Rebalancing With Cash Flows

With stocks continuing to enjoy a roaring bull market, rebalancing is on the minds of many investors—or at least it should be. Disciplined investing starts with choosing long-term targets for the asset classes in your portfolio and making regular adjustments to stay on course. Rebalancing discourages you from chasing performance, timing the markets and taking inappropriate risk.

There are three main rebalancing strategies. The first is based on the calendar: you might rebalance annually, or even several times per year. (Many balanced funds, for example, rebalance every quarter.) The second is based on thresholds: a rebalance might be triggered any time an asset class is five percentage points off its target. Finally, you can rebalance with cash flows, buying underweight asset classes with new contributions or cash from distributions (or, if you’re drawing down your portfolio, selling overweight positions when you make withdrawals).

In the real world, most investors probably do some combination of all three, and that’s fine. But there’s a good argument to be made for emphasizing the cash-flow method.

Go with the flow

Rebalancing with cash flows is particularly useful for those making regular contributions. The idea is that you deposit cash in your account every month or so, but you don’t invest it immediately (you might use an investment savings account to earn a little interest). You also take all your ETF distributions in cash rather than setting up dividend reinvestment plans (DRIPs). The money accumulates until you have enough to make a single cost-effective trade: then you use it to buy whichever asset class is furthest below its target. As a rule of thumb, you should wait until the cash is at least 1% of the portfolio’s balance—so if you have $100,000, you can make your first purchase when you’ve accumulated $1,000. (You can reduce this amount if you use mutual funds or commission-free ETFs.)

A rebalancing strategy based on cash flows has several benefits:

  • Fewer transactions. Calendar or threshold rebalancing typically involves both selling and buying. But rebalancing with cash inflows requires only purchases, which can reduce the number of transactions. (You may still need to sell an overweight asset class during a dramatic market move.) And as long as you keep to the 1% rule, the drag caused by holding too much uninvested cash will be negligible.
  • Easier decisions. There’s lots of evidence that investors find selling harder than buying. We shouldn’t underestimate the discipline it takes to put your money into assets that have recently fallen in price (did you buy real-return bonds last year?), but experienced investors will likely find it easier to buy low than to sell high.
  • Lower taxes. In a non-registered account, selling overweight asset classes is likely to result in realized capital gains. Rebalancing with cash inflows allows you to keep selling to a minimum and defer those taxes longer.
  • Easier to track adjusted cost base. While reinvesting distributions is an effective way to benefit from compounding, it can cause headaches in non-registered accounts. With many ETFs now paying dividends monthly, you’ll need to adjust the cost base of your funds for an additional 12 transactions per year. By taking the dividends in cash you’ll reduce that burden.

Pick one and stick with it

Rebalancing with cash flows may have practical benefits, but how does it compare in terms of performance and risk management? Remarkably well, it turns out. A Vanguard study in 2010 compared various rebalancing methods using targets of 60% stocks and 40% bonds, with data going back to 1926. The researchers found surprisingly modest differences in the long-term results. As long as you chose a reasonable strategy and stuck to it, the annualized returns and volatility were similar.

For example, a portfolio rebalanced every month had an annualized return of 8.5% and a standard deviation of 12.1%. If the rebalancing was planned annually but only performed if the portfolio was more than five percentage points off target on the scheduled date, then the annualized return was 8.6% and the volatility was 11.8%. Finally, if the portfolio was simply rebalanced by reinvesting all the dividends and interest in the underweight asset classes, the return was 8.5% and the volatility 11.3%.

Moreover, the study ignored transaction costs and taxes: had these been included, the cash-flow method would almost certainly have come out ahead. As the Vanguard researchers wrote: “An investor who had simply redirected his or her portfolio’s income would have achieved most of the risk-control benefits of more labor- and transaction-intensive rebalancing strategies at a much lower cost.”

41 Responses to Rebalancing With Cash Flows

  1. Willy June 23, 2014 at 9:08 am #

    I could see sticking to cash-flow only rebalancing if all I had were a single, large account and everything was contained within. Practically speaking, though, at least for me, that is not the reality. Having to juggle TFSAs, RRSPs, etc, means your “free cash flow” may not always be in the account you want it to be in (and you cannot always easily move it – for example out of an RRSP) and usually “forces” some other transactions at least once per year, which means you may already be selling something, leading to an opportune time to rebalance (for example, you get more TFSA room every January that may force you to sell/move some things anyway). Practically speaking, at least for me (managing at least 5-6 accounts between myself and my spouse in an integrated manner), rebalancing solely on cash flows would be hard and probably MORE confusing than just realigning everything, placing things in the optimal accounts (tax efficiency wise, etc) once per year.

