Your Complete Guide to Index Investing with Dan Bortolotti

Why Rebalance Your Portfolio?

2018-06-17T20:44:39+00:00 February 22nd, 2011|Categories: Asset Classes, Indexing Basics, Portfolio Management|Tags: , |73 Comments

An important part of the indexing strategy is that you occasionally rebalance your portfolio back to its target asset allocation. I get a lot of questions about rebalancing, so I felt it was time to put together a series of posts about the idea.

For those who are new to the concept, we’ll start with a primer on what rebalancing is. One of the most important decisions investors will ever make is their asset allocation—the percentage of stocks, bonds, cash and other asset classes in their portfolio. For example, a mix of 60% stocks and 40% bonds is common in a balanced portfolio.

The problem is that asset allocations don’t stay constant. As the markets move month by month, your portfolio’s stock-bond mix will change, sometimes dramatically. If you had a 60-40 portfolio in mid-2008, the stock portion fell to about 45% by March 2009. If you were at 60-40 when the market bottomed, then your mix would be close to 80% equities today.

That’s why investors should occasionally adjust their portfolio to get it back to its target. You can do this by adding new money to the underperforming asset classes, or by selling off some of the outperforming funds and using the proceeds to prop up the laggards. In either case, the idea is to “reset” your portfolio to its original asset allocation.

Why rebalance?

One of the benefits of rebalancing is that it encourages you to buy low and sell high, so many people assume that the strategy is designed to boost returns. But that’s not actually the case. Think about it like this: if stocks outperform bonds over the long term—and we wouldn’t invest in stocks if we didn’t expect this—then a portfolio that is never rebalanced will naturally become more and more heavily weighted to equities. So more often than not, rebalancing will mean trimming back stocks and moving that money to the fixed income side. Over the long term, that’s likely to lower returns, not increase them.

If we assume an annualized return of 10% for stocks and 5% for bonds, then a portfolio that starts out with 60% in equities will naturally drift to 80% stocks after 20 years. Most investors do not want their portfolios to get more risky as they age. Rebalancing, then, is primarily about managing risk by keeping your asset allocation more or less consistent. If it does boost returns, that’s simply a bonus.

Another benefit of systematic rebalancing is that it helps investors control their behaviour. Whenever you add money to your portfolio, you need to make a decision about where to allocate those new funds. If you’re like most investors who simply follow their emotions, you’ll likely add the money to whatever asset class is hot. (How many people are enthusiastically adding to the bond side of their portfolios these days?) However, this is simply performance chasing, and over the long term, it’s disastrous. A disciplined rebalancing schedule—preferably written down in an investment policy statement—helps you avoid this trap and stay on course.

So how frequently should you rebalance your portfolio? There is no simple answer, but in my next post, I’ll look at some of the options.


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  2. Michael James February 22, 2011 at 10:43 am

    I agree with you that rebalancing is not well understood. When rebalancing between two asset classes that have similar expected returns, rebalancing is about boosting returns by shifting money to the asset class that is destined to perform better (we hope). This is the idea behind rebalancing between say Canadian and U.S. stocks. When rebalancing between two asset classes that have different expected returns where one is expected to run away from the other (e.g., stocks vs. bonds), rebalancing is about controlling risk at the expense of expected return. It’s true that the boosting return effect applies to some degree in the stocks vs. bonds case, but this effect is very likely to be swamped by the long-term drag of bond returns vs. stock returns.

  3. The Dividend Pig February 22, 2011 at 11:32 am

    When it comes to a rebalancing schedule, I’ve read everything from quarterly to once every four years, based around a presidential cycle (supposedly US markets do better during the last 2 years of a presidency). I try to keep it simple, so for the assets I do need to rebalance, once a year is enough, and only if they drift over 5%.

  4. Invest It Wisely February 22, 2011 at 4:11 pm

    That’s an interesting point how rebalancing between two different classes manages the risk while reducing expected returns; what is the effect on expected return adjusted for risk? Would you expect this strategy to increase the expected return given a constant level of risk?

    I’m also curious as to your thoughts of those who employ a “beating the index with bonds” strategy — gradually increasing their bond percentage during bull markets, then trading the bonds for stocks after a stock market crash.

  5. Canadian Couch Potato February 22, 2011 at 5:21 pm

    @Invest it Wisely: William Bernstein has a very detailed (and mathematically intimidating) article that looks at expected returns from rebalancing that you may find interesting:

    As for the “beating the index with bonds” strategy, it sounds to me like nothing more than market timing. Which is to say I’m skeptical.

