimaginable and irrational exuberance was contagious. The book’s premise was that the boom times would cause the Dow Jones Industrial Average to rise to 36,000 within just a few years, and it offered advice on how best to cash in on this eventuality.

(At the time of this update, the Dow is around 40,000 some 25 years later.)

2. “Japan As Number One” was a book released by Harvard social scientist Ezra Vogel back in 1979. It was not an unpopular view at the time that the United States economy would soon be surpassed by prosperous Japan.

(That never happened and it wasn’t even close in terms of overall economic growth over the last few decades.)

3. I read that former U.S. Federal Reserve chair Alan Greenspan warned in his 2007 book “The Age of Turbulence” that the world might need double digit interest rates to control inflation in the near future. That never happened either. 

(You might recall since The Great Financial Crisis (i.e., since 2007-2008 and into part of 2009) for the decade+ thereafter that interest rates were nearly zero and only in recent years did inflation spike post-COVID-19 pandemic.)

These are just some very quick examples. There are thousands more. 

Experts are simply not very good at making any meaningful predictions. So, we should spend less time on them. The financial markets are followed by intelligent people trying to make sense of imperfect information through very persuasive predictions. That’s pretty much where it ends.

Back to the theme, if we (as DIY investors) cannot rely on experts nor their predictions to help us with any financial certainty, then we probably need to take some risk management practices into our own hands. I’m not perfect at this, but I’m trying to do what I believe is best for us. 

The act of rebalancing your portfolio is one such risk management tool.

Rebalancing offers benefits to us as DIY investors: risk reduction, cashflow management and/or possibly better returns depending upon any market timing. I leveraged some resources from Vanguard to share two key ways you can rebalance your portfolio:

1. Calendar-based rebalancing – leverages a quarterly or annual frequency to get your portfolio back to your desired target mix (i.e., a year is up, so time to mix back to 80% stocks/20% bonds or fixed income).

2. Threshold-based rebalancing – leverages a change in asset allocation beyond a desired value (i.e., oops, I’m now at 90% stocks vs. 80% stocks like I wanted to be so time to sell some equities).

As per the article:

“Whichever method you choose, make a plan to review your portfolio, comparing your current asset allocation against your desired asset allocation, noting the progress toward your goals, and buying or selling investments to reach your preferred asset mix.”

Unfortunately, rebalancing your portfolio does not make your portfolio perfect. You could miss out on more gains if your stocks continue to ride a long-run or you could suffer portfolio declines when stocks suddenly tank, and then you sell. If you have gains, selling appreciated securities could lead to new tax consequences in a taxable (i.e., non-registered) account. Also, if you have more than one equity holding, you will need to figure out which stock or which ETF to trim assets from. Since different stocks and different equity ETFs move differently, the timing of your sale could be imperfect when compared to alternatives. There are also transaction costs to consider with any sale, while ensuring you continue to meet your cashflow needs. There is the longevity of your portfolio to consider with the timing of your sale. Finally, your financial costs could be even higher if you use a financial advisor to do the selling-buying-selling cycle work for you. 

How do I continue to manage/rebalance our portfolio?

I was on record back in 2015 to share how I rebalance my portfolio.

How do you rebalance your portfolio?

I shared some practices then that I continue to employ today:

• For our taxable accounts – I just keep buying some Canadian stocks with a focus on Canadian stocks that are out of favour to others; down in price; approaching 52-week lows; other considerations related to my DIY sector asset mix. One example for me in 2024 is TOU. I put that purchase in my most recent monthly dividend income update. 
• For all other accounts (RRSPs, TFSAs, LIRA, etc.) – I also keep buying in these accounts with a twist: I simply buy more of my favourite indexed ETFs (e.g., XAW) as a “when in doubt” purchase. Dedicated readers will also know I’ve been working to build-up more cash/cash equivalents inside our RRSPs in particular – to prepare for future cash withdrawals but I don’t sell any stocks or ETFs to raise that cash. We let dividends and distributions paid from the stocks or ETFs we own to build-up the cash balance instead. 

Weekend Reading – Rebalancing your portfolio edition

While I approach rebalancing work differently than others might suggest, I’ve come to appreciate over the last few decades that rebalancing your portfolio is more of a risk management exercise than anything else. It’s a feel-good / sleep-well-at-night exercise. Rebalancing is about making periodic adjustments to your portfolio over time to adjust to your needs and goals as they change too. So far in my asset accumulation years, my rebalancing approach is probably both unconventional and boring – I really just keep buying.

How do you rebalance your portfolio? Do you make significant equity or bond shifts in your portfolio every year or so? Do you own an all-in-one asset allocation ETF that largely does this work for you? I look forward to your comments and contributions…

More Weekend Reading – beyond rebalancing your portfolio

Some tiny thoughts from one of my favourite sites @farnamstreet:

“The difference between great success and bitter failure is often found in consistently applying the fundamentals.”

Dan Kent at Stocktrades shared the top telcos in Canada.

Aligned to this week’s theme on predictions, forecasts and knowing what is always best: @RubinJMiller

Source: https://x.com/RubinJMiller/status/1813956752171471081

Great stuff in this Globe and Mail article (subscription) – how inflation has impacted (or not) some FIRE-plans. Recall, Financial Independence, Retire Early (FIRE) tends to mean retirement to something, really another form of work for most 30- and 40-somethings. Nothing wrong with that but some level of disclosure is important. 

From the article, some snippets and thoughts below.

First, I find it very impressive what Mr. Leung and Ms. Shen have done since leaving their former careers in 2012 at the age of 32 while shunning the Toronto real estate market and renting instead.

Second, you might recall I profiled this couple a few years ago.

Ditching home ownership and becoming a millionaire instead

Third, since living off their portfolio from age 32 with a starting point / investment fund of about $1-million their wealth has grown to roughly $2.2-million today.

So, how has part of the FIRE-crowd battled inflation? Stay invested. From the article:

“Unlike Ms. Shen and Mr. Leung, they don’t tinker with their investments. They simply leave them alone knowing that inflation and market gains tend to level out over time.

This is a point that Evan Parubets, head of the advisory services team at the investment firm Steadyhand, agrees with. He doesn’t recommend that clients change their portfolios through market shifts, unless they’re extremely aggressive with their strategies.

“Portfolios for the most part actually have built-in inflation adjustments,” Mr. Parubets said.”

And worse-case:

“Inflation can be rough for people who are just a few years from retirement also. When running projections with clients in their 50s, Ms. Thuy said she’s had to advise some to continue working in a part-time role, or working in a lower-paying job that aligns with something they enjoy, to supplement their retirement income for a couple years.”

Indeed. That aligns with my inspiration from a previous case study:

How your part-time job can support your retirement

Here are other fine reads for you over the weekend:

• When Rebalancing Creates Higher Returns – and When It Doesn’t by John Rekenthaler of Morningstar
• How Much Money You Need For Retirement? by Ben Carlson of Ritholtz Wealth Management LLC

Have a great, safe weekend!

Mark