  2. JohnZ June 23, 2014 at 9:30 am #

    Holding cash in a saving account, rebalancing 2- 3 times each year using the Cash Flow approach is simple and strait forward. (with multiple, different type accounts)

  3. Ryan June 23, 2014 at 9:35 am #

    For myself, I’ve invested in several ETFS that pay out monthly dividends and have opted for DRIP. This essentially leaves my portfolio on auto-pilot as I don’t like the fact that I have to pay for a trade which then adds up in cost.

  4. Holger June 23, 2014 at 9:42 am #

    If you are forced to keep the majority of your investments in non-registered accounts, the impact of taxes becomes significant. In a bull market like now, any benefit from re-balancing by selling overweighted asset classes (I’m looking at you, US stocks) is more than offset by the income tax liability this would generate. Thus the cash flow method is definitely appropriate here.

    In my own accounts, I just bank the incoming cash and check every month if an asset class has dipped below a defined threshold. If it did, I buy more. I use Michael James’ formula to calculate the “buy more” threshold.

  5. Canadian Couch Potato June 23, 2014 at 10:00 am #

    @Willy: Rebalancing across multiple accounts is always difficult, no matter which method you use. Any time you need to sell bonds in the RRSP and buy more stocks in a non-registered account you run into the same problem—i.e. you can’t move the cash proceeds from the RRSP to the non-registered account. It’s probably not possible to use only the cash-flow method: I just feel that it’s the place to start.

  6. Willy June 23, 2014 at 10:27 am #

    @CCP: Agree totally. No problem in starting there (and usually I try to). With multiple accounts, I have found in practice that it’s almost never sufficient, and you cannot avoid a sale or two. Not a big deal though.

    As a side note, re your comment that selling is harder than buying, I can say that as a reformed stock picker, back then, selling was HARD for sure. A loss isn’t a loss unless you actually sell it, right? Hang in there long enough and it’ll come back? Conversely, I have noted that since moving to passive investing, I have basically zero reluctance to sell anymore. The confidence, knowing you have a plan, and the mechanical, unemotional nature of it all has removed any difficulty for me personally. Just a personal observation.

  7. Canadian Couch Potato June 23, 2014 at 12:37 pm #

    @Willy: That’s really interesting, and it speaks to the importance of having a disciplined strategy in place so your decisions are not based on emotion. As you’ve found, when an index investor sells an asset class it’s because of a mathematical rebalancing decision. There’s no thought about the near-term prospects for that asset class, etc. Any time you remove emotion from the process you’ve gained something.

  8. Smithson June 23, 2014 at 9:16 pm #

    @CPP: I use cash flow rebalancing just as you describe. I make monthly contributions to my RRSP and then every three months I use that money along with any ETF distributions (I don’t DRIP) that have accumulated and I rebalance by buying whatever is off-target. I’m happy with this, but I’ve always wondered if this technique isn’t biased towards purchasing the ETFs in my portfolio that have high distributions. REIT ETFs would be a good example. A significant portion of REIT ETF total returns come from their distribution compared to something like HXT, for example. If I owned both and both had the same total return, over time I would be putting more money into the REIT ETF due to the fact that its price would be lower than that of HXT. Do you think this matters? I guess what I’m asking is: should investors be rebalancing on a price basis or a total return basis?

  9. Peter June 24, 2014 at 6:51 am #

    Nice to see a post like this just when I am beginning to use this strategy. I am in the middle of moving everything into a few ETFs. And yes selling things like APPL, TD and FTT that have done so well is not easy. I have to keep remembering that I am not ‘losing’ anything and that selling 20 stocks for a few ETFs with 1000’s of stocks them is a good thing…..