  6. marie February 22, 2011 at 9:31 pm

    CCP: I posted this comment on the MoneySense site but thought I would take my chances and post it here too. Sorry for the repeat if you saw the original.

    There was an article in over the weekend comparing index ETF’s to actively managed funds. Here’s the link although I’m sure you’ve read it:–why-etfs-are-out-pacing-mutual-funds?bn=1

    At the end the author pointed out he set up an ETF couch potato portfolio – testing only – and stated it was at a loss of 0.6% since inception at 2008/09 and commented that he wondered how many would be willing to stick out almost 3 yrs with no net gains. I could be wrong but the article seemed in defense of actively managed, more expensive mutual funds. This seems to fly, somewhat contrary, to the advice given by you and other bloggers and passed on years ago by a well versed and financially successful friend who used similar concepts as yourself and Cdn Capitalist. My friend advised me to stick with index funds until a certain level of investment and financial position was reached and then look at mutual funds. He had very diverse and strong portfolio along with house and car paid for etc. In general, would you agree?

  7. Andrew Hallam February 22, 2011 at 10:03 pm


    The couch potato strategy will beat the vast majority of active mutual fund portfolios over your lifetime. There’s no academic evidence refuting that. It has to work that way. Take the U.S. market as an example. If it gains 8% in a year, that means the average dollar invested in that market made 8%. Mutual funds, pension funds, endowment funds and indexes make up the vast majority of money in that stock market. So if the markets made 8% in a year, what would the average fund make?

    The answer is 8%….before fees. After fees, the average fund would make about 6%. A low cost index would make about 7.8%.

    You could consider picking funds that have beaten the indexes, but there’s something called “reversion to the mean” ensuring that funds that do outperform the indexes during one time period (even a very lengthy time period) are unlikely to keep outperforming the stock market in the next lengthy time period. Numerous academic studies support this.

    I think I know Dan well enough for him not to take offense at this, so here goes:

    Don’t take investment advice from magazines….period. Some of it will be good, solid advice, as Dan’s articles have been. But much of it is there to sell the magazine. If every article was about how great indexes were, the advertisers (which are comprised mostly of financial service companies) would stop advertising, and the readers (many of whom do like to tickle their own gambling bones) would cease to buy the magazine. And then the magazine would die.

    Marie, stick to this blog for advice, and run things past your accountant so you can keep the tax issues streamlined and efficient. And don’t get confused by the double-speak you might read about in a magazine.

    Good luck!


  8. Andrew Hallam February 22, 2011 at 10:33 pm

    Marie, just to add to what I wrote before:

    I wasn’t able to find the article you linked to…from my computer, it wasn’t working. But you mentioned that your friend suggested switching to actively managed funds when your assets grew. That, of course, doesn’t make sense. Your future shortfall (if you choose active funds over indexes) would be even larger, in dollar terms, as your portfolio increases. Paying just 2% extra, in fees (as you would with active mutual funds) on a $10,000 account isn’t as damaging as paying an extra 2% in fees on a one million dollar account.

    Back to the article….
    The key ingredient in a couch potato strategy is patience.

    Over a one year, three year or five year period, your neighbour’s account might beat yours, even if it’s in actively managed funds. This is what defines the evolved investor from the vast majority of people. The evolved investor goes with a strategy that is fully evidence-based (such as the couch potato) and they stick to it. If the markets don’t “dish out” a highly performing three or five year period, the evolved investor realizes that everyone else (even those in actively managed funds) are going to be in the same boat. But the further reality is that even during the past five years (which were difficult for investors) the couch potato strategy still beat the vast majority of pros.

  9. Canadian Couch Potato February 22, 2011 at 11:06 pm

    @Andrew: No offense taken at the comment about not taking advice from magazines. For the most part, I would agree, although I am happy to note that indexing is getting much more support in the mainstream media in recent years thanks to influential writers like Jason Zweig, Jonathan Clements, Larry Swedroe and Allan Roth. Not to mention MoneySense. :)

    @Marie: I would echo everything Andrew said. The evidence against actively managed mutual funds is overwhelming. If your friend is wealthy, it likely has more to do with his income, savings rate and investment discipline. It’s highly unlikely that he owes his wealth to his mutual fund managers.

