Author Topic: Question about re-balancing a TD Index Fund portfolio  (Read 922 times)

Dora the Homebody

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Question about re-balancing a TD Index Fund portfolio
« on: March 27, 2017, 12:19:28 PM »
I am probably going to switch over to the TD E-series index funds in a Canadian Couch Potato-type portfolio:

25% TD Canadian Bond Index
25% TD Canadian Equities Index
25% TD US Equity Index
25% TD Internation Equity Index

Two questions I have about this:
1. when you are dividing up by 25%, is that the total dollar value, or equal number of shares in each index?
2.  When you re-balance, do you balance the dollar value or the number of shares?

I had been going along assuming the % was of the total dollar value, but I was reading an article about re-balancing the portfolio and I came across this paragraph:
"Even when you're on an investment plan, your portfolio can begin to drift. Due to the way that funds are operated, and to market conditions, you might end up with more shares of one fund than another. This can bring your portfolio out of balance, and result in sub-par performance.
In order to get back on track, once a year you should rebalance your portfolio back to your original asset mix.

(my bolding).

And I thought, oh, geez it's the number of shares that need to be equal? 

Please advise!

GreatLaker

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Re: Question about re-balancing a TD Index Fund portfolio
« Reply #1 on: March 27, 2017, 12:51:47 PM »
The first thing to do is determine your target asset allocation. In your case you have used 25% in each fund. Basically choose a % bond allocation based on your risk tolerance and timeline. For a young investor that understands investing and volatility saving for retirement, the bond allocation could be 0%. For a retiree that is risk averse, the bond allocation could be 60% or higher. 25% bonds is a reasonable % for a moderately conservative investor.

So let's use your proposal of 25% in each asset class. When you are first creating the portfolio, put 25% of the dollars into each fund. So if you are investing $10,000, put $2500 into each fund. Number of units is not relevant, since each fund may have a different unit price.

Then when you rebalance, balance it back so each fund equals 25% of the dollars. This drives behaviour of buying low and selling high. If you can, rebalance with new contributions, but if that is not possible, sell some of funds that are above the target and buy funds that are below target. You don't have to be ultra accurate, but for example if a fund got up to 30% or down to 20% it's time to rebalance.

Here are some good links:
http://canadiancouchpotato.com/2011/02/22/why-rebalance-your-portfolio/
http://canadiancouchpotato.com/2011/02/24/how-often-should-you-rebalance/

Moneysense has a rebalancing spreadsheet here: http://www.moneysense.ca/invest/portfolio-rebalancing-tool/

Do you have multiple investing accounts or just one account?

Dora the Homebody

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Re: Question about re-balancing a TD Index Fund portfolio
« Reply #2 on: March 27, 2017, 02:13:20 PM »
Ok thank you.

I have a TFSA as well, within which we are saving for a downpayment on a rental property.

I'm 34 so 25% bonds may even be a little low for bonds according to some, but I think that's what I want to do.

I thought the % was referring to the dollar value, so I think that article I was reading was maybe just kind of poorly worded.

GreatLaker

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Re: Question about re-balancing a TD Index Fund portfolio
« Reply #3 on: March 27, 2017, 03:06:48 PM »
Yes, the article was not well written.

As far as fixed income (bond) allocation, there are rules of thumb, but in the end you need something you are comfortable with. "Stocks let you eat well, bonds let you sleep well." There are young investors that want all guaranteed savings, and veteran retirees that have 100% equities.

If you take a look at this link: http://canadiancouchpotato.com/wp-content/uploads/2015/01/CCP-Model-Portfolios-TD-e-Series-2016.pdf at the rows for standard deviation and lowest 12 month returns to see how volatile the various portfolios have been. Note though that bond returns over the past 20 years have been strong because bonds rise when interest rates fall. In a flat or rising interest rate environment bond returns are likely to be lower, so the difference in returns between the lowest and highest equity percent is likely to be greater going forward.

25% Bonds is a great starting point as long as you are comfortable.