    I will adding one ETF buy every two months from this point on, and will just add to whatever is underweight, or if the balance still close, I will just buy the one that is at the best price relative to its NAV. That should keep me pretty close to optimal and by default will should keep me always buying holdings that are the better value. But I will still do a full rebalance exercise every year. I have also decided not to DRIP anything to keep honest to the cash flow theory. So 6 buys a year x $9.95 a buy. Sure beats a 1.1% active management fee! I just hope I can stick with it.

    The tax issues are actually less of a factor if you are not looking for income I think. Now with HBB it’s pretty easy to add to Bonds without worrying about extra tax hits.

  10. My Own Advisor June 24, 2014 at 8:14 am #

    Excellent post Dan.

    I rebalance with cash flows for the stocks and ETFs I own. Rebalancing with the dividend stocks is a challenge, I admit. I need to wait to buy under-appreciated stocks that are not always on sale. Kinda frustrating in this market climate actually so I need to be more patient than any index investor.

    Your point about waiting until at least $1,000 cash exists (to make a transaction) is a very good one. I’m trying to keep my transaction costs to about 0.5%.

    Mark

  11. Dennis E June 24, 2014 at 8:51 am #

    I agree that rebalancing removes the human element from the equation. But, the part which I struggle with is “what is an appropriate asset allocation”. It seems to me that when the stock market was flattened during the GFC, that would have been the time to throw caution to the wind and go all into equities (Note: Sadly, I did not do this). Conversely, if we get a roaring economy a few years down the road and the Fed is boosting interest rates then perhaps the smart money will pack up and leave until things cool off for a while. I apologize for bringing the subject of market timing into an indexing blog. But, it seems to me that there is some merit in using a set of ranges for your asset allocation rather than fixed values. I’d be interested in hearing your thoughts.

  12. Canadian Couch Potato June 24, 2014 at 9:13 am #

    @Dennis E: The problem with tactically moving within a range of asset allocations is that its a slippery slope towards market timing. I think you know my opinion abut the futility of that strategy. Remember that a portfolio will naturally move within a range of allocations anyway, and using a threshold-based rebalancing strategy accomplishes a lot of what you’re after: i.e. buying more of assets that have fallen in price and therefore have higher expected returns.

    I should also note that rebalancing only removes emotion from the equation in theory (unless you are in a balanced fund or use some kind of rebalancing algorithm, like a robo-advisor). You still have to execute your strategy, and many indexers still find this very difficult.

  13. Kurt June 24, 2014 at 11:54 am #

    For the most part I use cash flows for balancing – I automatically transfer a set amount to a separate savings account bi-weekly (paydays), and then every 2 months I buy whatever is furtherst below target allocation. (I do use DRIPs.) However, I found with the recent run on equities that even with this approach my “bonds” were still falling behind and decided to sell some equities to do a rebalance. I have most of the “bond” portion of my portfolio in a GIC ladder, but decided to buy some VAB to give more rebalancing flexibility.

    It does feel a bit weird to sell equities and buy bonds when equities are doing so well, but I tell myself that by keeping my bond/GIC portion at the correct allocation, I’ll be in a position to buy low whenever equities take an inevitable dip. It’s forcing me to buy low, sell high.

  14. Micahel McBride June 24, 2014 at 4:20 pm #

    Rick Ferri’s “hunch is that for most people the tax savings [due to asset location decisions] all come out in the wash over time” (http://www.rickferri.com/blog/strategy/does-asset-location-make-sense/).

    If his hunch is correct, and you have multiple account types, you could remove the difficulty of rebalancing across multiple accounts by keeping the same asset allocatioon in each account.

    Then you could just focus on choosing your rebalancing strategy.

    Are there any studies to back up his hunch?

  15. Canadian Couch Potato June 24, 2014 at 9:35 pm #

    @Micahel: I’m not a big fan of relying on hunches. Justin Bender and I looked at the last 10 years of actual fund data to examine this question and found that the asset location decision made a significant difference. See our white paper linked here:
    http://canadiancouchpotato.com/2014/04/24/do-bonds-still-belong-in-an-rrsp/

  16. Micahel McBride June 24, 2014 at 9:56 pm #

    Hi Dan:

    Thanks for answering and directing me to the excellent article written by you and Justin.

