Rebalancing 101

RYAN By Guest Blogger Ryan Lewenza

A common theme on this blog is the importance of balance in portfolios. I’m going to get wild and crazy today and discuss the importance of (re)balancing portfolios. Hey what I can say, I live on the edge!

What is it?

As markets gyrate and change over time this impacts a portfolio’s asset mix (the percentage in stocks and bonds), putting things out of whack. For example, using our preferred 60/40 balanced portfolio, if stocks have a great year and outperform bonds, the percentage weight of stocks within the overall portfolio will increase while the weight in bonds will decline. After a strong year in the equity markets the equity weight could increase to 65%, with fixed income representing 35% of the overall portfolio. Rebalancing entails just getting the asset mix back in-line with the preferred 60/40 weights, so this would involve selling 5% of the equities and adding 5% to fixed income.

Why do it?

There are three key reasons to do this. First and foremost is to help to control risk in the portfolio. If equities have a great run and, as a result, then make up 70-80% of the portfolio, this results in a much higher risk level than the preferred 60/40 asset mix. Second, it imposes a level of investment discipline, which is so critical to successful long-term investing. Essentially, systematically rebalancing forces you to trim your winners and add to underperforming assets. You’ve probably heard the old market adage “buy low, sell high”, well, rebalancing is this in a nutshell. Lastly, a disciplined rebalancing strategy improves investment results.

Below is a table that shows the benefits of rebalancing portfolios, both from a return and risk perspective. Rebalancing a portfolio annually helps to reduce risk (standard deviation or portfolio volatility) and increase returns. Lower risk and higher returns is basically a free lunch and in the investing world there are very few of those.

Rebalancing Pays Off

Source: SCIR, Turner Investments

When to do it?

We basically use two different methods in determining when to rebalance portfolios – a fixed time schedule or a portfolio change driven event. In annual portfolio reviews with clients we review the asset mix (among many other things) and if the asset mix has deviated too far from our 60/40, we’ll rebalance the portfolio back to this asset mix. Or, if due to any major market moves, a particular asset class has gone above a certain threshold range, then we’ll look to rebalance portfolios. For example, if the US equity markets go for a major rip and the US equity weight increases to 25% (from our 20% recommended weight), we’ll trim back US equities and add that 5% to an equity market or asset class that has underperformed.

Costs of rebalancing

There are a few drawbacks to rebalancing. First are transaction costs. Rebalancing requires trades, which results in a cost. For fee-based accounts there are no additional costs to clients, one more reason why we prefer fee-based accounts to commission-based accounts. The second consideration is taxes. Rebalancing entails trimming your winners, which often results in a capital gain and taxes owing? From our perspective, we always view capital gains and taxes on the gain as a secondary consideration (our market call and portfolio positioning being the main driver), but taxes should still be considered when making changes. Sometimes, if we’ve generated significant gains for a client in a particular year and we want to rebalance an account later in the year, we’ll push out the rebalancing into the next year so as to smooth out and minimize the tax impact. It’s good to have general guidelines but be flexible!

Finally, from an investment performance standpoint, rebalancing a portfolio can sometimes limit the upside, particularly in a raging bull market. In this circumstance you’re trimming the equity weight while the equity markets continue to surge higher. But don’t forget that rebalancing is as much about controlling risk as it is about maximizing returns and, more often than not, it’s prudent and wise to trim your winners along the way as no trends last forever. As I like to say, “no one goes broke by taking a profit”.

So there’s the 101 on rebalancing. With the New Year we’re busy talking with clients and reviewing portfolios, with rebalancing being an important component of our client reviews. Following the market weakness in Q4 we’re rebalancing portfolios by adding to our preferred share and equity holdings. Maybe now’s the time to review your portfolio and do the same.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.

 

69 comments ↓

#1 Joane on 01.19.19 at 3:21 pm

Hey Ryan, once my grammas will is settled I will inherit
1.5 million. I’m thinking all stocks vs etf’s. I’m 34 and don’t spend much at all. Will leave all money invested till 65-70. Rrsp and tfsa are maxed, I appreciate your opinion, thank you
Joane

#2 Paul on 01.19.19 at 3:27 pm

Great post Ryan. What’s your opinion on the glide path approach to asset allocation?

#3 espressobob on 01.19.19 at 4:30 pm

Rebalancing is possibly one of the best kept secrets some retail investors never seem to understand. They dump their core positions all together when things go south.

These are the individuals that would benefit most by hiring an advisor.

#4 AlMac on 01.19.19 at 4:35 pm

Ryan – thanks for the interesting post and timely for me as I am scheduled for a rebalance. A couple of related questions:

1. On 9 Apr 2018 Garth provided a portfolio array for a 60/40 mix; is this still your advice? (Garth stated later on in the year that you have ‘trimmed’ rate reset preferreds and on 7 Apr 2018 Doug suggested increasing emerging by 50%?);
2. On 17 Feb 2018 you said you liked 70/30 over 60/40 for TFSAs (dependent of course on circumstances for each client’s investment strategies). Is this still your thinking?;
3. Are there any areas of growth opportunities (other than some people’s views on cannabis) such as oil, or health care? and
4. Given the current market volatility, would you recommend a DCA strategy over the remainder of 2019 or go all in now for a chunk of cash within a RRSP? (understanding Garth said he does not recommend DCA).

#5 Ryan Lewenza on 01.19.19 at 5:38 pm

Paul “Great post Ryan. What’s your opinion on the glide path approach to asset allocation?”

