Should You Even Bother To Rebalance Your Portfolio?

moon

Investors often ask, “When should I rebalance my portfolio?”

Most are looking for a perfect time of year.Others want to know if they should rebalance once a year, once a quarter, or during every full moon.

Vanguard back-tested a portfolio that was split 60/40 between U.S. stocks and U.S. bonds between 1926 and 2009.

They didn’t bother with lunar cycles.

But they did test four scenarios: rebalancing the portfolio monthly, quarterly, annually and never.

Image by Pixabay

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Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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30 Responses

  1. Pat says:

    Hi Andrew, interesting article. What about rapid. large market swings? Rebalancing then seems like an easy way to boost rate of return. What do you think? Thanks.

  2. Charlie says:

    Hi Andrew, sorry to repost again, but trying to catch your attention. Pick me, pick me:)

    Happy new year.
    I am currently running a portfolio of 70% VWRD and 30% IGLO on the LSE.

    Do you see anything wrong with buying other funds to makeup the following portfolio.

    Stocks:
    VWRD – 50%
    IDP6 (S&P small cap) – 10%
    IDWP (global REIT) – 10%

    Bonds:
    IGLO – 15%
    LQDE (Corporate Bond) – 15%

    Although this is not an exact Ric Ferri portfolio, I’ve been reading some of his articles and like his thinking.

    And one last question, why do you never recommend TIPS / Treasury Bonds in your books for non-Americans? They seem to perform well relative to some of the Global Bonds?

    Warm regards,
    Charlie

    • Hi Charlie,

      I pick you! Your portfolio looks good. You are seeing poor performance among global bonds because many are priced in USD. As for TIPS, they’re good.

      This may not apply specifically to TIPS, but it may apply to some logic that you articulated above. We don’t know whether one bond fund will beat the other over the next 5, 10 or 15 years. Nor do we know what interest rates respective bond funds will pay. That’s why looking at past performances and/or current yields is irrelevant. Diversify. Keep costs low. Rebalance. That’s all you can do.

      Cheers,
      Andrew

  3. Charlie says:

    Thanks for your time Andrew.

  4. Cory A. says:

    Hi Andrew,

    I’m currently a 31 year old Canadian teacher, and I consider myself a modest investor (with a small loan and mortgage in the background). After having read your book (and subsequently some books that you cited), I’ve changed my portfolio to an index-based strategy…but I still have a few questions.

    1: I am currently using the RBC Direct Investing with money divided between RBC Canadian, U.S., and International Currency Neutral Index Funds (RBF 556, 557, 559). In your opinion, is it wise for me to stay with RBC DI or move my investments into Vanguard Canada? I noticed that I have to work through a financial advisor to access Vanguard Canada – is that wise, or will that just be throwing money away? Can I also buy Vanguard Index’s through RBC DI?

    2: As someone with a pension, should I still be investing in Government bonds as a means of diversifying, or should I just keep my money in index funds? I should note that my wife (a medical professional who makes good money – but has significant student loans to pay back – does not have a pension).

    Do you have any other suggestions or guidance?

    Thanks Andrew!

    Cory A.

    • Hi Cory,

      Your index funds, with RBC, are very expensive. I believe they are the most expensive index funds in Canada.
      You can buy Vanguard’s ETFs without a financial advisor. You would purchase the ETFs directly through RBC Action Direct’s brokerage.

      As for bonds, you could go light on them. Keep bonds at about 25% of your portfolio value, considering that you have a nice pension coming.

      Cheers,
      Andrew

      • Cory A. says:

        Thanks Andrew,

        Do you have any suggestions about making the switch to Vanguard? Like what ETFs I should be targeting and the whether or not I should do so immediately? (I’m curious because I would not be selling from a position of strength given the market’s performance in 2015).

        Also, what makes one bank’s index (in my case, RBC) more expensive than anothers’?

        Thanks again,

        Cory

        • Hi Cory,

          You could sell those indexes and then transfer the assets to Vanguard’s ETFs via RBC Action Direct. Your index funds have high expense ratios, much as actively managed funds do. Never concern yourself with selling at a loss when you are simply switching from one low priced index to another. That’s like not being happy about selling your home and buying the one across the street, because your home has fallen in value. Both homes would have fallen in value.