    -M

  17. ccpfan June 25, 2014 at 8:51 am #

    I’ve discovered that by:
    1- using a rebalancing band of 10% of allocation (e.g. 40% bonds -> 36% to 44%)
    2- making quarterly contributions and rebalancing at the same time if a band is hit (using a high-interest savings account in the interim), and
    3- allowing for over-rebalancing if that reduces the number of transactions when rebalancing (as long as the final amount is within range)
    I am able to keep the number of transactions very low, while also keeping my asset allocation in check within rebalancing bands across multiple accounts.

    It took me a while to figure out the above. But, as I use ETFs, I needed to minimize my transaction costs to justify not using e-series funds. It is quite easy to end up with higher total costs than the e-series’ .44% MER if you pay too much in transaction fees, even with low-cost ETFs.

    I just use a spreadsheet similar to Dan’s rebalancing spreadsheet for a first approximation and then plan my transactions ahead, using a pen and paper, trying to keep their number minimal. Doing that once every 3 months is not much work.

    Thanks go to this blog for teaching me about most of this.

  18. Andrew June 26, 2014 at 11:12 am #

    Useful article as usual and great comments. Despite the simplicity of the CP approach am always learning more.
    Related Question:
    In rebalancing using cash flows during a withdrawal period such as retirement what is the maximum amount one can remove from a portfolio, as a percent, that is recognized to be sustainable over long periods of time? I’ve read about the figure 3% and wondered if there were calculators or tools that could be used to show the potential effects of different withdrawal amounts.

    I know two instances of retirees in the first few years of retirement presently taking larger withdrawals than 3% (about 9-10% in one case) as their advisors do a “summer rebalance” against the larger stock market gains recently (with portfolios of individual stocks and mutual funds so this is complex). Instead of balancing back to their original risk tolerance (50/50) and taking only 3% or so out of the portfolio and buying some bonds, with the result of retaining a larger capital base, one advisor is using the 20% plus stock market gains and the rebalancing process to allow spending of the proceeds. The risk level will be back to 50/50 target but the portfolio will also return to just about the level of capital of about a year ago. I wondered about the long term potential repercussions of this. I played with the numbers a bit but don’t have a Monte Carlo model and backtesting data set. I am also curious about the answer to this as a planning consideration for the future – knowing how much I might safely assume to be able to withdraw annually. Its easy enough to find research on this but are there any tools that could be used to demonstrate potential scenarios? Abstract research I find doesn’t have as much impact as using the actual numbers from a portfolio.

    Even with zero net returns in 10 years and just 3% withdrawn, capital will be about 75% of start value.

  19. Franco Barbiero June 26, 2014 at 3:32 pm #

    Hi Andrew,

    A withdrawal rate of 3% is a simple rule of thumb that many advisors use when calculating how much can be withdrawn from a portfolio without decreasing the portfolio’s nominal capital over the long term. The rule of thumb actually used to be 4-5%; however, given prevailing yields, there is no wonder why it has now become just 3%.

    The amount that can be withdrawn from a portfolio to fund a client’s retirement lifestyle needs is actually based on a number of factors, including (but not limited to):

    1. the asset mix and ensuing projected rate of return;
    2. the volatility of these returns;
    3. the client’s time horizon/life expectancy;
    4. projected changes in the client’s spending habits;
    5. projected changes in inflation;
    6. the client’s marginal tax rate; and
    7. the client’s comfort with encroaching on capital .

    These factors might result in a withdrawal rate that is higher or lower than 3% (though often higher). Because of the multitude of factors, I typically use a professional financial modelling tool to determine a reasonable withdrawal rate/amount.

    If I understand the scenario you describe correctly, though I admit I am not too clear on it, it seems that the advisor you are referring to is “allowing” his clients to spend more than 3% because the performance on the portfolio has been very strong. This is curious as typically we would count on the good years to provide a capital buffer for the not-so-good years. Perhaps I am not understanding the scenario?

    Franco Barbiero
    http://www.nobs.ca

  20. Carole June 26, 2014 at 9:57 pm #

    @Andrew & Franco,
    I’m assuming that you are referring to withdrawals from cash savings/investment accounts. To the best of my knowledge, regular payments from a RRIF have a minimum required annual amount of ~4.75% (for my age) of the assets at Dec31/Jan1. Once you start regular withdrawals from your RRIF, you can’t stop them. So if you have other assets, it seems sensible to delay opening a RRIF closer to age 71, when you must.