Yes and no. Glide path investing entails reducing your equity exposure and increasing bonds as you get older and cannot take on as much risk. The problem with this is the record low interest rate environment. If you move more and more of your savings into low yielding bonds and GICs your returns will decline and it will be harder to keep up with your withdrawals and inflation. This is why we recommend older clients maintaining a higher equity weight into retirement. But obviously reducing risk in the portfolio as you get older makes sense. So split the difference. You can slowly adjust down your equity weight but I wouldn’t follow the 100-age formula for equity exposure any longer. – Ryan L

#6 CEW9 on 01.19.19 at 5:48 pm

#4 AlMac on 01.19.19 at 4:35 pm
3. Are there any areas of growth opportunities (other than some people’s views on cannabis) such as oil, or health care?

I keep an interest in this as well, though I don’t like to gamble on it (much). Maybe maximum 1% of my portfolio at any given time. Most often no percent.

But here is what I see this year:

1. Two elections for Big Oil.

First in May in Alberta. Watch for a rally if PC party is in the lead, the closer we get to May 19 (they are currently). If (when) they win there will be a big pop for oil, followed by the usual drop once the rose-tinted glasses fall off. I might buy some oil etf for a few months, and sell somewhere between May 18 & May 20.

Second election is the Federal one, probably in October. If Con’s show any promise there may be a rally going into the election, especially if they start to promise to drop Bill C-69. I usually think the hype never matches the truth, so I look for a drop of the Oil rally after the election as well. Most likely the Liberals will be ahead in the polls and our resource industries doomed.

2. Internationally, India’s economy is predicted to quintuple in the 2020s. Turkey, too, is expected to triple. So don’t ignore emerging markets.

3. Robotics industry will ascend as population declines are more widely recognized. Most people don’t realize that Canada, the US & all of Europe, Japan; pretty much all the world outside of Africa have dangerously unsustainable birthrates. If economies are to grow, they will depend on new automation in virtually every industry. I want to be an owner of that, and though I currently don’t own any robotic ETFs I am considering it, especially for my children.

I am 3/4s of the way through reading George Friedman’s book “The Next 100 Years”. I recommend it. It was written 9 years ago, and it brought unusual clarity to my global outlook and understanding of geopolitics & geopolitical trends.

Just my 2 cents (rounded to the nearest 5) from an averagely intelligent gent.

#7 Ryan Lewenza on 01.19.19 at 5:48 pm

AlMac “Ryan – thanks for the interesting post and timely for me as I am scheduled for a rebalance. A couple of related questions:

1. On 9 Apr 2018 Garth provided a portfolio array for a 60/40 mix; is this still your advice? (Garth stated later on in the year that you have ‘trimmed’ rate reset preferreds and on 7 Apr 2018 Doug suggested increasing emerging by 50%?);

Yes – Ryan L

2. On 17 Feb 2018 you said you liked 70/30 over 60/40 for TFSAs (dependent of course on circumstances for each client’s investment strategies). Is this still your thinking?;

70/30 at least. We go even higher for many clients so 80/20 works as well. – Ryan L

3. Are there any areas of growth opportunities (other than some people’s views on cannabis) such as oil, or health care? and

Energy sector is looking tasty. Value stocks are due for a period of outperformance, and EM should have a better year on a peak in the USD. – Ryan L

4. Given the current market volatility, would you recommend a DCA strategy over the remainder of 2019 or go all in now for a chunk of cash within a RRSP? (understanding Garth said he does not recommend DCA).

We’re not big market timers and we’re positive for 2019 so put some money to work. But risks are higher (particularly political risks) so keeping a bit of powder dry is a wise move. If markets do hit an air pocket this year on a political flare up (ie Mueller, Brexit) put the dry powder to work. – Ryan L

#8 Ustabe on 01.19.19 at 6:03 pm

#1 Joane on 01.19.19 at 3:21 pm

Hey Ryan, once my grammas will is settled I will inherit 1.5 million. I’m thinking all stocks vs etf’s. I’m 34 and don’t spend much at all. Will leave all money invested till 65-70. Rrsp and tfsa are maxed, I appreciate your opinion, thank you
Joane

Joane, first sorry about your Grandmother. Second, all stocks? You haven’t read this blog for long I suppose.

You want the services of a Financial Planner. For a fee they explore your needs, separate out the wants and advise you on how to proceed. They don’t sell product.

Conversely an advisory firm such as the one that Ryan works in can do both the initial planning and sell you the products needed to fulfill. Choices, of which you soon will have many available to you.

You are bequeathed a life changing sum of money, please don’t blow the opportunity.

#9 espressobob on 01.19.19 at 6:18 pm

Asset allocation is another area that requires study as a DIYer. Whether growth or yield is a matter based on ones requirements down the road.

Many gravitate towards the latest trends like gold or bitcoin and weed stocks not even realizing the risk in commodity plays.That’s not investing.

Professional management can alleviate one from bad decisions.

#10 crowdedelevatorfartz on 01.19.19 at 6:27 pm

@#1 joanne
“once my grammas will is settled I will inherit
1.5 million. I’m thinking all stocks vs etf’s. I’m 34 ….”
+++++

Another fortunate Millenial reaps the rewards of a rich Boomer.
Be nice to Boomers.
They may reciprocate OR if you whine too much you may get a soother instead of millions.

