How often should you rebalance your portfolio? There’s good news on that front as less is more. We’ll take a look at a very telling chart from Frederick Vettese. And I take another look at the very telling perfomance table for the core Tangerine Portfolios. In this post I will also take you through my top observations of the week – by way of my Twitter / X Tweets. That includes – bonds vs GICs, big dividends under attack, my U.S stock portfolio returns, and what’s in store for the Canadian banks.
Courtesy of Fred Vettese in the Globe and Mail, a look at rebalancing a core ETF portfolio.
Here’s the link for those who have a Globe subscription.
On April 1, 2013, $1,000 was invested in each of four exchange-traded funds: a U.S. stock ETF, denominated in Canadian dollars (stock symbol XUS), a Canadian stock ETF (XIC), an international stock ETF (XEF) and a Canadian bond ETF (XBB). The initial asset mix is therefore 75-per-cent equities and 25-per-cent bonds.
Fred’s test showed almost identical results for rebalancing every quarter and once a year. That suggests that you can save yourself some time and effort (and perhaps trading costs) by rebalancing just once a year.
We can also see that when the unbalanced portfolio performed better during a period of robust stock returns. That said, the portfolio risk level has increased.
I have been evaluating portfolios for many years (decades) and more often find that rebalancing once a year often leads to greater returns. It allows a successful asset to go on a greater run before the money is moved to the under performing asset.
You might also consider rebalancing based on thresholds – perhaps when an asset is 5% ore more about your target allocation.
The lessons of the Tangerine Portfolios
I had another look at the index-based Tangerine Portfolios. As you may know I was an advisor and trainer with Tangerine for several years. Those are a wonderful solution for those who want lower-fee managed portfolios and investment advice.
You can also have a look at the Tangerine Global ETF Portfolios.
There are many lessons that can be learned or observed from the returns of the portfolio models. I offered some ideas in this Twitter thread.
While you can check out that thread, and yes you should follow me on Twitter / X I will strip out the main lessons (shown below).
Lesson 1: Risk and returns
Investors were rewarded for taking on more risk. The risk / reward proposition.
An all-equity portfolio might earn in the area of 9% annual, while a balanced growth model is more 7%’ish and a balanced model more 6%’ish. Keep in mind that the start dates for the balanced portfolios was terrible – just before the financial crisis in 2008.
Lesson 2: Too conservative?
Returns can be quite modest for Balanced Income (70% bonds) and Balanced (40% bonds) portfolios. We might need to take on more risk (more equities) to reach our goals. But we must invest within our risk tolerance level. Higher risk portfolios will offer greater volatility – steeper declines in recessions and market corrections.
Lesson 3: When we don’t invest
If your time horizon is less than 3 years, you should remain in cash. We see Balanced Income with a negative return at 3 years. Often, other models have extended periods of no positive return at 3 years. If your time horizon is 5 years, and given the generous yields today for GICs, cash and ultra short bonds, it may make sense to stay in these ‘risk free’ investments – compared to a Balanced Income or Balanced Portfolio.
More on portfolios and time horizons. 1-3 years: Cash / GICs / Ultra short bonds. 3-5 years: Balanced Income or Balanced. 5-7 years: Balanced Growth 10 years or more: Equity Growth Of course if your risk tolerance level only allows for a Balanced Portfolio, but your time horizon is very long, you still stick with the Balanced Portfolio. Your risk tolerance overrides time horizon.
Lesson 4: Market corrections and returns
Market corrections will greatly impair returns. For the 3 Balanced Portfolio models, the inception date returns include the Financial Crisis when stocks fell by 50%. We see some very modest returns from that start date. In fact, the bond-heavy portfolio outperformed the other portfolio models until June 2014. It took 6.5 years for the more stock-heavy portfolios to catch and pass the low-medium risk Balanced Income Portfolio.
My U.S. Portfolio on Twitter
Here are a few more bits covering what I was up to on Twitter this week. I will update our portfolios on Seeking Alpha and on Cut The Crap Investing. Here’s a look at my personal RRSP Portfolio – American style.
The defensive wall is Walmart, Pepsi and Johnson & Johnson.
The history of bonds
I find this fascinating. The history of bonds in the U.S. That charts suggests that we are at the top, if the mountain shape/period on the chart was a single outlier.
Of course, we don’t know with any certainty where bond yields go next.
Big dividends under attack
Check out my commentary in reply to Mark’s post on My Own Advisor.
For the record, I think there is incredible value in the big dividend space. I added to VDY this past week in a couple of accounts. But let’s certainly acknowledge the risks. As per my response Tweet, always keep greater diversification in mind.
Big banks to muddle through?
The big Canadian banks are likely to muddle through.
GICs vs bonds
That said, I am a big fan of the GICs on offer today – check out the GIC rates at EQ Bank.
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Blair Rogerson
Always interesting and timely insights- for bonds I’m looking at TLT after next FED decision- any disadvantage vs XBB ?
Dale Roberts
Hi Blair, with TLT you get the maximum potential for inverse relationship to a severe stock market correction. That is, it is stock market insurance or hedge. On the other side it has the greatest risk of a price decline (lost value) if rates keep increasing. You also get U.S. currency exposure with TLT.
XBB is Canadian of course and buys ‘the bond market’. The average duration for XBB is just below 7 years. TLT is about 25 years. The greater the duration the more risk or reward.
Mark
Hi Dale,
I’ve been with Tangerine for a few years now and have some money invested in their core balanced portfolio. Most of my money is in GICs with them though. I also opened a Money Market account with Tangerine very recently to park some TFSA cash and to give it a ‘test drive’.
Currently, I’m in the process of deciding what to do going forward as I’ll be turning 60 later this year. I started invested really late in life due to very low incomes and income instability, so what I have invested (not much) I’ll be using more as a glorified savings account when I retire. There won’t be anywhere near enough to draw regular income from it.
Anyway, I’m trying to decide whether to renew my GICs as they mature, or possibly pouring some (or most of that money) into my balanced index fund. Next January I’ll be starting my CCP and plan to invest the after tax amount into investments for 5 years until I turn 65 as I’m still working (self employed).
Do you think the Tangerine balanced fund (60/40) is a good option for someone my age or would you recommend I consider keeping some of my money in GICs as well? (I already have an emergency fund). I would prefer to keep some of that GIC money liquid in the Money Market Fund but I doubt it will pay out much after fees.
Thanks in advance,
Mark
Dale Roberts
Great question Mark. And there would be many in your same situation. I will answer you in detail, and perhaps I can make it a blog post.
I’d estimate/guess that you’d be better off delaying CPP to at least 65 for the increase in payments (plus it would increase your income taxes while working) A double hit.
And you could certainly invest in a balanced portfolio with monies not needed for 5 years.
But again, I will put his in a post. And I’ll gather more info.