    I hope my assumptions are correct, or I may have to rethink some planning.

    @CCP Thanks for all I’ve learned from this site. It’s kept me on the ‘straight & narrow’ path for my registered plans.

  21. Franco June 27, 2014 at 5:56 am #

    Hi Carole,

    You raise a very good point. Often, when people are compelled to withdraw more than they need because of RRIF minimums, there is less opportunity to preserve one’s initial capital, even if the excess withdrawal is re-invested into a taxable account. This, of course, is due to the taxation of the withdrawal.

    As you suggest, delaying the conversion of an RRSP to a RRIF is often a reasonable strategy if one has other non-registered accounts that he/she could use to fund living needs; however, in some cases, specifically in cases when one’s marginal tax rate is low, it may still make sense to convert one’s RRSP early, or to withdraw from the RRSP (without converting it to a RRIF). The modeling, however, is tricky as there are a number of variables to consider.

  22. gsp June 27, 2014 at 6:12 am #

    @Carole, RRIFs can be converted back to RRSPs whenever a 71 or younger investor so chooses, that stops forced withdrawals. Also, those forced RRIF withdrawals need not be completely spent! Some of the withdrawal can be reinvested in a TFSA yearly as contribution room increases and the remainder can go to taxable accounts.

    For investors 65 or above without income that qualifies for the pension income tax credit, it makes sense to convert part of an RRSP to a RRIF to be able to withdraw 2k/year tax free(at least federally).

  23. Andrew June 27, 2014 at 11:07 am #

    @Franco @Carol
    Thanks for the detailed reply and comments. Its not a RRIF account and this person is 65 and I thought it curious as it would make more sense to me to rebalance with the 3% withdrawal and have a higher capital base. Its not the first time this advisor has done this and I was (am) concerned what will happen say if markets took a turn for the worse for a period after this large withdrawal. Using banner years as excuses to withdraw more than what is sustainable does not seem prudent.
    As I said however if there was a tool to show the potential negative effects, using the actual portfolio numbers, it would be clearer to the people concerned. My family members eyes glaze over when I talk about this stuff, talking about things in relative terms with percents seems to be abstract, but when I say “if you saw 10% of your portfolio value decline it would be X dollars” they listen attentively.

  24. Carole June 27, 2014 at 6:49 pm #

    @gsp
    Thanks for the information. I did not know that a RRIF could be converted back to a RRIF. I need some of my RRIF money, but the extra goes mostly to TD TFSA e-series funds (or to a vacation).

  25. Caitlin Harrigan July 3, 2014 at 11:24 am #

    Hello Dan,

    Thank you for your blog. I am reading it in conjunction with Andrew Hallam’s Millionaire Teacher and both have been extremely informative for a newbie DIY investor such as myself.

    I am a 30-yr old professional and have savings in an RRSP and TFSA (under $25000). I am invested in TD Balanced & Dividend Mutual Funds for both. However, I am wanting to transition my investments to a Global Couch Potato portfolio using the TD e-Series index funds of the following mix:

    Canadian equity 25%: TD Canadian Index – e (TDB900)
    US equity 25%: TD US Index – e (TDB902)
    International equity 20%: TD International Index – e (TDB911)
    Canadian bonds 30%: TD Canadian Bond Index – e (TDB909)

    My investment needs are twofold:
    1. Long-term (retirement) – I won’t access this money until retirement
    2. Short-term (house down payment) – I will need to access this money in 2-3 years

    I am seeking your advice in how I should allocate my current & future savings into my RRSP & TFSA using the Global Couch Potato strategy to accommodate both short-term (greater liquidity & lower volatility) and long-term (lower liquidity & higher volatility) needs. Would you have any insights in terms of asset allocation with this in mind?

    Thanks very much,

    Regards,
    Caitlin

  26. Canadian Couch Potato July 3, 2014 at 3:22 pm #

    @Caitlin: Thanks for the comment. I’m afraid I can’t provide any specific advice without knowing your complete financial situation. In general terms, your suggested asset allocation seems fine for a young investor with a long time horizon. However, whatever portion of your savings you have earmarked for the home purchase should not be invested at all. Any money you need in two to three years should be kept in cash or short-term GICs and not invested in stock or bond funds. Otherwise it may not be there when you need it. Good luck!

