Last week I looked at why you should rebalance your portfolio, and considered the question of how often to do it. The frequency with which you rebalance often comes down to cost. If you’re using index mutual funds in a registered account, the cost may be zero. But if you’re paying ETF trading commissions or incurring capital gains taxes when you rebalance, then you should consider strategies to keep your costs as low as possible.
Here are three ideas for lowering your rebalancing costs. And at the bottom of this post, I’ve also included a rebalancing spreadsheet that you can download and adapt for your own portfolio.
Do it less often
I recently heard from an investor who put $10,000 in the Global Couch Potato four years ago, using iShares ETFs. He said he religiously rebalanced the portfolio once a year—at $29 per trade. That means trading commissions eroded about 1% of his portfolio’s value annually. Any advantage that rebalancing might have given this investor would likely have been wiped out by that excessive cost.
If you have a small ETF portfolio, keep rebalancing to a minimum, especially if you are paying high brokerage commissions. Unless your portfolio is way out of whack, there is no pressing need to rebalance annually—every second year is fine.
Focus on the broad stock-bond mix
Your overall blend of fixed income and equities has the greatest influence on your portfolio’s volatility. The rest is just details, so don’t obsess over them. For example, let’s say your target is 30% bonds and 70% stocks, divided as follows: 20% Canadian, 20% US, 20% international and 10% emerging markets. A year later, you find yourself with 24% Canadian, 19% US, 18% international and 11% emerging markets, for a total of 72% equities.
You probably don’t even need to rebalance this portfolio at all, because your overall stock-bond mix has barely changed. If you feel you must, you can simply trim 2% from the Canadian equity fund and put it into bonds. Making any additional trades would just be a waste of money.
Mix mutual funds and ETFs
While index mutual funds generally have higher annual fees than ETFs, they do have one big advantage: you can add or withdraw small amounts of money without cost. Even if you’re primarily an ETF investor, consider keeping one or more of your holdings in index funds to help lower rebalancing costs. If your broker is TD Waterhouse, for example, consider using e-Series funds for your core holdings and ETFs for emerging markets, REITs and other asset classes that those funds do not cover.
In my own RRSP, I actually use the PH&N Inflation-Linked Bond Fund rather than an ETF for my allocation to real return bonds. (Yes, it’s actively managed, but it costs 0.55% and its holdings are almost identical to the index ETFs.) As equities have outpaced bonds over the last two years, I have kept my allocation to fixed income in balance by adding new money to this fund, including the cash dividends paid out by my ETFs. This has allowed me to keep my overall stock-bond mix consistent without incurring any trading commissions.
A handy rebalancing spreadsheet
Confused by the math involved in rebalancing your portfolio? I’ve created a handy rebalancing spreadsheet, which you can download here. Here’s how to use it effectively:
- In column A, enter the names of the index funds or ETFs in your portfolio. I’ve included room for multiple asset classes: you can add or delete rows as necessary.
- In column B, enter the target allocation you’ve set for each of your asset classes.
- In column C, enter the current value of each of your funds. The spreadsheet will calculate what percentage of your portfolio each fund represents and display this in column D.
- When you’re ready to rebalance, enter the amount of new money you’re adding in cell B9. (If you plan to rebalance without adding any new money, enter $0.01.)
- The spreadsheet will then calculate how much money you need to add or subtract from each fund in order to perfectly rebalance the portfolio. These values will appear in column E.
Hope you find the spreadsheet useful. Please let me know if you have any suggestions for improving it.
Hi,
I just started my Global Couch Potato with TD-e series funds. It works great so far! My question is how much I will really save if I move all money to ETFs when my saving reaches $100,000. With the trading fee and more complicated process, is it worth doing?
Thanks
@Helen: If you are planning to stick to just the four asset classes in the Global Couch Potato, then moving to ETFs will save you very little and is probably not worth it at $100,000. You are already using the lowest-cost index funds in Canada, so you’re on the right track.
Hi,
Thank you for the reply.
I know you had compared historical result between active managed funds and Index funds in general, but have you tracked the historical performance of the 6 Model Portfolios?
Many thanks,
Helen
@Helen: Many of the ETFs in my model portfolios have not been around for more than a few years, so getting long-term performance is impossible. However, I have checked out the recommended funds to ensure that they have a good record of tracking their indexes closely. That is the most important measure of an index fund’s success.