          Cheers,
          Andrew

          • Cory A says:

            Thanks again Andrew,

            I’m sorry for hijacking your comment section…last time, I promise.

            I looked into the MER’s and you were 100% right with RBC being high.

            In your book, you discussed options for Canadian investors…suggesting the TD e-series indexes vs ETFs, and how ETFs are more for lump-sum investors with an account of $100,000 or more, or the transaction fees would significantly effect profits.

            Based on these options, I fit into the e-series index option (I invest bi-weekly, and I’m significantly less than $100,000)…do you feel Vanguard ETFs are still the way to go, or should I explore the TD E-series options?

            Thanks again,

            Cory

          • Hi Cory,

            For smaller accounts and very regular deposits, go with the e-Series index funds.

            Cheers,
            Andrew

  5. Tim says:

    Andrew,

    I have heard you say that you subscribe to the idea of holding one’s age as a percentage in bonds. I live in the UK where we have the Vanguard Lifestrategy range available to us, which makes it very easy to rebalance automatically with no effort whatsoever. However, the issue is that, for any one of the range of Lifestraegy funds, they will only ever be rebalanced to the “correct” asset allocation once – ie one’s 20th, 40th, 60th or 80th birthday.

    I know this sounds like a daft question, but, let’s say I’m 50 years of age, should I have 50% of my portfolio in the Lifestrategy 60% Equity and 50% in theLifestraregy 40% Equity fund, or should I just stick with 100% in the Lifestrategy 60% Equity and then, at age 60, just switch to 100% in the Lifestrategy 40% fund until I turn 80?

    Thanks

    • Hi Tim,

      The bond/age ratio is a good rule of thumb. But it isn’t for everyone. I’m 45 years old, and volatility doesn’t scare me. A portfolio with ever-increasing bonds won’t perform as well, so I’ve decided to keep my bond allocation at 40%, regardless of my age. When I am 60, for example, I plan to have a 40% bond allocation. This is up to you: your risk tolerance, your desire to go for growth. Equities, of course, will outperform bonds over the long term.

      Cheers,
      Andrew

  6. Tim says:

    Thanks for the swift reply Andrew. Your response surprised me a little. I have heard you describe yourself in the past as a “wimpy investor”. Maybe your not so “wimpy” after all!

    Tim

  7. Ramona says:

    Hello Andrew,
    I am feeling a little confused at this moment with rebalancing. My TD funds CAN Equity took a nosedive in the last few months and I am uncertain if I am supposed to rebalance them (currently 35% of total investment) and move them to International Equity funds. I have less in bonds. It would mean a great loss, or do I stick it out.. not looking promising for the Can TD e funds at the moment.

    • Hi Ramona,

      You might be confused about how this works. When one of your indexes falls a lot, it means things look promising for that index. That’s the one that you buy more of, when you rebalance. That’s the one that you should be feeling great about. Your U.S. and International indexes did well last year. You would skim money from those and add the proceeds to your Canadian index, to the point where your portfolio allocation is back to where it began last year.

      Cheers,
      Andrew

  8. Pat says:

    Hi Andrew,

    Have been trying to figure out something that this thread is getting into so thought I’d ask here. I’m 50 and my wife is 38. We’re on track to retire with solid government DB pensions, me in 15 years, and my spouse in 17-22 years. Our pensions will replace our salaries for the most part, so I’ve decided that in our personal investments my stock/bond allocation should be 80/20 and my wife’s 90/10. Starting at 10 years from retirement we would gradually shift them to say, 50/50 by the time we retire and maybe keep them there, or say, 40/60 through retirement. Questions:
    – Sound good?
    – In the phase within 10 years of retirement, as I’m shifting our investments to more bonds, I’m concerned about selling stocks at a loss to meet target allocations. How do you handle this? Are potential losses justified by the need to get to a more conservative allocation?

    Thanks,
    Pat

    • Hi Pat,

      In theory, the reallocating should have occurred much more gradually than what you are proposing.
      On the flip-side, with 2 DB pensions, I don’t think you really need to shift your allocation. You could simply keep it at 80/20. Your pensions, after all, are like wonderful bonds. And as long as you can handle the added market volatility, you will benefit from having a higher equity portion than what a 50/50 portfolio would deliver.