    The Moneyville article you linked to doesn’t say anything that is downright wrong, it just doesn’t tell the whole story. Remember that Gordon Pape has made his living as a mutual fund commentator for decades. One of his specialties is recommending winning funds. You can’t expect him to suddenly do an about-face and say, “Hey, maybe trying to pick outperforming mutual funds is a huge, expensive waste of time.”

  10. Kristi February 23, 2011 at 12:11 am

    Hi Dan – this question probably doesn’t belong under this post – just wasn’t sure where else to post it.

    I recently set up a “Complete Couch Potato” portfolio with BMO Investorline (used the older version with VT and may switch next year when I rebalance).

    Now, I have generated about $120 in dividends – only one of my ETFs is eligible for DRIP according to BMO (ZRE). Here’s my questions:

    I’m assuming I should just let any other dividends accumulate as cash and then factor in that money when I rebalance at the end of this year?

    What determines whether a specific bond ETF is eligible for a DRIP?

    Your blog is excellent – I am constantly telling my friends about it!


  11. Paul G. February 23, 2011 at 12:54 am

    I always thought rebalancing would allow higher returns, since it would mean taking money from bonds and putting it into equities following a crash…. though doing it the other way around when the market is sky-high might diminish returns, and it just winds up being as you said once both effects are combined.

    An idea for a future post: finding a tax-efficient way to invest without being in a registered account. For example, HXT instead of XIU means compound growth without dividends being taxed, which is why I’m going to go HXT once my trades are 10$ (which means paying some capital gains on XIU, of course). Are there other options, for Canadian, or US or other international ETFs that don’t lead to dividends (and dividend taxation) and can hence be bought at won’t generate taxation (or paperwork in general) as long as they’re held ?

  12. Andrew Hallam February 23, 2011 at 5:03 am

    I agree with Dividend Pig when he says:

    “When it comes to a rebalancing schedule… I try to keep it simple, so for the assets I do need to rebalance, once a year is enough, and only if they drift over 5%.”

    But I can add a further element to think about. If you’re perpetually buying the lagging indexes over your lifetime, you’ll be rebalancing without selling anything (unless something silly happens, the markets crash ala 08/09 and you can enjoy a greedy rebalancing then).

    I invest fresh money every month, and I don’t generally have to think about rebalancing at the end of the year (unless the markets go haywire) because I do a form of value averaging when making purchases. I sure don’t follow the strictness of the value averaging approach, as decribed in Mike Edleson’s classic text by the same name: but I do enjoy buying the laggards each month and not really having to worry about selling anything on a set anniversary.

    That said, when markets are especially volatile, as they have been for the past decade, a rebalancing strategy with bonds will (has!) very easily beaten a strategy of holding 100% equities the whole time. And if you look at the long term returns of the Classic Canadian couch potato portfolio, it has beaten the Toronto stock market index since 1976, despite having a 33% bond allocation. So you never know. A full equity option might not always outperform a rebalanced portfolio of stock and bond indexes. You could end up with less volatility (thanks to having bonds) and possibly a greater overall return as well. To be honest, if I didn’t have bonds in my portfolio over the past decade, my portfolio would be at least $200,000 less than what it is.

  13. Michel February 23, 2011 at 6:01 am

    I know about the virtues of asset allocation; but, isn’t it to reduce volatility? Isn’t a 100% index stock fund (or 100% good, well established dividend paying companies) going to accumulate (with compounding dividends) to more money, than let’s say, a 60/40 mix? over a 5 to 10 year period.

  14. Andrew Hallam February 23, 2011 at 8:28 am


    I think the answer to your question is, “sometimes” a full equity portfolio will beat a portfolio of rebalanced stock and bond indexes.

    Stocks beat bonds long term. There’s no argument there. But a regularly balanced account of stocks and bonds would have easily beaten a full equity (stock) index over the past decade.

    And since 1976, the classic, annually rebalanced Canadian Couch Potato Portfolio (33% U.S. index, 33% Canadian index, 33% bond index) has beaten the Canadian stock market index. That’s a pretty long run: 34 years.

    Equities outperform bonds, but they certainly don’t always outperform a disciplined, rebalanced collection of stocks and bonds. What will happen in the future? Will a portfolio of 100% stock indexes beat a portfolio of stock and bond indexes that’s rebalanced annually. I don’t know. And I’m not really sure if anyone else does either. I’ve had a bond allocation that somewhat approximates my age, and I’ve increased the bond component as I’ve gotten older, while bolstering up the laggards (whether stocks/stock indexes or bonds. And I’m pretty glad that I’ve done that.

