Weekend reads. Is it time to rebalance your portfolio?

If you’re a self-directed investor you are responsible for knowing your risk tolerance level and then creating a portfolio that is within that risk tolerance level. That can be an easy task. Dialing up or down your portfolio risk level is achieved by dialing up or down your allocation to stocks.

There are many wonderful tools out there, I offered a link to Steadyhand’s volatility meter with How many sugars in your coffee? How many bonds in your portfolio? As a benchmark the classic Balanced Portfolio of 60% stocks and 40% bonds will fall in the range of 20%-25% in a major market correction when stock values get cut by 35%-50%.

Of course your personal risk tolerance level can change along the way, and the risk level of your portfolio will change as well as the assets increase or shrink. That’s why we rebalance our portfolios to keep the risk level in check – and aligned with our tolerance for risk. You may start with a 60% stock allocation and then in a period of a robust stock market run (see last 10 years) the portfolio can quickly drift to 75% or 80% stocks. The markets have taken you from a Balanced model to a Balanced Growth model. And that’s exactly what would have happened from 2009 with a classic mix of 20% US, 20% Canadian, 20% International stocks and 40% Canadian bonds. If you had simply let those assets run (with no rebalancing) the stock component would have drifted to 70% within 5 years.

If you had let your portfolio drift you would then ‘ask yourself’ (yes self-directed investors do have to talk to themselves once in a while) if you are comfortable with a portfolio that might fall by 35% in a major correction compared to that 25% range. If the answer is yes, then carry on. From personal experience and from my conversations with hundreds upon hundreds of investors (OK that number’s likely in the thousands) our risk tolerance level does change over time. And it’s my hope that you can learn more about yourself as an investor and how you feel through the tests and gut checks that the market throws at us from time to time. Over the last 10 years we had the opportunity to learn from the modest stock market corrections.

Here’s’ the TSX 60 XIU over the last 10 years, chart courtesy of portfoliovisualizer.com. This is a price chart with no dividend reinvestment.

XIU from 2009

There have been many gut check opportunities. The biggest decline was just under 20%. Here’s the drawdown chart/feature on portfoliovisualizer.com. That’s a free portfolio analysis tool by the way, sign up and have some fun.

XIU Drawdowns

With each correction we learn a little bit more about our investor-self. You may build up more tolerance for risk. It’s also possible that you learn that you are not all that comfortable for watching your portfolio decline by 20% or more. On that, please have a read of my Seeking Alpha article Mr. Volatility is asking you, taunting you – so you wanna go? In that article there is a special guest appearance by Mike Tyson, perhaps the biggest punching heavy weight boxer of all time. Investing and risk tolerance is like boxing. Do you think you could take a stock market punch from the likes of me (yes I grew up with a boxing ring in the back yard) and then could you take the big haymaker from Mike Tyson?

The stock markets can be quite courteous, they give us little love taps so that we can somewhat test out our tolerance for taking one in the gut.

What about your geographic continental shift? 

In the above Balanced Portfolio test period the stock assets would have shifted as well to 33.6%, US, 20.5% Canada and 17.3% International (EAFE Index). That also may be of little concern. As Dan Bortolotti pointed out in his post on the fine art of rebalancing from 1980 to 2019 the returns of a US/Canada/International portfolio are identical for a rebalanced portfolio and a portfolio that was not rebalanced at all.

We do not have to get too uptight about continental drift with respect to our portfolios. I do not think that rebalancing has to be too much of a fine art. We might ‘let it go’ more often than not. Of course the main consideration is your risk tolerance level. Bad things happen when we invest outside our comfort zone. Mike Tyson puts you on the mat.

I think that even if you hold a portfolio of high quality individual stocks, you can mostly let it go. Let your winners run. It’s those winners that will potentially more than make up for the stock losers in your portfolio. And of course your dispersion will be much greater with individual stocks. I would not make the effort (and create the fees and taxes in a taxable account) to keep things in balance. Does it matter if a few stocks are at 12% of your total portfolio while others are at 3-4%? I’ll be back with an article on stock portfolio rebalancing in the near future.

You can rebalance on the fly. 

And here’s an opportunity that greatly reduces the need to sell one stock or bond asset to move the monies to another asset. You can add new monies and any portfolio income to the asset that is out of favour and down in price. Depending on your portfolio value, rebalancing on the fly might be able to keep your portfolio more closely aligned and in balance.

Net, net, as you can likely tell, I am not a big fan of paying too much attention to modest portfolio shifts. You can be more passive than many would suggest or write.

If you think there is value in active asset allocation and you want a managed portfolio you might embrace BMO SmartFolio or sign up with ModernAdvisor.

Other weekend reads. 

I”m a lazy investor and a lazy weekend reads guy, so I’ll let Mark Seed do most of the heaving lifting with the this post on myownadvisor. Thanks Mark to the link to my article that suggests investors should protect their portfolio assets long before retirement.

On Seeking Alpha I followed up with a look at the Canadian banks and their recent performance and earnings updates.

Here’s a great post on FindependenceHub The Hard Truth About The FIRE Movement. Of course FIRE represents Financial Independence Retire Early. It’s likely not as easy as many may think, and the risks are great. Thanks to Maria Weyman of creditcardgenius for that article.

From Mike TheDividendGuy do we really need International stocks? If the answer is no, that might simplify that rebalancing question even further.

In the Globe John Heinzl is Riffing on RRIF withdrawal strategies. And here’s an investor who is paying 2.32% in mutual fund fees. Is that too much? Ha.

On that I might send you back to my post on Who Is The Most Cost Effective Robo Advisor in Canada?

With more on those nasty fees please have a watch of this Preet Banerjee video.

Thanks for reading. Kindly hit those share buttons for Twitter, Facebook and LinkedIn. You can Follow Cut The Crap Investing at the very bottom of this page.

Have a great weekend.

Dale cutthecrapinvesting@gmail.com

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