Since the markets are down 10% since March, it might be a good idea to pick up some shares while you can and rebalance your portfolio (and not do your annual contribution of shares to your ETF Portfolio in March like I did!)
In fact, I dread it and avoid the heck out of it if I can. I dreaded it so much that I neglected the ETF portion of my portfolio and didn’t contribute to it regularly. It wasn’t because I had to pay the commissions to trade the ETFs (I do, but at $4.95 a trade, it’s not a big deal), but it was the fact that I didn’t really know how to do the math to balance the funds through buying and selling shares (yeah, embarrassing I know!).
It wasn’t until I read the Millionaire Teacher by Andrew Hallam that I was reminded of the importance of balancing your investments to ensure that there are proper proportions in bonds, Canadian equities, international equities, etc. or else your investments and the hard earned money you invested might go haywire down the road.
When I combined this newfound wisdom from Mr. Hallam with the fact that I no longer pay any fees at all (seriously… $0) to buy ETFs, see my Questrade Review for more details, I decided that I should be done procrastinating. This move by Questrade to make a serious run at index investors is really smart in my opinion. It comes on the heels of similar moves by US discount brokerages and is sure to get them a ton of fee-conscious supporters here in Canada.
A Great Tool (Excel)
Kerry Taylor from Squawkfox has a great free Excel tool to help you rebalance your portfolio easily to ensure that the proper asset allocation (bonds and equities/ Canadian index, International Index etc.) are maintained.
For Those Excel Challenged (like yours truly)
If you’re Excel challenged like me (Note to self- New Years Resolution 2013 is to learn how to use Excel and be proficient at it). The easiest way to rebalance your ETF Couch Potato portfolio is as follows…
Are you ready?
Here it is (it only works if you have extra money):
Just Buy More Shares
Yup. It’s as easy as that. All you have to do is remember the proper MIX of the ETFs that you bought. For example, looking at Canadian Couch Potato’s Model Portfolios:
Canadian equity 20% iShares S&P/TSX Capped Composite (XIC)
US and international equity 40% iShares MSCI World (XWD)
Canadian bonds 40% iShares DEX Universe Bond (XBB)
Let’s say your:
XIC holdings were now $350 (now 33% instead of 20%)
XWD holdings were now $200 (now 19% instead of 40%)
XBB holdings were now $500 (now 47.6% instead of 40%)
You want to add in money so that the 20/40/40 proportion is balanced again (because right now it’s not- it’s Murphy’s Law- the market likes to make your proportions unbalanced just like how disorder (messy room) naturally occurs after order (clean room))
What I usually do is make the 40%’s a normal number.
For example, I will make XWD and XBB to add up to $1000 each.
XWD need to add $800 worth of shares
For XBB will need to add $500 worth of shares
The total for XWD and XBB is $2000 now, and makes up 80% of your new portfolio (40% + 40%). You need 20% of XIC still.
To do this, take $2000/0.8= $2500
Therefore, you need to make up $500 of XIC which is adding $150 worth of shares.
Therefore you will be investing an additional $1450 at this rebalance event.
It doesn’t have to be such a large number (because who has $1450 to invest all the time, really), but you can do this with any number as long as you pick a number you can calculate easily.
I hope this makes sense and I know its rudimentary but it’s a simple (am I going to get some hate comments about how lame this post is? LOL) and important tool to learn if you’re math challenged and buying and selling in order to balance your portfolio isn’t your cup of tea.
It might not work for everyone and I’m sure I’ll comments pointing out the flaw in this approach (which I’m sure there are many) but this is how I do it! 🙂
I should note that if this math is even more intimidating for you than it is for me, there are relatively new options that are now hitting the Canadian mainstream known as robo advisors. I know the name sounds all mechanical and scary (who wants a robot in charge of their nest egg?), but I can assure you it’s not. I even updated this post in January of 2018 to highlight my super positive initial experience with a robo advisor, so check out my Wealthsimple review for more information on that score as well as some bullet points on what the heck a robo advisor is, and some of the other options available in Canada. Overall, it’s a super easy way to take a part of your paycheque and turn it into an investing portfolio without hardly any month-to-month work. Personally, I’ll still force myself to do some of this rebalancing math (it’s good work for my brain at the end of the day), but if it’s just not your thing I seriously recommend checking out the whole robo advisor deal.
Readers, do you balance your portfolio regularly? When do you usually do it and how do you usually do it?