  15. Canadian Couch Potato February 23, 2011 at 8:48 am

    @Michel: You’re right, mixing stocks and bonds in a portfolio is a strategy to reduce volatility, not to raise long-term expected returns. If your only goal was to achieve maximum long-term growth regardless of risk, you would be in 100% equities. That said, five or 10 years is not long-term — bonds have outperformed stocks in most countries over the last decade. But over a lifetime of investing, that is highly unlikely.

    The other point (which Michael James alludes to in his comment) is that if you are mixing asset classes with the same expected returns — such as Canadian, US and international stocks — then rebalancing can be expected to reduce risk and enhance returns. This is why diversification is sometimes called “the only free lunch in investing.”

  16. Canadian Couch Potato February 23, 2011 at 9:00 am

    @Paul: Thanks for the suggestion regarding tax-efficient investing. I will look into this further. In the meantime, note that Horizons also has a product that tracks the S&P 500 with the same no-dividend structure (ticker HXS):

    Another option is to look at emerging markets and small-cap stocks, which tend to pay smaller dividends. But you really need to be careful here. Both of these asset classes are very volatile and people should not invest in them just because they may be tax-efficient.

  17. Canadian Couch Potato February 23, 2011 at 9:09 am

    @Kristi: Thanks for the question. Yes, the usual practice is to reinvest cash dividends and interest at the next rebalancing period.

    Note that many discount brokerages will DRIP any Canadian ETF, so you may want to call BMO InvestorLine and ask. That’s why I’ve always been skeptical when Claymore and BMO talk about their DRIP programs as if they were something special. My brokerage DRIPs my iShares ETFs, too, and I’m sure it’s not the only one.

    That said, none of them will DRIP Vanguard or other US-listed ETFs, so you will inevitably have some cash building up in the account. The good news is that many Vanguard ETFs pay dividends annually in late December, not monthly or quarterly. So you may want to plan your rebalancing period for early in the new year when the cash balance will be the highest.

  18. DM February 23, 2011 at 9:47 am

    @CCP, thanks for the article Dan. Another important review on some of the practical steps of DIY investing. My question is about how one’s initial asset allocation ought to change over time. For example, I am 34 and right now I am about 65% equities, 30% bonds and 5% real estate. But each year my target asset allocation shifts marginally out of equities and towards bonds such that, by the time I’m 65, my target allocation is something in the neighbourhood of 25% equities, 70% bonds and 5% real estate. From there, I expect to pretty much hold it constant. The point is that, while the precise numbers will vary according to one’s risk tolerance and investment preferences, it is advisable to “ratchet down” one’s exposure to equities over time. Do you find this to be a common practice? Or do some folks just stick with a single asset allocation over their lifetime?

  19. Canadian Couch Potato February 23, 2011 at 10:10 am

    @DM: Yes, it’s certainly common for investors to gradually ratchet down the risk in their portfolios as they get older, but it’s important to keep things in perspective. The “bonds = age” idea is good rule of thumb, but you don’t need to be changing your allocation every year to keep up. Maybe every five years or so you can raise your fixed-income allocation a bit, although in your 30s and even your 40s this seems a little less important than when you’re close to retirement.

    Some people certainly do keep the same allocation over their lifetime. I know lots of stock-pickers who have never owned bonds, even in their 60s and 70s. (I’m assuming they keep a portion of their savings in cash.) A lot of it comes down to how much volatility you can stomach without abandoning your plan.

  20. marie February 23, 2011 at 11:03 am

    @CCP: Thanks for the reply. Im It seems my comment may have come across not as intended. I was trying to note, and give credit to sources like yours, that indeed my friend has been very disciplined and used self-education and managed risk to build his current situation and used many of the same guidelines as your blog and others, i.e. he maintained his lifestyle even with annual raises and bonuses including living in the same small house while paying off debt, buying a car every 10 yrs (not 5) and building up assets. He’s a fan of moneysense for good info. I wasnt aware of Mr. Pape’s career with mutual funds so I had no expectation, the article left me a bit confused about when or if to introduce mutual funds back into my portfolio based on a bad past experience. I think I’ll just stay the course and rely on the great advice Im fortunate to have.

