Most Canadian Do-it-yourself (DIY) investors are hybrid. They own a basket of Canadian stocks and largely manage U.S. and international diversification by holding ETFs. The ETFs are managed for you; that means the holdings (stocks and bonds) are rebalanced for you. When you hold a portfolio of individual stocks you will have to manage your own rebalancing. When to rebalance your stocks in retirement offers its own considerations. It can be a different ball game when we consider RRSPs and TFSAs where there are no tax ramifications, compared to taxable accounts where every buy and sell is a taxable event. In the Globe & Mail, Norm Rothery offered up a wonderful study of rebalancing schedules. We can start with which rebalancing strategies might create the greatest total return over time.
We’ll start with the good news. Canadian blue chip stock portfolios have historically outperformed the market over longer periods. Here’s the chart, once again courtesy of Norm Rothery …
As a measure of blue chip we can start with the strategy of investing in the 100 largest stocks with out-performance of almost 2.5% annual compared to the TSX. That advantage increases as we move to the low volatility strategy that I have suggested for consideration (from the beginning of this blog in 2018). As always this is not advice. But investors who create their own stock portfolios might prosper from understanding the history of Canadian stocks.
The Canadian low volatility portfolio
When you build a low volatility portfolio in Canada you will gravitate towards the Canadian banks, insurance companies, pipelines, utilities, railways, the grocers and other consumer staples. You might argue the ‘safest’ stocks in the Canadian market.
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The good news for those who do not want to create their own stock portfolio is that BMO has you covered with the BMO Low Volatility Canadian Equity ETF – ticker ZLB-T. Who doesn’t like out-performance with lower volatility?
As always – past performance does not guarantee future returns.
For those who create their own stock portfolio you’d simply buy enough of ’em from the various sectors. You might end up with a portfolio in the area of 20 stocks.
How often should you rebalance?
Here’s the Globe & Mail article from Norm (sub required) – How often should you update your portfolio?
Norm looked at several successful Canadian stock portfolio models …
We see that monthly rebalancing monthly offered a benefit in 6 out of the seven models. I’m more than surprised by that. Rebalancing monthly or quarterly was a benefit in all of the models, compared to annual rebalancing.
Here’s the numbers for the stable dividend (low volatility) portfolio.
- Monthly rebalancing – 14.2% average annual
- Quarterly rebalancing – 13.84% average annual
- Annual rebalancing – 11.59% average annual
The positive effect of regular rebalancing is MASSIVE according to this study. Remember, rebalancing is the process of selling your winners and moving money to your ‘losers’ or underperformers to keep your original allocation consistent.
Buy low, sell high
If you have 20 stocks and begin at an equal-weight allocation of 5% in each stock, you’ll sell the high-performance stock that is now 7% of your portfolio. You’ll move that money to a few of the stocks that are now only 3% of your portfolio (for demonstration sake). You’ll bring them all back to a 5% weight.
Of course, Norm’s evaluation is based on a time period calling for regular rebalancing. Ironically, ZLB is rebalanced twice a year, maybe they need to ramp that up? 😉
Of course with regular rebalancing we have to consider transaction costs. Fortunately the trend for many discount brokerages such as Questrade and the investing app from Wealthsimple is to offer free trades. Some of the big bank brokerages will still have considerable trading fees.
Rebalancing your stock portfolio in retirement
The lesson from Norm’s study is – take the money and run. Or in retirement, you might take the money and fly to the Caribbean … your call.
In the accumulation stage rebalancing will mean selling your outperformers and moving the proceeds to the underperformers. In retirement the rebalancing process will mean selling your winners to create retirement income AND moving proceeds to underperformers.
I am in semi-retirement and I’ve sold high flyers such as Apple to create retirement income. I’ve held Apple (AAPL) from 2014 and the stock price has increased ten fold.
I call it making homemade Apple dividends. Remember, there is no difference between a share sale and a ‘real’ dividend for creating retirement income (other than tax treatment in taxable accounts). Just as – Dividends don’t contribute to wealth creation there’s nothing special about a dividend in retirement. The superior retirement portfolio wins irregardless of yield from dividends or specialty income such as from covered calls.
This past week I moved some proceeds from Royal Bank of Canada RBC-T and moved the money to TC Energy TRP-T.
Related posts:
Own the Canadian Banks, don’t let them own you.
Canadian oil and gas investing, utilities and pipelines.
That rebalancing portfolio event is a move from growth (financials) to defense (pipelines).
It’s easy to sell winners. When they are above your targets you can set a series of limit sales at target prices. For example, sell at $150, $160, $170, $180. It’s satisfying to watch that retirement income pour in.
Other retirement considerations
Of course, in retirement there are many considerations that are vastly different compared to the accumulation stage. You might rebalance from high flying stocks and move the money to cash/bonds/gold to lower the overall risk level of the portfolio. You are essentially securing or storing these profits to create ‘future income’.
You may need to lower the risk level of a specific account to that it matches your greater retirement cash flow plan. This is the kind of “stuff” that we will demystify at Retirement Club. Use the Contact Dale form at the top of this page if you’d like to join us for an online tour of the Club – tomorrow at 12 pm EST.
Rebalancing in taxable accounts
For those with taxable accounts it is crucial to manage the taxes – the balance between capital gains and capital losses. Of course it starts with selling stocks in a loss situation, and then we manage our capital gains.
We can delay taxes for what are projected to be lower tax years. We crystallize capital gains when you are in a low tax year. Plan to realize significant capital gains in years when you expect to be in a lower overall income tax bracket (e.g., during parental leave, sabbaticals or retirement).
Here’s a good post in MoneySense from Jason Heath – How to handle a stock with a huge capital gain. Jason looks at few strategies for the accumulation stage and in retirement.
I won’t go into detail today on managing capital gains in taxable accounts, but here’s a good overview from Edward Jones. I will be back soon with a dedicated post on strategies for taxable accounts.
There is quite the fiscal dance between taking regular profits and the tax implications.
Geographic allocations
We also have to keep our geographic allocation in check. Vanguard and others suggest that annual rebalancing might do the trick. You might rebalance once or twice a year to maintain your Canadian, U.S. and International weights.
More Sunday Reads
On Twitter, I bounced off of Aaron Hectors RRIF chart to add in the RRIF essentials …
It will come as a surprise to many that it is not that difficult the learn the retirement planing essentials so that you may choose to continue on your DIY journey.
At Findependence Hub experts opine on how we might use AI tools to invest and plan retirement.
Dividend Hawk looks at his dividends and portfolio news for the week, plus a collection of Seeking Alpha posts.
Can you invest and beat CPP?
This week I offered this post – Can you take CPP at age 60, invest the payments and “beat” the Canada Pension Plan? You’l find it’s an interesting challenge and framing. And it’s not about beating the ‘returns’ of CPP such as the 122% boost in payments you’d receive by delaying to age 70. When will delayed CPP catch your investment head start is the question.
At Stocktrades Dan took a loot at the recent Canadian bank earnings and begins with the word – Wow!
From Booming Encoure, a seasonal offering – we should be looking for connections not perfection this holiday season.
The Loonie Doctor looks at what investments to buy in your FHSA – First Home Savings Account.
A reminder – open that First Home Savings Account in 2025 even if you don’t plan to contribute. That way you’ll still earn the contribution space. Pass that message on to your kids, grandkids, nieces and nephews.
From Parallel Wealth the 2026 tax changes that every Canadians should know.
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