The TD e-Series index mutual funds remain a useful alternative to the asset allocation ETFs that take centre stage in my model portfolios. Following on the heels of our detailed look at the performance of the Vanguard and iShares portfolios in 2020, let’s look at what the e-Series funds delivered last year.

Here’s how the four individual building blocks performed in 2020. Remember, as always, that published mutual fund returns are net of all fees, and assume all distributions are reinvested.

Fund nameFund code2020 return
TD Canadian Index Fund - eTDB9005.77%
TD U.S. Index Fund - eTDB90218.12%
TD International Index Fund - eTDB9115.48%
TD Canadian Bond Index Fund - eTDB9097.56%
Source: TD Asset Management

My model portfolios suggest five possible allocations of these funds, ranging from conservative (70% bonds and 30% stocks) to aggressive (10% bonds and 90% stocks). Assuming your portfolio had the following asset mixes at the beginning of the year, and that you never rebalanced, here’s what your performance would have looked like in 2020:

Asset allocation2020 return
70% bonds / 30% stocks8.44%
55% bonds / 45% stocks8.73%
40% bonds / 60% stocks9.02%
25% bonds / 75% stocks9.31%
10% bonds / 90% stocks9.60%
Source: TD Asset Management, DFA Returns 2.0

A fairer comparison

In the past, I reported the model portfolio returns using this methodology: that is, assuming you started the year with the target asset mix and then rebalanced at the start of the following calendar year. However, starting last year, when I adopted the Vanguard and iShares asset allocation ETFs for my model portfolios, we changed the methodology for reporting historical returns in order to provide a better apples-to-apples comparison of the different options. All of the model portfolio returns now assume monthly rebalancing.

Remember, in practice the Vanguard and iShares asset allocation ETFs are likely to stay close to their strategic asset allocations at all times. Although they will stray from their targets during a large swift move in the markets, they enjoy large and frequent cash flows that allow them to rebalance almost continuously. So to make fairer comparisons, we’ve assumed the other options in the model portfolios—those using two ETFs, as well those built from e-Series funds—are more frequently rebalanced, too.

Over the long term, the differences in rebalancing strategies will not be dramatic: there’s plenty of research showing that the specific interval is not that important, so long as you do it with some regularity. The timing may not even make a significant difference during most calendar years.

However, 2020 was anything but typical: it included the fastest bear market in history, followed by a remarkably swift recovery. Last year, if you rebalanced monthly—selling bonds and buying stocks in the spring, and then doing the opposite later in the year—you would have enjoyed a significant bump in returns, compared with an investor who simply stayed the course for the full 12 months.

Here’s what the e-Series portfolio returns would have looked like with monthly rebalancing. These are the numbers you will see in the just-posted edition of the historical model portfolio returns:

Asset allocation2020 return (monthly rebalancing)Difference vs. annual rebalance
70% bonds / 30% stocks8.82%+0.38%
55% bonds / 45% stocks9.19%+0.46%
40% bonds / 60% stocks9.48%+0.46%
25% bonds / 75% stocks9.68%+0.37%
10% bonds / 90% stocks9.81%+0.21%
Source: TD Asset Management, DFA Returns 2.0

More isn’t better

Be careful before you infer anything from these short-term results. There’s no reason to expect more frequent rebalancing to improve your results. This is especially true when you consider transaction costs and taxes, which are assumed to be zero in the model portfolios.

Indeed, it’s a common misunderstanding that rebalancing is a reliable way of boosting returns: it’s not. On the contrary, because the expected return on stocks is significantly higher than that of bonds, most of the time rebalancing will consist of selling equities and buying more fixed income. Over the long term, you should expect that to lower returns, not increase them.

Rebalancing is primarily a risk-management tool: it’s designed to make sure your equity allocation never strays too far from what you’ve deemed appropriate for your time horizon and temperament. It’s also a way of enforcing discipline in portfolio management: any time you add new money you can consistently top up whatever asset classes are furthest below the target, rather than relying on guesswork—or worse, simply chasing whatever asset class has been the hottest.

There is no optimal rebalancing strategy, so it’s not something you need to obsess about. You can rebalance at regular intervals (once a year is fine), by thresholds (for example, whenever an asset class drifts off target by five percentage points), or using cash flows (any time you add or withdraw funds). Most people will probably use some combination of all three.

So don’t conclude from 2020 that tweaking your portfolio every month will reliably juice your returns if you’re using the e-Series funds. You could have only known that with the benefit of hindsight. It’s far more important to add new money with discipline, rebalance when the opportunities present themselves, and keep your focus on the long term.