  21. DM February 23, 2011 at 11:23 am

    @CCP, actually Dan that’s exactly what I’m doing – my target allocation changes every year. But the year on year change is so gradual that I hardly notice. I prefer this method over making big changes (e.g. increasing the portfolio’s fixed income component by 5%) once in a while.

  22. Canadian Couch Potato February 23, 2011 at 11:27 am

    @Marie: Sorry if my reply sounded undiplomatic. I didn’t mean to sound disrespectful to your friend. I guess I misunderstood this point: “My friend advised me to stick with index funds until a certain level of investment and financial position was reached and then look at mutual funds.” This sounds like advice that some advisors give — the idea is that indexing is for small accounts and unsophisticated investors, and once you have a certain portfolio size you should look to active mutual funds or other strategies. But this makes no sense. An investor with a lot of money is no more likely to beat the market than one with only a few thousand bucks.

    If you have confidence in the Couch Potato strategy, then there is no good reason to ever introduce actively managed mutual funds into your portfolio.

    @DM: If you’re adding new money and rebalancing anyway, there’s no harm in adjusting the allocation every year. As long as you recognize that there is no strategic difference between a portfolio that is 30% bonds and one that is 31% or 32%. That’s going to change day-to-day anyway.

  23. marie February 23, 2011 at 12:06 pm

    @CCP…ah the joy of e-writing and miscommunications! It happens, I laugh and move on. I see your point. I think my friend was trying to provide the same advice based on what he saw was happening at the time with some mutual funds I had and fees I was paying. He encouraged index funds and some tips that worked for him in terms of general financial management. I think his point was, he did get into mutual fund but not until much later and didnt need or use them to build from. So, same advice I was just a poor messenger. I will not worry about mutual funds for now…as you agree their not essential. Thanks!

    Interesting note, while my partner and I have a few financially sucessful friends, what we admire about them most is not their wealth but thier generous spirit and ability to laugh at themselves and life. Two came from very modest starts and never lost those values. Good guys really can finish first.

  24. Paul G February 23, 2011 at 12:09 pm

    @CCP: The ETF you proposed is extremely thinly traded (200 shares today total, at noon), but it’s exactly what I was hoping to find. Looking forward to reading your post on this subject.

    About BMO InvestorLine, the only securities available for DRIP are as follows (a list of securities and ETFs is on their website):
    This might push me to Claymore bond ETFs rather than Ishares, since it’ll lessen the cash in an account and allow annual rebalancing when the Vanguard ETFs pay out their annual dividends (otherwise too much cash would build up)

  25. Canadian Couch Potato February 23, 2011 at 12:36 pm

    @Paul: HXS is brand new, which helps explain the low trading volume. If the bid-ask spread is kept tight, low trading volume isn’t a huge deal for ETFs.

    Thanks for the BMO info. I should contact the major brokers and ask about their policies regarding DRIPping. Scotia McLeod does do it with iShares ETFs, but clearly not everyone does. Can anyone share their experience here?

  26. Paul G February 23, 2011 at 3:20 pm

    As long as you’re contacting to ask about DRIPs, you could ask if they respect the drip discount given by some corporations; apparently not all brokerages respect it. BMOinvestorline emailed me that they do honor it, and it’ll influence me for some choices (ZRE vs XRE, for example)

  27. marie February 23, 2011 at 3:50 pm

    Speaking of DRIPS can someone explain briefly if this something a Couch Potatoe using index/ETFs and looking to keep it simple should consider? Can you not just invest in a dividend fund? Sorry but I dont have a lot of knowledge around this concept. I learn fast so feel free to re-direct me to some good articles as well.


  28. Canadian Couch Potato February 23, 2011 at 4:01 pm

    @Marie: All questions welcome here! Almost all index ETFs pay dividends (or interest, in the case of bond ETFs). Unlike mutual funds, which automatically reinvest all these dividends, ETFs pay them in cash. This means that ETF investors will often have small amounts of cash sitting in their accounts. You can use this cash when you rebalance, but it will still sit idly for months earning nothing.

    One way to minimize this problem is to ask your brokerage to use a dividend reinvestment plan, or DRIP. Instead of paying you the dividends in cash, they will use the money to buy additional shares in the ETF, with no commission. You can only buy whole shares, however: so if an ETF is currently trading at $20 per share and the dividend payment is $87, you’d get four new shares, plus $7 in cash.