      Cheers,
      Andrew

  9. alex says:

    Hi Andrew,
    Just found out about you this week through the “My Advisor” newsletter I also subscribe to. At 57 and around 100,000 in cash where would you invest and how and with who? Would you wait? Are dividend stocks with Canadian Shareowner a good idea? I want the easiest way possible to invest. Too bad we don’t have the equivalent of the Vanguard Total Retirement fund or do we …here in Canada? Thank you!

  10. alex says:

    Hi Andrew,
    Just found out about you this week through the “My Advisor” newsletter I also subscribe to. At 57 and around 100,000 in cash where would you invest and how and with who? Would you wait? Are dividend stocks with Canadian Shareowner a good idea? I want the easiest way possible to invest. Too bad we don’t have the equivalent of the Vanguard Total Retirement fund or do we …here in Canada? Thank you!

    • Hi Alex,

      I’m a big fan of index fund investing, over trying to find the right kind of dividend paying stocks. You can buy ETFs (index funds) through any brokerage: TD Waterhouse; CIBC Investors Edge; RBC Action Direct etc.

      I don’t know your risk tolerance nor whether you will be getting a defined benefit pension. So here’s a neutral allocation model of Vanguard ETFs that you could buy off the Canadian market.

      40% VSB (Canadian bond market index)
      30% VCE (Canadian stock market index)
      30% VXC (Global stock market index)

      https://www.vanguardcanada.ca/individual/etfs/etfs.htm

      Cheers,
      Andrew

  11. alex says:

    Andrew, thank you for taking the time to answer. If I wanted to be a little more riskier would I increase the Canadian Stock Market index percentage or the Global
    stock market index? Thanks again Andrew.

  12. Hi Alex,

    To properly answer your question, a full assessment of your financial situation and goals would be required. If you didn’t plan to ever live in Canada (I write for many expats) then high Canadian content would be a huge risk. If you’re a Canadian who will be getting a defined benefit pension, diversifying globally would mitigate risk. Just build a diversified portfolio with a bias towards your home country or future retirement residence. Rebalance it once a year.

    Cheers,
    Andrew

  13. Jason says:

    Andrew,

    I’m a 36 year old hardcore couch potato! When I’m ready to hang up the international teaching life style (no US SS), what’s your opinion on shifting my portfolio to a Vanguard Managed Payout Fund vs managing it myself with a 60%-40% spilt and following the 4% rule?

    Thanks,

    Jason

    • Hi Jason,

      I am not knowledgable of all of Vanguard’s international products. I do know of such a product for Americans. It’s excellent. But if you aren’t an American (you say you have no U.S. social security number) then you won’t be able to buy such a product from Vanguard USA.

      Also, as solid as this product is, you can do just as well (perhaps better) by sticking to the 4% rule upon retirement. That would have you selling a 4% inflation adjusted amount of your portfolio each year of your retirement.

      Cheers,
      Andrew

      • Jason says:

        Hi Andrew,

        Sorry for my confusing message. I actually am an American, but I’m working as an international school teacher (following in your footsteps :-), so I can’t count on US SS.

        My investments are with Vanguard (US) and include Total US, Total Int, and Bonds. My question is, upon retirement, is it a smart move to transfer my three funds into a Vanguard Managed Payout Fund. By doing so I would have to worry about fiddling with the 4% as the Vanguard Managed Payout Fund does it all for me.

        Thank you,

        Jason

  14. Jeremy says:

    Hey again Andrew, I’ve recently been reading Tony Robbins’ book ‘Money’ and through an interview with Ray Dalio, he comes up with what he calls the best portfolio for long term investors. It’s called the All Weather portfolio and it consists of 7.5% Gold, 7.5% Commodities, 30% Index Stocks, 15% Intermediate Index Bonds, and 40% Long Term Index Bonds. His reasoning for having such a heavy bond % is that stocks are more risky then bonds so you should over compensate with bonds. I was wondering if you’ve heard of this portfolio before, and if you have, what you think about it?

    All the best,

    Jeremy

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