#11 Ryan Lewenza on 01.19.19 at 6:28 pm

Joane” Hey Ryan, once my grammas will is settled I will inherit 1.5 million. I’m thinking all stocks vs etf’s. I’m 34 and don’t spend much at all. Will leave all money invested till 65-70. Rrsp and tfsa are maxed, I appreciate your opinion, thank you Joane”

I echo Ustable comments. No to individual stocks. Broad-based low cost ETFs ONLY. Go balanced including some corporate bond and preferred share ETFs. A well constructed balanced portfolio can return 6% over the long-run, more than enough return for these funds. And as Ustable said “don’t blow it”. – Ryan L

#12 Casual Observer on 01.19.19 at 6:43 pm

It’s been a long while since I posted, but about 4 and a half years ago I started structuring part of my savings along the lines of a “Permanent Portfolio”.

https://www.greaterfool.ca/2014/06/22/stress/#comment-310993

To re-cap, it consists of:
25% Stocks – split evenly between the S&P 500 and the TSX Composite
25% Long Canadian Bonds (20+ year)
25% Gold Bullion ETF
25% Cash (Short Term CAD T-Bills or Insured HISA)

The Permanent Portfolio never seems to garner much respect (even I thought it was ridiculous at first), but it has averaged over 9.4% CAGR since 1970, and more importantly, in Canadian dollar terms, it’s only suffered two negative return years in the last 49 years, with the largest loss in 1981 (-5.95%). The only other losing year was 2013 (-0.06%).

http://www.ndir.com/cgi-bin/downside_adv.cgi?1=0.25&2=0.25&3=0.125&4=0.125&5=0&6=0.25&7=0&8=0&9=0&10=0&11=0&12=0&A1=0.00&A2=0.00&A3=0.00&A4=0.00&A5=0.00&A6=0.00&A7=0.00&A8=0.00&A9=0.00&A10=0.00&A11=0.00&A12=0.00&type=Nominal&MCarlo=Historic&StartYear=1970&StopYear=2018&StartSize=10000.00&Withdrawal=0.00&CADUSD=Canadian

It even managed to gain 1.48% during 2008, and 1.71% during 2018 when a record 90% of asset classes were set to post negative returns.

https://www.marketwatch.com/story/how-bad-has-2018-been-for-investors-the-worst-ever-according-to-one-metric-2018-11-26

Historically, it has managed a steady 3-5% return after inflation (real return) over nearly every time frame. During the past 5 years, the nominal return has been 5.72%. With an average rate of inflation of 1.69% during that time, that works out to a little more than 4% real return, which is right in line with it’s historic returns.

Incidentally, nominal return assumptions (before fees & inflation) for a balanced portfolio range from 4.55% for a conservative portfolio (70% bonds) to 6.05% for an aggressive portfolio (75% stocks).

https://www.tangerine.ca/forwardthinking/investing/what-is-a-realistic-rate-of-return-on-an-investment-portfolio

I know I’m probably setting myself up to be criticised by the 60/40 crowd, but going on 5 years, I have no regrets. When 90% of asset classes can have a negative year, and this portfolio still manages a positive return – I’ll take the criticism and keep sleeping soundly at night.

#13 50 YEARS OF MAPLE LEAF INCOMPETENCE! on 01.19.19 at 7:49 pm

A blessed respite tonight for Toronturds and GTAholes.

No Leafs game to watch.

Instead, I suggest you might enjoy watching the Canadiens, Flames and Oilers, teams who have actually won something in the last 50 years!

And spend some time thinking about Ryan’s sage advice about rebalancing. Perhaps hold off buying more Make Believes tickets, and put the cash into an ETF.

And PUL-LEASE Toronturds – we know it’s a little chilly and you are getting a truly horrifying 5-10 cm of snow tonight, but there really is no need to call in the army, ok!? Just grab a blanket and a shovel.

Pathetic Loser Snowflakes.

#14 Know one on 01.19.19 at 8:20 pm

Hi Ryan,
I am curious what that 1970 to 2005 histogram looks like comparing unbalanced equities only vs. the 60/40 mix unbalanced? Assuming a rational investor who doesn’t get spooked by market corrections.
Thank you

#15 NFN_NLN on 01.19.19 at 9:15 pm

Top-performing hedge fund is shorting Canadian banks on all the usual suspects — and something even more worrying

https://business.financialpost.com/news/fp-street/a-top-performing-hedge-fund-is-shorting-canada-banks-on-housing

#16 MF on 01.19.19 at 9:42 pm

13 50 YEARS OF MAPLE LEAF INCOMPETENCE! on 01.19.19 at 7:49 pm

Lol GTAhole here. Buddy I don’t think I’ve watched a leaf game since 1993 when Doug Gilmour was playing.

And I would love any of those teams you mentioned to win the cup.

Who are you talking to?

MF

#17 theoryAndPractice on 01.19.19 at 9:49 pm

Ryan, Thanks for the post. A hypothetical question regarding to when to balance is better for given first two cases below and assume almost same amount & asset class moves are needed;

portfolio vs markets
up up
down down

– ignore the other two cases:
down up
up down

#18 akashic record on 01.19.19 at 10:01 pm

Hi Ryan,

Passive investing, especially ETF, keeps gaining popularity.

Do you see any unintended consequences, when individual securities are no longer traded in volume, but as part of an index?