    Hope that helps. Here are some other links:

  29. Steve in Oakville February 23, 2011 at 4:10 pm

    @Marie: DRIPs are dividend re-investment plans and they’re not only relevant for dividend funds or ETFs. Many stock funds and all bond funds return cash to shareholders in the form of interest or dividends. DRIPS allow investors to purchase additional shares of the security with no commission charges. For the discount brokerages, they only DRIP when the dividend or interest payment is enough to purchase at least one full share of the security. If the amount paid out is less than the cost of a share, you’ll just get cash. If the amount paid out is greater than the share cost, you’ll get a share plus the remainder in cash.

    For couch potato investors there is likely a benefit to have the shares re-invested, because cash gets put to use sooner (every month or every quarter) rather than having it sit earning nothing until rebalancing time. That said, for small accounts it won’t matter because the amount paid out will probably be less than the cost of a share.

    For example, consider Claymore Gov’t Bond Ladder (CLF). It pays a monthly distribution of about 7.5 cents per share, and it trades at around $20. If you have 300 shares, you’ll get about $22.50 per month in income. If you have the dividends re-invested or DRIP’d, you won’t get 22.50, but you’ll get one share (value $20) and $2.50 cash. So, cash is being put to use sooner (because the next month, you’ll get 7.5 cents on 301 shares…).

    Anyway, having cash build up for annual rebalancing isn’t a bad way to do it either. I think CCP might have a post about this somewhere on the site i.e., comparing DRIPing to taking dividends in cash.

    @Paul: Excellent comment on the DRIP discount. I know for sure that Waterhouse does honour the discounted DRIP, but can’t speak to other brokerages.

  30. gibor February 23, 2011 at 5:28 pm

    I bought ZWB, as per BMO this ETF is DRIP aligible, but when I call my TD Waterhouse, they said that cannot setup DRIP…. it’s kinda confusing…

    Could anyone give me good website where i can check dividends for ETFs?
    How ETFs dividends work at all? I check PRF
    and they tell that Yield 1.32% Div per share = 0.059 and paid quaterly , current price $58.81 …however, for this yield they should pay 0.19 per share…

  31. gibor February 23, 2011 at 5:37 pm

    OK, on another website i found info for dividends for 2010… looks like they pay completely different amount every payment , but if I sum , i get corect amount 0.79..
    just strange that they don’t pay equal amounts….

    12/31/2010 0.33621 0.33621
    9/30/2010 0.19811 0.19811
    6/30/2010 0.19820 0.19820
    3/31/2010 0.05857 0.05857

  32. Maxwell C. February 23, 2011 at 7:56 pm

    @gibor: I think that the reason they pay different amounts during different quarters is that profits are different each quarter (I would assume more so with seasonal businesses). Also, the board of directors might decide not to pay out such a large dividend one quarter in order to retain the earnings and grow the business.

    Correct me if I’m wrong :-)

  33. marie February 24, 2011 at 12:31 am

    @Steve and CCP: Thanks…both were helpful. I will read up and think about what will work best for my partner and I. Ironically our CA just had a chat with me today about flowing money through our business to us via dividends versus the regular payroll cheque we’ve done for years. Great timing!

  34. gibor February 24, 2011 at 1:37 am

    @Maxwell, yeah, but PRF is not a seasonal businesses, it’s ETF that combines a lot of different companies (as per RAFI) and who gonna predict profit, dividends got declerad up front

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  39. John Lever February 29, 2012 at 1:49 am

    I want to increase my bond holdings because my Equities have done exceptionally well the past few months. I wondered if there would be much risk in buying a medium term bond ETF 5-10 years or if I would be better off buying an individual bond and holding it until maturity or a GIC? I am concerned about rising interest rates and the effect it will have on bond ETF prices. I have read articles saying there’s little risk if you hold the full duration. Would I be better off to buy a GIC and wait for the interest rates to rise? Is there any fixed income investments these day’s paying 4% interest? I have $10,000 – $20,000 cash to invest in fixed income – Just not sure where to put it :) Cheers Johnny

  40. Michel February 29, 2012 at 10:21 am

    I would just buy XBB.

  41. Canadian Couch Potato February 29, 2012 at 3:47 pm

    @John: You won’t find a safe investment yielding 4% these days, unfortunately. Even 10-year government bonds and 5-year GICs are paying less than 3%. As you note, you are taking little risk with a bond ETF if its duration is at least as long as your time horizon. Think carefully about whether you really want to take more risk in search of higher yield. An extra percentage point on $10,000 is $100 a year. Is it worth it?