  27. Caitlin Harrigan July 4, 2014 at 9:33 am #

    Hi Dan,
    Thanks very much for your response, your thoughts are most appreciated. I agree that a GIC is the most secure option for short-term savings in that your principal & a rate of return are guaranteed. However, the rates of return are a little discouraging, since most are lower than the rate of inflation. I’m currently looking into GICs and am curious about “market growth” GICs. TD Canada Trust offers this type of GIC for periods of 1, 3 and 5 years. What are your thoughts / do you have recommendations on particular GIC’s?

    Alternatively, would you recommend any government or corporate bonds, a relatively stable bond index or a money market fund? I realise these aren’t guaranteed investments, but am interested to know about your insights.

  28. Canadian Couch Potato July 4, 2014 at 10:07 am #

    @Caitlin: Rates are low, but unfortunately that is the price of safety. Market-linked GICs are complex products that are a marketing triumph for banks but a poor choice for investors: while you won’t lose your principal you could easily end up with a 0% return. Government bonds and money market funds have lower yields than GICs, so they’re not a realistic option, and corporate bonds might get you more yield but only with additional risk. There is no such thing as a stable bond index fund: all of them can lose value.

    That’s why I always encourage short-term investors to use high-interest savings accounts or GICs if they want to make sure the money is there when they need it. Don’t settle for ones at your bank branch. You can get higher rates at a credit union, online bank or through your discount brokerage.

  29. Nathaniel Mallet July 22, 2014 at 11:48 am #

    Great article, as usual, but I don’t understand the “1% of portfolio” rule of thumb.

    I completely agree with the premise of “The money accumulates until you have enough to make a single cost-effective trade”. However, how the rule of thumb of accumulating cash equivalent to 1% of the portfolio doesn’t account for the trading costs at all. In fact, in the case of small portfolios (in the case of someone just starting out), trading costs as a % of invested cash could be quite high. For example, in the case of a $10,000 portfolio and flat $10 investing fee per trade, the trading fee is 10% (1% of a $10,000 portfolio is $100, and $10 on a $100 trade is 10%).

    The rule of thumb I read about and that I’ve been following is to accumulate cash until it represents 1% or less of my trading costs. Keeping with the example above, if my trading fees are $10, then I would wait until I accumulate $1,000. That way, my trading cost is 1%, regardless of my portfolio.

  30. Canadian Couch Potato July 22, 2014 at 12:06 pm #

    @Nathaniel: The rule about limiting trading costs to 1% of the transaction is fine as a minimum threshold. As you say, if you are paying $10 per trade it does not usually make sense to make an ETF purchase or sale for less than $1,000 or so. But suppose you had $1,000 sitting in cash and your portfolio is $500K. That cash represents 0.2% of your overall portfolio. Is it really causing a significant drag on your performance? It’s not necessarily a mistake to reinvest this amount, but it doesn’t need to be a priority.

    If your portfolio is $10,000 and you are paying $10 per trade you should not be invested in ETFs, period. Index mutual funds would be far more cost-effective.

  31. Nathaniel Mallet July 22, 2014 at 12:22 pm #

    @ Canadian Couch Potato: I would argue that it depends on how you look at it. I agree 100% that at 0.2%, it’s probably not a significant drag on my portfolio. But if I invest that $1,000 at the beginning of the year, rather than wait a few months to accumulate 1% of my portfolio, that’s a few months of lost returns. Of course that could also mean a few months of avoided losses. So it might all balance out.

    I admit, I’m probably splitting hairs. 🙂

    You last point on ETFs vs Index funds is very interesting. I always assumed that ETF would be better if I kept my trade costs low, at least for the ETFs I’m invested in, as their fees are usually cheaper that the index mutual funds available to me (by available to me, I’m mean of those my bank makes available at $0 trade fees). Given the very long investment timelines I’m looking at, a one time 1% investment fee is easily covered by a yearly 0.25% management fee savings over 25+ years.

    But I haven’t actually done the math. Time to break out the spreadsheet!