I have a very simple RSP portfolio using TD e-series funds. 25% CDN Index, 25% US Index, 25% INT Index and 25% Bond Index. Given that there are no trading costs and no tax implications. I am thinking of rebalancing whenever the market value of two of the funds varies by more than $200. For example if I started with $5,000 in each of the 4 funds and at some point the CDN Index fund was at $5,100 and the INT equity fund was at $4,900, with the other two funds somewhere in between, I would simply sell $100 of the CDN Index fund and buy $100 worth of the INT equity fund. ( I realize that there is a minimum holding periof of 90 days but once the initial holding period passes the transactions would be cost free). Are there any risks to this approach?
My wife has a LIRA held with BMO Investorline that is just terrible to rebalance. Because it is a LIRA, you can’t add new money. That means incurring a $10 trading fee for what is a relatively small amount of interest each year. The account also holds a mutual fund but BMO’s minium mutual fund investment is $500 which again causes problems.
Amir: Some funds and/or brokers charge an early redemption fee if you do not hold the fund for 90 days. Just make sure none of that applies to you if you are going to constantly tweak.
During most years, if you’re adding fresh money to your account, you won’t have to sell anything to rebalance. Buying the laggard each month or quarter (whenever you deposit money into your account) is an easy option. I have added to my bond index for two months in a row now because it was under-represented, thanks to the rise in my stock indexes. I want my bond index at 40%, and I’m finally back to that allocation percentage. By next month, if equities drop (which I hope they do) then I can buy the worst performing equity index, out of the two I own: U.S. and International.
@Helen. IMHO just check historical performance for your TD e-funds and similar ETFs. For example TD Nasdaq -e fund vs ZQQ, or TD Canadian Index -e fund vs XIU… if you se that ETF always perform better than e-fund, than switch
@Amir: Personally, I think that regularly rebalancing amounts of $100 to $200 is unnecessary. I’d concentrate on keeping my stock-bond mix close to my target, which you can probably do with a once-a-year rebalance.
Sorry….off topic question.
Is anybody know website where I can reserch GIC rates offered by diffirent financial institution?
I asked in TD Waterhouse and they said that I can buy GIC of a lot of institutions, but they don’t have list of GIC on their website. In order to buy GIC , I have to call TDW rep, who will be trying to sell TD GIC.
Just thinking that for fixed income portion of RRSP, GIC probably is better than bonds.
@gibor: Here you go: http://money.canoe.ca/rates/gics_5.html
Not all of these will be available through your brokerage. You can buy many of them directly online (Outlook, Ally, ING, etc.).
@gibor. You are right that you need to speak to a TDW broker, but they won’t just try to sell you a TD GIC. Simply ask for the best rate in the year you are seeking and they will tell you. TD occasionally has the best, or ties for the best, rate, but my wife has a GIC portfolio at TDW and only one of the positions is from TD. The choices may pay a little less than those you can buy directly from, for example, one of the online credit unions based in Manitoba, but on the other hand you have the advantage of consolidating your positions all in one statement and you do get a competitive and fairly broad selection.
I keep my rebalancing very simple. Whenever I have money to invest, I buy more of whatever is cheap at the time.
I am finding couch potato investing becoming more complex with multiple accounts and given tax considerations. My wife and I have RSP accounts and TFSA accounts and a joint non-registered account. That adds up to at least 5 different accounts and some people may have more (for example, through an employee plan). Even with 5 accounts, it is very challenging to make monthly contributions, keep the correct asset allocation and rebalance among all the accounts. As our investments grow, we are starting to invest outside the RSP/TFSA for the first time and that means trying to shift the Canadian equity portion into the non-RSP account. With all this complexity, the couch potato is not looking so simple anymore. Your software looks good but it does not appear to work across multiple accounts and does not consider tax efficient investment. It would be great to have another spreadsheet that could accommodate more complex allocations. Alternatively, it would be helpful to know if there is any other software available (free or purchased) that you can recommend for this task.
@Investorquest: I sympathize with your situation. However, the complexity of managing several investment accounts isn’t directly related to the Couch Potato strategy. The problem is the same no matter what investment strategy you happen to use. Helping with “asset location” is one of the ways advisors can add value.