  42. Adam May 24, 2012 at 8:17 pm

    @Open source portfolio, CPP
    I realize this is a little late to try to reply, but think the answer to the following question could be answered from this topic. If you are dedicated to rebalancing often with ETF’s you can rack up some expences quickly. General attitude is 1. every X months, or 2. During market moves of Y%.
    I am not knowledgable enough on options to detail a strategy, but it seems one would not be hard to apply that would fit into couch potato strategy (to lower costs, keep desired asset allocations) and to optain even closer to market returns. I am curious to hear whatever replies come up.

    From the article ‘More income ETFs from BMO’ Open source portfolio February 28, 2011 at 5:10 pm wrote ‘I’ve spent a lot of time trying to figure out how I can utilize options to my advantage. I’ve yet to come up with a decent enough solution.’ …

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  44. marcai January 29, 2015 at 7:32 pm

    Could you please advise the best ETF for TFSA? Is it OK to buy an ETF with US stocks in it? Could I buy ZUH or ZLB or TDB 902? Thanks, marcia

  45. Johnny February 1, 2015 at 12:14 pm

    Just an update: I ended up starting a ladder of GIC’s and Sunlife, Bell Strip bonds using a barbell strategy. I am very happy with the ease and safety of this strategy and even sold off my short term bond ETF at that time. My long term bonds are up 15% and the GIC’s when they mature will be reinvested in new 5 year GIC’s. The short term Vanguard Bond Fund has not lost or gained anything in 5 years so, it’s better that I’m guaranteed a little interest and my principal back at maturity.
    I also broke my 10% portfolio investment rule in one company and bought AAPL, CHL in Jan 2014. I bought some long calls on VXX and SPY put insurance in case the market changes. My strategy is win-win in my opinion and I earn a great Dividend too. Speculating isn’t a good strategy at most times and I’m glad I started with the Couch Potato strategy with some satellite investments namely the Apple calls I bought. I think rebalancing isn’t necessary if you use derivative insurance. That way I can participate in the gains and protect myself against large losses. I like a buy and hold forever strategy as it makes things easy. I’d enjoy reading a couch potato perspective on such a strategy. I know the insurance and hedging can be expensive but, the risks of getting out too early or late “losses lose more than gains gain” and the costs of frequent rebalancing are greater in my opinion. I’m just a novice investor with 5 years experience.
    Just for fun I think Blackberry, Microsoft, Netflix shares will crash in the future and we are in for a 20% market correction in the next few years so, rebalancing however it’s done is a good move for most.

  46. Amus December 19, 2015 at 5:40 pm

    Hi Im new to the game and very into the couch potatoe strategy. I’m just curious is there any trick to picking which type of account to start my couch potatoe in. i like using both my tfsa and rrsp and would like to incorporate them both into my portfolio (ie splitting my indexs between the two?). this may make rebalancing a bit tricky. is this a good idea or would you recomend using one or the other.


  47. Canadian Couch Potato December 20, 2015 at 8:14 am

    @Amus: The decision between TFSAs and RRSPs depends on your personal tax situation. It is very common to incorporate both into your portfolio. To make it easy to rebalance you can simply hold all of the asset classes in each account, since you cannot move money from one registered account to another.

  48. roger January 11, 2016 at 11:22 am

    Need a hand please on ASSET ALLOCATIONS :

    I have 00,000$ in my Questrade (tfsa) and i have ETFS and my asset allocation is :

    ex: 60% / 30% /10% as a example

    I make a weekly deposit into my account of 000$

    so i use 000$ to always keep 60% 30% 10% even if one of my (ETFS) is more expensive to buy this week ???

    ex: week 2 = 65% – 25% – 10% to rebalance i will buy more of the 25% etfs is that correct ?

    thnx for your help !

  49. David Stewart September 16, 2016 at 8:09 pm

    Hey! Thanks for your help over the years on this site.

    Silly question, but significant, that just popped into my head today. When we rebalance are we basing the percentage on the number of stocks or the value in portfolio? The value is always changing. I hope that makes sense. Thanks so much in advance.

  50. Canadian Couch Potato September 17, 2016 at 9:41 am

    @David: When you rebalance, always use the current market value of the holdings.

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