  32. Canadian Couch Potato July 22, 2014 at 3:01 pm #

    @Nathaniel: No need to break out a new spreadsheet: I’ve done it for you. 😉

    http://canadiancouchpotato.com/2012/07/30/comparing-the-costs-of-index-funds-and-etfs/

  33. Matt August 18, 2014 at 7:32 pm #

    Hi Dan,
    Being a young DIY investor, I’m moving towards a couch potato strategy for my long term investments, buying 5 ETFs (following one of your model). I only have 2 registered accounts, RRSP and TFSA. My RRSP contribution is maxed out and planning to have a good amount of money soon that will allow me to max out my TFSA also ($31K). I’ve already started my couch potato strategy in my RRSP account buying all 5 ETFs and rebalancing 4 times a year. But know I’m wondering, with that kind of money that I will be adding to my TFSA, I cannot really rebalance with my RRSP without selling. I was wondering if it could be a good idea to just “duplicate” my strategy to my TFSA, so buying the same 5 ETFs that I already own in my RRSP in my TFSA? So I would have to rebalance 2 different accounts individually but with the same strategy. I’m planning to rebalance with cash flows as far as it is possible, and with my broker buying ETFs is free of charge, but selling is $4.95. Any thoughts on that would be really appreciated. Thanks!
    Regards,
    MaTT

  34. Canadian Couch Potato August 18, 2014 at 8:53 pm #

    @Matt: Building the same portfolio in both your RRSP and TFSA is probably fine for now. You can consider a more efficient set up when the portfolio grows larger. If you are rebalancing with cash flows and only making a couple of sales each year the cost is likely to be minimal.

  35. Tristan December 20, 2015 at 3:52 pm #

    @CPP: When rebalancing with cash flows should you give priority to the stock/bond ratio, or if one of the stock sub classes is more off balance than the stock/bond ratio, should you give priority to the more off balance stock sub class? Eg., say bonds were $2K below target, and although stocks were therefore $2K above target, but Canadian stocks were $8K below target (and US stocks about 8K above target), and you have $2K to invest, would you buy $2K of bonds or $2K of Canadian stocks? The stocks are in a taxable account, so I wouldn’t want to sell US stocks to buy Canadian stocks, especially as they don’t exceed the 5/25 bands.

  36. Canadian Couch Potato December 21, 2015 at 8:19 am #

    @Tristan: In general, the stock/bond ratio is more important, as it controls your overall risk level. A portfolio that is, for example, overweight in US equities and underweight in Canadian equities needs some attention, but it is not meaningfully more or less risky.

  37. Tristan December 21, 2015 at 5:09 pm #

    Thanks. It does make sense to approach it from a risk point of view, notwithstanding the attraction of just buying the asset class that is furtherest below it’s target in order to buy a depreciated asset, in this case Canadian stocks, although, of course, they could be lower still next month.

  38. Kevin April 12, 2016 at 2:46 pm #

    @CCP Thanks for all the great information.

    After a number of years, my portfolio has collected various ETF’s in asset classes across numerous taxable and registered accounts. The result is I now have a substantial CCP portfolio comprised of VCN, VUN, VXC, XEF, XEC, VAB, etc. An example of my inefficiencies is I have now contributed the “max” to my RRSPs and TFSA, but I now have VUN in my TFSA and it would be better served sitting in my RRSP. Any subsequent bond ETF purchases would also be in a taxable account.

    I would like to “simplify” and clean up my entire portfolio and stick to the three Vanguard ETF’s as recommended in your model portfolio.

    Ultimately, my questions are:
    1) Assuming that I should never take my assets out of registered/taxable accounts because of the various implications that may arise, the best strategy would be to “sell” my investments across my accounts and repurchase my investments based on a revised allocation (that I would calculate before executing all of this). Is there another way?

    2) Is a “clean up” worth it over the long term? I will be incurring trading fees to do this.

    Thanks for your thoughts!

  39. Canadian Couch Potato April 12, 2016 at 4:32 pm #

    @Kevin: It’s impossible for me to suggest whether it is worth it to clean up the portfolio without knowing the details. Taxes would be a factor too, as well as transaction costs. But in general, it usually is a good idea to simplify things if you are confident you will be able to keep them simple going forward. Certainly it makes little sense to buy more bonds in taxable account, for example.

    It would be worth clearing up some potential misunderstandings first: for example, I’m not sure why VUN would be more appropriate in an RRSP than a TFSA.

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