What is going to be the effect on public companies, when evaluation, price discovery, etc. of their stocks are going to happen mainly by smaller “insider” group of ETF issuers, instead of large, diverse group of individual investors?

How about the market as a whole?

#19 Joane on 01.19.19 at 10:02 pm

Hi Ryan & unstable, thx for responding. I do read the blog as much as I can. My grandparents were my mentors my entire life and all they ever owned was stocks. My gramma had 8700 shares of Rbc she got at 12$ per share. They were transferred into my account aswell. My gramma always said to never sell them cause of the dividends. She never owned bonds either, she said why own them, life goes up and down so be patient. The 1.5 will not be touched for 30 years atleast. I would only buy blue chip dividend stocks. As for etfs why not just buy the s&p 500 like warren buffet says? As for hiring an investor I’ve spoke to a few but there fees are to high. I will only pay .5% max to investor or you lose to much money over the 30 years. We all know over the long run a stock portfolio wil out perform a etf portfolio hands down. If I was a finance advisor I would sell etfs just so clients wouldn’t call me ASAP when markets drop. That would drive me crazy. Any blog dogs out there have a 100% stock portfolio? Thx
Joane

#20 Lee on 01.19.19 at 10:29 pm

Or you can just ride U.S. small cap to the moon.

#21 Doug in London on 01.19.19 at 10:50 pm

Yes, periodic rebalancing absolutely makes sense. Remember just before Christmas when generous old St. Nick blessed us with some amazing deals on equities, meanwhile bonds and bond funds went up slightly? That was an ideal time to cash in some of those bond funds and buy cheap equities. Now that equities have gone up, it’s a good time to reverse that flow by cashing in some equities and buying bond funds. Buy low, sell high. It’s really that simple.

#22 Benny Hur on 01.19.19 at 10:56 pm

Hi Ryan, All in on XBAL and add every payday? Auto rebalancing, what’s not to love?

#23 Anonymous on 01.19.19 at 11:02 pm

Hi Ryan,

I think you left out one mechanism of re-balancing. For working age investors who are still contributing to their portfolios, the asset portfolio balance can be maintained by deploying the new contributions only to the under-performing assets, and never really selling.

I guess that this does not constitute “selling high”, only “buying low”, but at least mathematically the portfolio balance is kept on plan and there are no tax consequences to account for.

#24 millmech on 01.19.19 at 11:09 pm

Ace Goodheart
Forward this to the person who you said was arrested for drunk driving in the bar.
https://www.pentictonwesternnews.com/news/confused-about-breathalyzer-rules-penticton-rcmp-clarify/

#25 crowdedelevatorfartz on 01.19.19 at 11:33 pm

Speaking of “rebalancing a portfolio”….
Just watched a HUGE house fire in North Burnaby tonight.
House is a complete right off.
It was fully engulfed from the bottom floor to the top before the fire trucks arrived from 5 blocks away…….
Be interesting to see what pans out from the investigation….

#26 Vampire studies on 01.19.19 at 11:46 pm

Hmmm seems I just read this somewhere. It appears the difference in returns with the annual re-balancing is almost negligible. The volatility does seem moderately lower.

I recall a strategy where a 25% change in allocation
calls for a re-balance. This means an increase from 20
to 25% of the total portfolio, or an 8% to 10% etc. I guess it works for a drop of 12% to 9% as well.

So perhaps the annual re-balance just doesn’t allow for significant gains/losses to accumulate, and conversely misses quick corrections like we just had.

Ryan – do we have any info where a different metric is used to re-balance? Thanks

#27 Steve French on 01.19.19 at 11:50 pm

Hi Ryan:

Who’s your favourite blog dog, me or Smoking Man?

Sincerely,

SteveO.

#28 Smoking Man on 01.20.19 at 12:36 am

When you get this song. You can be counted as one who has made it.
https://youtu.be/5_e-Hvg57cA

#29 David Driven on 01.20.19 at 12:56 am

The only ones who benefit from churning an account are the advisors and the tax man. Otherwise Buffet wouldn’t say “never sell a winner”. Starve the beast, just buy the stocks that go up and keep all your money to yourself, greed is good. Fees and taxes are bad.

There are no fees for rebalancing. – Garth

#30 Smoking Man on 01.20.19 at 1:13 am

20 years before 911

https://youtu.be/GpAUDOI24Oo

And if you think it’s over you bet wrong. We have had 2 years of resistance..

God bless the Deplorables.

#31 waiting on the westcoast on 01.20.19 at 1:21 am

Ryan – great job restaking your turf… Poor Sinan.

Thanks for another great post… You mentioned a 20% shift in allocation (5% of 26%) would be a reason to reallocate. Do you go by rule of thumb or do have have a set deviation?

#32 Karlhungus on 01.20.19 at 2:06 am

Seems like some contradiction in this post. Rebalancing increases returns, but if stocks are going up (which they do most of the time) then rebalancing will cut your profits

#33 Stan Brooks on 01.20.19 at 2:49 am


#15 NFN_NLN on 01.19.19 at 9:15 pm
Top-performing hedge fund is shorting Canadian banks on all the usual suspects — and something even more worrying

https://business.financialpost.com/news/fp-street/a-top-performing-hedge-fund-is-shorting-canada-banks-on-housing

Outside the financial sector, 80% of Canadian companies aren’t generating enough cash to support their businesses, says Crescat

Quite scary frankly considering that the financial sector thrives on the biggest ever housing bubble.