You may find this post helpful:
https://canadiancouchpotato.com/2010/03/05/put-your-assets-in-their-place/
Thank you for the speedy response! This is an incredible website full of informative and practical advice. I also wanted to check on the software question. Do you know of any software (free or purchased) that can help with a somewhat more complex allocation – something similar to the rebalancing spreadsheet referenced – but offering more options across multiple accounts / tax strategies. I was doing some online research about the Quicken Home & Business software. Not sure if it or some other software would help or if you think a simple rebalancing spreadsheet can still be used? I understand how to invest myself but it would be great to have software to simplify the effort which was the beauty of your spreadsheet.
@Investorquest: I’m not aware of any software that can help with what you’re describing, sorry. You might try posting a comment on Canadian Money Forum or Financial Webring. There are lots of very keen DIY investors in those forums, and maybe someone can help.
I thought that one of the advantages of purchasing an index or exchange traded fund is that the market would rebalance it automatically for you in most instances?
@D. Robinson: If you hold a Canadian equity fund that goes up 5% and a US equity fund that goes up 15%, you will need to rebalance your portfolio to get those two holdings back to equal amounts.
Thanks your for your response.
I’m looking at opening a TD e-series fund account but I have one question I’m hoping you can answer.
It talks about a 2% early redemption fee for transfers between the different mutual funds within 90 days of purchase. How does this work if I do monthly PPP deposits to the various funds that I’m interested in. Even with only a yearly rebalance would I be subject to the 2% fee because I’m purchasing additional units of the fund every 30 days?
Thanks in advance.
Wow, great posts. Love the spreadsheet!
Thank you again,
C
Hi,
Thank you for the great spreadsheet! It keeps my rebalancing very simple.
Can I modify the spreadsheet for the personal use?
Thanks,
Sean
@Sean: Feel free to modify the spreadsheet however you wish.
Hi,
I have a portfolio of td index funds in a non registered account. I have put off rebalancing because I was thinking I would have to pay taxes on stocks I rebalanced.
However when I spoke with a td rep, they thought if I was just rebalancing, I should not have to pay taxes an gains because I’m just moving funds from 1 fund to another. Is this true?
Investing 100k, would you go Vanguard etf’s 40% (VAB) 20% (VCN) 40% (VXC) or
CIBC Balanced Index fund Premium (.39) mer. or
Mawer Balanced fund (.96) or
TD E Series) funds.
Thanks
Thanks for the spreadsheet. I was thinking how on earth am I going to rebalance my portfolio until I stumbled upon this page and found my answers.
Hi,
I have been an avid reader of your website, as well as Andrew Hallam’s website.
I am ready to make purchases of VFV, VDU and my Singapore STI ETF.
The thing about re-balancing, or action on this passive index-based portfolio is: when do you add in new money to buy the lagging index, and when do you simply sell the over-performing indexes to buy the lagging index (without adding new money in)?
If I invest an initial 20k, do I simply re-invest the dividends + sell off over-performing indexes to buy more of the lagging indexes VS simply adding money into the lagging indexes? In essence, would I be adding any more money to the initial 20k? Because if I keep adding new money, and not selling the over-performing indexes, how would I be capitalizing on the ‘sell-high’ concept?
Thanks so much!
Andrew
@Andrew: Rebalancing does not specifically require you to sell high, especially if you are able to add new money. The idea is simply to keep your portfolio’s asset allocation close to its long-term targets at all times. In your example, you imply that you will always have money available to add to the portfolio. Most people are not in that situation. But if you are making regular contributions and you are able to rebalance with these inflows, then all the better:
https://canadiancouchpotato.com/2014/06/23/rebalancing-with-cash-flows/
In the spreadsheet, for current allocation, is it book value or market value?
@Sherman: Always market values.
Hi,
I’m just getting started, thanks so much for all your help with this website! I invested $17k into a Tangerine Equity Growth portfolio RRSP a while ago, but I recently quit my job and had $39k from my pension to do something with. I decided to plunge in and did ETF’s this time, purchasing 1/3 VCN and 2/3 XAW with Questrade into a LIRA. I was trying to mimic the share the tangerine fund had in its equities (1/3 each). I suppose what I did with the ETF’s is similar? My question about rebalancing is because I have all equities and no bonds, how imperative is it that I rebalance on a regular basis?
Thank you!!
@Mark: Rebalancing is less important (and less likely to be triggered) in an all-equity portfolio, but you should keep an eye on the portfolio to make sure it doesn’t drift too far from your targets. You can use the 5=percentage-point rule, i.e. if your Canadian equities are more than 5 percentage points off your 33% target (less than 28% or more than 38%), then you can make a couple of trades to rebalance.