BTW valuations of the banks are quite excessive:


At their peak last year, the six largest banks, traded at an average of 1.9 times book value, a similar valuation to U.S. banks prior to the global financial crisis in 2008, according to Costa. He expects that to drop to 0.7 times book value or so, where U.S. banks were trading post-financial crisis.

Other investors have recommended shorting Canadian financials on a looming housing correction in the past, including Steve Eisman, who predicted the U.S. subprime mortgage collapse.

While I doubt that a major storm will affect the banks in terms of solvency (it will impact the profits for sure) , the above raises the valid question:

What else except resources and some utilities has real value for the buck on TSX and isn’t time for a selected stocks vs. broad index approach, specially on TSX?

#34 Stan Brooks on 01.20.19 at 6:52 am

GTA now is becoming on average more expensive than Manhattan, the center of the financial capital of the world, headquarter of most hedge funds, investment companies, world class banks, world class Businesses.

https://www.zerohedge.com/news/2019-01-03/perfect-storm-manhattan-home-prices-fall-below-1-million-first-time-three-years

For Vancouver this is not new, is has been for quite a while even more expensive.

A reminder to what extent are houses overpriced in Vancouver and GTA: 70-80 % correction down (long overdue) sounds about right.

And one question for the experts:

Who owns the stocks that you have in your broker’s account: you or the broker?

What do you really own: the stocks or a claim on those stocks along with all creditors?

#35 Need Help on 01.20.19 at 7:43 am

Garth, thanks for providing this great forum – I am in a not very pleasant situation at work and very likely soon need a employment/human rights lawyer but I have no idea how to find someone that is really working for a regular person like me that has an issue with a very powerful organization. My apologies for posting anonymous but I can’t disclose my name or location. Please let me ask the blogdogs for help.

If anyone can refer me to a competent employment/humanrights lawyer with tons of integrity, preferable outside Alberta, that takes on the cases of the average Joe/Jane I’d really appreciate it.
Thanks from all my heart!

I am in a very scary situation (my employer very unfair in the way they treat me, PTSD related, and I am so intimitated and scared that it is getting really hard to do a good job – I still do, have a very good standing with the people I work with and no complaints but it gets harder and harder as they just keep investigating and finding fault). PLEASE HELP!!

#36 crowdedelevatorfartz on 01.20.19 at 8:12 am

Nope .
Not a house fire.
Storage facility next to the Trans Mountain Pipeline Tank farm where all the anti pipeline protesters were arrested a few months ago..
Big Fire, right next to some homes….

https://www.citynews1130.com/2019/01/19/fire-breaks-out-on-burnaby-mountain/

#37 reynolds531 on 01.20.19 at 8:58 am

#35

Ask your union or association for a name. The problem is the lawyers like to stay with the money…on the employer side.

If you have an EAP I would use that extensively. If may both help you outright and and the same time strengthen your case.

Good luck.

#38 Anthony on 01.20.19 at 9:03 am

I rebalance every two weeks but only through purchases (i.e. never sell, just preferentially buy some assets over others to re-establish desired allocation). As a result, my allocation has almost never deviated by more than a percent or two in the past five years and sell-side transaction costs/taxes have been avoided. Ryan or Garth, are there any known issues with this strategy? Thanks.

#39 Westcoast Woman on 01.20.19 at 9:13 am

Thanks for posting this, #23 Anonymous on 01.19.19 at 11:02 pm. “I think you left out one mechanism of re-balancing. For working age investors who are still contributing to their portfolios, the asset portfolio balance can be maintained by deploying the new contributions only to the under-performing assets, and never really selling.”
I wasn’t able to articulate as well as anonymous what I’m doing, they’ve hit it on the nail! My portfolio is still small (only five digits) so I’ve been adding to the under-performers but not taking out my gains as each transaction costs me $9.99! The balancing is a bit haphazard at the moment but it means I am creeping closer to the six-digit portfolio.

#40 att on 01.20.19 at 9:17 am

oh no.. I thought you didn’t have to submit essays to Garth now that the other guy was hired. not out of the woods yet eh?

#41 Another Deckchair on 01.20.19 at 9:30 am

@19 Joane;

Ok – from reading this response, you seem to know more than I’d have thought from your first post.

My thoughts from a random stranger, who is old enough to be your father (i.e. in a different stage of life from you):

0) your grandmother seems to know what she’s talking about, and has prepped you well.

1) 1.5 mil, using the “4%” rule for FIRE, means 60k per year income, “for ever”. That’s not bad, I think it’s not far off the average household income. (Assuming you also work, you are made in the shade, and also assuming estate taxes are not an issue)

2) lots of younger people are upping the equity – 1500days.com, gocurrycracker, etc. MrMoneyMustache.com. Look for FIRE and living by doing what you want to do. That doesn’t mean living lying on a beach for the rest of your life. You are waaay too young for that. ;-)

3) Dividend Portfolio – have been following (reading, not with $$) John Heinzl’s Dividend Portfolio in the Globe and Mail. You may need an online subscription, pay it, as the G&M is worth supporting. Earlier, for 5 years, the G&M had about 4 financial people investing in their own way; Heinzl was not at the top, but not at the bottom, either. Now he’s 1.5 years into his Dividend Model Portfolio. It may give you some ideas about diversifying.

4) Live well within your means. We all know this, but, I have kept track of finances since graduating from University. One trend that I note is that expenses track income, so making more means subconsciously spending more.

4.1) (personal) I find that, if one can purchase anything, the draw diminishes. We don’t even have 2 cars; walking, cycling, and using the city bus is fine. We’d never fit in with Turner Investments, because the thought of owning a Porsche is laughable. Material posessions is just “stuff”, and, how much stuff does one need? Have traveled, worked, and/or lived around different countries, and, now find that the desire to hop on a plane is not really there anymore. Maybe it’ll come back, maybe not.

(the key is people and dogs – people and dogs in our life make it worth living)

5) Every day is a gift. Live it to the fullest. You have the opportunity to do that. Don’t blow it.

Good luck, and make it happen.

#42 LarryB on 01.20.19 at 9:48 am

Best post in a long time and great advice (for free).

#43 Ryan Lewenza on 01.20.19 at 9:57 am

akashic record “Hi Ryan, Passive investing, especially ETF, keeps gaining popularity. Do you see any unintended consequences, when individual securities are no longer traded in volume, but as part of an index?
What is going to be the effect on public companies, when evaluation, price discovery, etc. of their stocks are going to happen mainly by smaller “insider” group of ETF issuers, instead of large, diverse group of individual investors?”

As ETFs grow in popularity this question comes up more and more. The active portfolio managers bring this up a lot with the view that through their analysis this will help to keep the market more in check as money will not flood into highly valued unattractive stocks. But this presupposes that active managers have some innate skill to isolate those attractive stocks. Sure some do but most active portfolio managers cannot do this successfully as the analysis clearly shows that 90%+ of active managers underperform the market. Stocks can either be held directly or through mutual funds (active) or through ETFs (largely passive). So I don’t buy the argument that as more money flows into passive ETFs this will result in price dislocations and overvalued securities/markets. Basically I find the people who hold this view are the active portfolio managers who are seeing money flow out from their funds. In summary, I don’t buy the argument that ETFs are bad for the markets and stock price discovery. – Ryan L

#44 Gravy Train on 01.20.19 at 10:11 am

#35 Need Help on 01.20.19 at 7:43 am
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#45 Ryan Lewenza on 01.20.19 at 10:15 am

Joane “My gramma had 8700 shares of Rbc she got at 12$ per share. They were transferred into my account aswell. My gramma always said to never sell them cause of the dividends. She never owned bonds either, she said why own them, life goes up and down so be patient. The 1.5 will not be touched for 30 years atleast. I would only buy blue chip dividend stocks. As for etfs why not just buy the s&p 500 like warren buffet says? As for hiring an investor I’ve spoke to a few but there fees are to high. I will only pay .5% max to investor or you lose to much money over the 30 years. We all know over the long run a stock portfolio wil out perform a etf portfolio hands down.”

No problem holding RBC. There would be a big capital gain and it’s one of the best banks in the world. I agree on buying an ETF that tracks the S&P 500. That’s what we do and Warren Buffet is 100% correct. Regarding just buying blue chip stocks, who’s going to do the analysis to determine those stocks, monitor them, and adjust the portfolio over time? How much free time do you have? Also Nortel, GE, Deutsche Bank, Bear Sterns used to be considered blue chip. Regarding fees if you can do this yourself, buy high quality stocks and not let emotions impact your decisions leading to investment mistakes then there’s no need to pay an advisor. Most people need help in managing their savings. If your car breaks down you don’t open a manual and try to fix it yourself. You go to a professional who has the experience and knowledge. If nothing else you have this great blog to help you along the way. Just stay open to the message! – Ryan L

#46 DGI&R on 01.20.19 at 10:23 am

Thanks for the article. I like the graphic on rebalancing, but I was wondering if you had some more recent research? Yours (Source: SCIR, Turner Investments) was from 1970 to 2005. Is it mostly the same result when compared up to 2018?

#47 Ryan Lewenza on 01.20.19 at 10:28 am

Vampire Studies “So perhaps the annual re-balance just doesn’t allow for significant gains/losses to accumulate, and conversely misses quick corrections like we just had. Ryan – do we have any info where a different metric is used to re-balance? Thanks”

That was just one report/study on the topic. There are tons more you could find online to dig further. Google CFA reports and rebalancing. You’ll find a number of academic reports that dig deeper into returns, risks and different rebalancing scenarios. – Ryan L

#48 Ryan Lewenza on 01.20.19 at 10:35 am

Anthony “I rebalance every two weeks but only through purchases (i.e. never sell, just preferentially buy some assets over others to re-establish desired allocation). As a result, my allocation has almost never deviated by more than a percent or two in the past five years and sell-side transaction costs/taxes have been avoided. Ryan or Garth, are there any known issues with this strategy? Thanks.”

Basically your following half of the strategy by buying underperforming assets. This is fine since your “buying low” and keeping the asset mix unchanged. But what about the selling high part? I would want you to trim some equities along the way. And this would impact your geographic split. With the US significantly outperforming in this cycle I suspect your now overweight US and underweight international stocks even though your overall equity weight is consistent. So don’t forget to dig deeper into your equity exposure. Overall not bad, but I would recommend also implementing the selling high part. – Ryan L

#49 Ryan Lewenza on 01.20.19 at 10:40 am

waiting on the westcoast “Ryan – great job restaking your turf… Poor Sinan. Thanks for another great post… You mentioned a 20% shift in allocation (5% of 26%) would be a reason to reallocate. Do you go by rule of thumb or do have have a set deviation?”

Sinan, stop stealing my thunder!! Haha. Our general range is 3-5% above our recommended weight. For example, if equities rise above 63% then we automatically start rebalancing back to the recommended 60%. – Ryan L

#50 Godth on 01.20.19 at 10:48 am

economists need to rebalance their understanding of how money/economics actually works. why are they driving their bugattis with reins?
Steve Keen On Private Debt.
https://www.youtube.com/watch?v=J-2_TeR0dCY

#51 akashic record on 01.20.19 at 11:06 am

#43 Ryan Lewenza
Thank you Ryan.

#52 Not 1st on 01.20.19 at 11:16 am

Garth maybe you missed it but some articles On Jack Bogle specifically referenced his dislike for ETFs.
Too much passive investing out there.

https://www.google.ca/amp/s/www.cnbc.com/amp/2019/01/17/jack-bogles-last-warning-to-the-investment-industry-dont-forget-the-little-guy-you-serve—.html

#53 Nut on 01.20.19 at 11:23 am

#19 Joane
I have a 100% stock portfolio, CDN big banks and utilities as a core, and other well managed growers as well. I don’t copy Buffett stocks, but I adopted his keep the winners, sell the non-performers approach. I ended up with a fine collection of stable businesses that grow, raise dividends, survive and rebound from recessions and bear markets. I don’t really care about the industry diversification too much. Why buy a crappy stock just because one “needs” industry diversification? When I buy, I limit the purchase to 5% of my stock assets so as not to depend too much on one company. I don’t really like fixed income due to no growth, higher tax compared to dividends, and its like towing a bucket behind my boat. I let the dividends pile up in cash, and when we hit an air pocket, like last Dec, I spend it on more stock. Too, I do subscribe to a modestly priced and well regarded stock advisory service just for ideas and to keep my perspective.

This is not a knock on Turner Investments strategy. There is no one size fits all strategy and lots of people are not comfortable with individual stocks. Too, their strategy does limit the bumpy ride. If one does not have a hand holding advisor, some are prone to rookie moves like buying high and selling low. They then blame the stock market instead of their poor insight and judgement.

In your case, considering the wisdom your grandma gave you, and your apparent comfort with it follow her example.

#54 Toronto Rocks!!!!!!!! on 01.20.19 at 12:07 pm

#13 Toronto Hater

Thanks for the comic relief moron. You crack me up. Guess you were in the mental ward and heavily sedated when the Jays won two World Series in the 90s and set major league attendance records. The Expos won the World Series in what year? Toronto FC North American champs in 2017…. Argos have won the Grey Cup 7 times since 1980. The Toronto Rock lacrosse team, most league championship wins. 6 times since 1999. Guess you haven’t noticed the Raptors being in 1st place almost all season and now in 2nd place by a mere .5 game for the overall lead in the NBA. Let’s see how the Grizzlies are doing. Hey, they aren’t in the NBA anymore…. Unlike you moron, I don’t put down any region, city, town or village in this great land. Keep up the posts, you sound like the other moronic Toronto basher on this blog, Stan “Madman” Brooks…

#55 Stan Brooks on 01.20.19 at 12:17 pm

#54 Toronto Rocks!!!!!!!! on 01.20.19 at 12:07 pm

Keep lying you realtor/private education ‘professional’ scammer.

#13 Toronto Hater is not me.

————————————–

BTW I am a huge Raptors fan, watched more games life than your IQ.

#56 Stan Brooks on 01.20.19 at 12:39 pm

It is over for the Canadian housing super bubble:

https://www.ctvnews.ca/video?clipId=1144609

https://www.blogto.com/city/2018/02/toronto-ranked-first-world-city-most-risk-real-estate-bubble/

https://dailyhive.com/toronto/ubs-global-real-estate-bubble-index-2018-toronto

https://betterdwelling.com/toronto-real-estate-prices-literally-look-like-the-textbook-chart-for-asset-bubble/

#57 Capt. Serious on 01.20.19 at 12:41 pm

Worth noting a couple of things about rebalancing:
1) if rebalancing based on thresholds you need different high and low thresholds because a 5% fall is not the same as a 5% increase on a given target weighting.
2) if using thresholds they should be relative to the asset class. Emerging markets are obviously much more volatile than US equity, for example.

#58 Stan Brooks on 01.20.19 at 12:53 pm

Canadian housing downturn will be much worse and longer, more protracted downturn than the US:

https://www.bnnbloomberg.ca/real-estate/video/ex-wall-street-trader-i-m-shorting-canadian-housing~939956

https://www.bnnbloomberg.ca/real-estate/video/canadian-banks-could-drop-by-at-least-50-china-to-play-a-role-short-seller~1590438

#59 LivinLarge on 01.20.19 at 12:54 pm

“My gramma had 8700 shares of Rbc she got at 12$ per share”…well without spending a bit of time looking back to when RBC was selling for a non split adjusted $12, my guess is that it is quite a while ago.

Personally, for ease of management and general peace of mind, it’s hard to beat any of the top 3 Canadian chartered banks. Some, like BMO are the longest dividend paying companies in Canada and they have never suspended or reduced their div. 150 or so years of dividends every quarter like clockwork.

They are however just as susceptible to major market moves like 2008 as most other blue chip issues.

8700 shares of RBC should have had at least two splits since originally purchased so of the current approx value of $870K almost half of that will be suject to capital gains tax at your current marginal rate so I’m guessing you’re going to be seeing considerably less than you may be expecting.

#60 Stan Brooks on 01.20.19 at 1:32 pm

https://www.bnnbloomberg.ca/real-estate/video/capital-economics-canada-s-housing-market-is-on-the-brink~1144453

Denial, ignorance, cherry picking… They call it ‘journalism’.

Oh, this is going to be quite epic and I am going to enjoy every single moment of it.

BTW predictions are of BoC reversing interest rate increases and even going after cuts into negative rates and more QE… It is going to be quite a fun for the loooooooooooonie.

Cheers/on 12 years Glen Grant today.

#61 Stan Brooks on 01.20.19 at 1:45 pm

#59 LivinLarge on 01.20.19 at 12:54 pm

That sounds about right. You pay taxes/gains based on the face value at time of acquisition/inheritance of the shares (minus 12 bucks – the price at purchase) at the marginal tax rate (i.e 54 % on half the gains), in that single tax year and than if you don’t sell and they drop in value, let’s say 50 %….. you may end up with 25 % of the original inheritance money.

#62 Shawn Allen on 01.20.19 at 2:28 pm

Stocks will outperform ETFs?

Joane at 19 said:

We all know over the long run a stock portfolio wil out perform a etf portfolio hands down.

****************************************
Not clear what you mean. For example the S&P 500 etf is a stock portfolio.

Do you mean buying all the stocks yourself will outperform just due to the ETF fees?

I would think that before fees half of stock portfolios will lag “The index” (a proper index being the cap weighted average of all the available stocks) and half the portfolios will beat the index. That’s the math and Buffett has said so.

Or did you mean a diversified portfolio of stocks will outperform a balanced ETF approach in the long run? (true)

#63 Matt T. on 01.20.19 at 2:29 pm

Ryan, you don’t get enough thanks. Appreciation and cheers, bud.

#64 AlMac on 01.20.19 at 3:32 pm

Ryan

Thanks for your responses to my questions – very useful for us DIY investors. Also thanks to CEW9 for your perspectives.

#65 Not So New guy on 01.20.19 at 4:03 pm

#1 Joane

You don’t need Ryan, you need ME! ;)

And I found your post Christmas rally. What a bunch of crooks. That is your currency being devalued folks:

https://mobile.twitter.com/NorthmanTrader/status/1086591401784164353

#66 Joane on 01.20.19 at 5:57 pm

#53 nut
You sound just like my grandmother, thx you for the advice. Growth is key to me on stocks. I bought lauertian bank at its low after Xmas but will dump when it goes a little higher. It’s a good income stock but that’s about it in my opinion. I love all the TULF stocks.

#62 Shawn Allen
Diversified portfolio of stocks will out perform etf portfolio

Thx Ryan aswell
As for my Rbc stock, yes one day I will pay the piper but that’s life

Thank you all
Joane

#67 Gregg in Victoria on 01.21.19 at 8:51 am

If I hold ETFs that are committed to 60/40 and an even split between beaver/eagle/international, shouldn’t the rebalancing happen within the ETF?

Of course, if the intent is to change some of those weightings then stuff would have to be moved around.

Many thanks in advance….

#68 LivinLarge on 01.21.19 at 9:09 am

As so often happens here, there seems to be some facts not in evidence.

How did the RBC shares end up in your account already without having the cap gains also sucked off??? As for when you will pay the piper, could be as early as April this year. You don’t get to change ownership status of the shares without capturing the gains for taxes.

If this was a recent inheritance then CRA will have their paws out soon. Now if these shares were a gift to you years ago then yes, you take the ht when YOU sell but they aren’t an inheritance, they were a gift and their adjusted cost base should have been calculated when gifted to you.

Then there is the bg question, whether you can be gifted anything but cash not something in kind. I just don’t recall.

So, too much is unclear about this situation and reads a bit like a fairy tale.

#69 Anthony on 01.21.19 at 9:18 am

“Ryan – Basically your following half of the strategy by buying underperforming assets. This is fine since your “buying low” and keeping the asset mix unchanged. But what about the selling high part? I would want you to trim some equities along the way. And this would impact your geographic split. With the US significantly outperforming in this cycle I suspect your now overweight US and underweight international stocks even though your overall equity weight is consistent. So don’t forget to dig deeper into your equity exposure. Overall not bad, but I would recommend also implementing the selling high part. – Ryan L”

Thanks for your reply Ryan! I suspect I may have a terminology issue. When I mention that “my allocation remains within a couple percent”, I should have indicated that my allocation “as evaluated every two weeks remains remains within a couple percent” whereas perhaps the industry interpretation of weighting is “as evaluated quarterly or bi-annually”. At least mathematically, I am never under or over-weighted on anything for longer than two weeks even despite recent US market changes. However, your comment got me thinking as to why. I believe I have an explanation.

In short, the strategy I am currently employing has an expiry date which is a function of the amount I am contributing every two weeks versus the total amount invested. At present, I am contributing about 1% of the total portfolio value every two weeks. So this can easily compensate for most market fluctuations. (+10% recent inc in US stocks * 0.25 weight = 2.5% difference to make up which is dealt with in 5 weeks all things being equal). However, as the portfolio value increases over time, market fluctuations will be larger and larger relative to the amount I can contribute on a bi-weekly basis. Eventually, the time it will take to re-balance using a purchase-only approach will become prohibitively long and I will need to start trimming winners as you suggested. Thanks again!