Author Topic: Rebalancing across Accounts  (Read 3904 times)

Goldielocks

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Rebalancing across Accounts
« on: October 07, 2017, 01:02:14 PM »
How do you approach rebalancing across accounts?   I am rebalancing 3-4X per year.

Four Buckets for Target allocations : CDN, US, INTL, Bonds

Eight Accounts*:
RRSP
LIRA
RESP
TFSA
Spousal RRSP
Spouse Own RRSP
Spouse Own TFSA
Taxable $CDN
Taxable $US  (with zero in here right now)

The challenge :   $10 Trading fee to buy and to sell (so $20 each time I rebalance from one fund into something else).
MERS for ETFs average 0.16%
MERS for TD funds without trading fees average 0.42%  So for me, the ETF accounts justify the trading fees when I have over $20k in each, and trade less than 4x per year.... so TD fund is not the solution.

I find it is a complex exercise that takes quite a bit of time to complete.  I have simplified this down to the minimum number of accounts, but the key challenge is that I need to sell and buy to rebalance, as new money is not enough, especially as the RESP, Spousal RRSP and the LIRA will have no more new money going into them, TFSA's have $5.5k cap per year.

Question 1) How  would you recommend allocating funds across accounts for cost efficiency AND simplification during rebalancing time?  Should I take into consideration that there are tax advantages to putting foreign dividends into the taxable account?  What about using Taxable US$ fund to trade US based ETFs... would that make more sense?   Are there low MER funds (like XAW) that blend allocations already that I should consider?

Question 2)  Do you consider the RESP in your allocation %'s... We will be withdrawing from here over the next 6 years, so I have over half of it in BONDs... not sure if I should include that BOND percentage in my totals to allocate or keep it separate...  thoughts?

* This is fundamentally the identical question for US or for CDNs..   Replace RRSP with IRA, TFSA with Roth IRA, etc.   The key difference is a $10 trading fee.    Questrade would save me $120 per year, so I may look at that in future, but not this year.

ender

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Re: Rebalancing across Accounts
« Reply #1 on: October 07, 2017, 02:24:29 PM »
I rebalance once a year on my birthday (so I remember, hah). I might do more often than that once we end up with even more invested.

I basically rebalance for convenience sake. We only have 7 accounts (two tIRAs, two Roth IRAs, HSA, and current employer retirements) and the bulk of our investments are in the IRAs. Both employers stay 100% in SP500 index funds and since everything else is at Vanguard it makes rebalancing easier. Practically this has meant I slowly end up moving Vanguard investments (the IRAs) to total international and total bond to keep our AA target.

We do not have taxable investments right now. But, if you do, there's significant benefit in not rebalancing them as you have to pay taxes on gains potentially (not sure if you are in Canada or not and if so what their taxes are? looks like it).

I don't have a significant enough pension and it's far enough out so I do not.

Goldielocks

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Re: Rebalancing across Accounts
« Reply #2 on: October 07, 2017, 03:46:32 PM »
Okay, so you have multiple accounts, but many only have one asset allocation in them. (US Stocks) 
Then a large account with all your allocations...
  so you only need to rebalance that one account (after adding up the totals across all accounts..)?

Taxable Cap Gains
Paying taxes on capital gains as you go is not so bad (once you have maxed out the tax advantaged accounts)...  In addition to some benefits, such as foreign dividend tax credits, I find that I pay for the cap. gains out of annual cash flow, so at the end of 15 years, not a lot of tax is owing on the investments when sold  (only a few years of gains instead of 15 years).  Of course, I am only starting the taxable account again, now that my income is lower than before, if I was in the top tax bracket I would avoid this except when I could net out the capital losses.

Any suggestions on how to view the assets in the Education fund, separate or part of my overall asset allocation strategy?

ender

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Re: Rebalancing across Accounts
« Reply #3 on: October 07, 2017, 04:29:22 PM »
Okay, so you have multiple accounts, but many only have one asset allocation in them. (US Stocks) 
Then a large account with all your allocations...
  so you only need to rebalance that one account (after adding up the totals across all accounts..)?

I aim for a 90% stock, with a 70/30 US/international split, and 10% bonds. This results in 63% US stocks, 27% international, and 10% bonds.

Some of our accounts are all in one of those categories. Right now our 401k/403bs are 100% in SP500 index funds.

Radagast

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Re: Rebalancing across Accounts
« Reply #4 on: October 07, 2017, 10:24:59 PM »
1. Ideally, have a single large tax sheltered account where you do all rebalancing, while all the other accounts have just one or two assets which do not need any action other than contributions/withdrawals. This is definitely the best way if you pay commission on each buy and sell. If there are no commissions and each account has the same investment options, then allocate every account with the same proportions. If none of these are possible...whatever you are already doing is already fine.

You do not need to rebalance 3-4x per year, in fact that is far more often than the ideal. Ideally once every 1-5 years is all you need, doubly if you pay a commission on each transaction. William Bernstein, one of the best investing authors and thinkers of our time, says "rebalancing once every two to three years is plenty." Calendar rebalancing on your birthday, or perhaps every second year on the day before the US election, should be fine.

2. I would consider everything except my house and the cash which I use to pay next month's bills (or any known use on a known date) as part of my allocation.

Goldielocks

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Re: Rebalancing across Accounts
« Reply #5 on: October 07, 2017, 11:47:02 PM »
Thanks,  I did step it up from 1x per year because of some lumpy transfers / rolling in of money from other accounts..  I don't think I could go to once every 5 years though!  There was also quite a bit of adjustment / movement this year, trending the account off track, too.

I will have to look to see why my plan to rebalance only one account wasn't working.  That was the plan, but then it did not work out the last 2 times.

Heckler

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Re: Rebalancing across Accounts
« Reply #6 on: October 08, 2017, 12:07:27 AM »
The only reason to be rebalancing 3-4/y is you are contributing this often, in which case I would simply try to contribute to the lowest value allocation.  Both our RSPs hold bonds and equity and both have contribution room. 

Most important is to maintain bond/equity allocation.  To me, the breakdown of equities (C/US/Int) is not as critical to keep balanced perfectly.


 That taxable US account is something I would avoid investing in unless I was filthy rich and travelling a lot to the US.

Heckler

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Re: Rebalancing across Accounts
« Reply #7 on: October 08, 2017, 12:09:31 AM »
Bogleheads has good material on how to set up multiple accounts. See in particular, Considerations about rebalancing section.

https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts
« Last Edit: October 08, 2017, 12:16:55 AM by Heckler »

GreatLaker

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Re: Rebalancing across Accounts
« Reply #8 on: October 08, 2017, 04:12:34 AM »
1. My investments are generally allocated to accounts according to tax-efficient asset allocation principles like defined here: http://www.finiki.org/wiki/Tax-efficient_investing. But in my RRSP I keep some of every asset class. This enables me to rebalance without selling in a non-registered account which would crystallize capital gains. If market really take a dive I would have to rebalance in a taxable account. It's not totally tax efficient, but makes rebalancing simpler so to me it's a good compromise.

There is no need to rebalance too frequently. Markets move somewhat randomly over the short term. Too frequent and granular rebalancing means you are just responding to random market fluctuation. I use a 5/25 rebalancing tactic. If an asset class get more than 5% absolute or 25% relative change from its target I rebalance. 5% absolute means if my target is 30% I rebalance when it gets down to 25% or up to 35%. 25% relative is used for smaller allocations. Say I have a 5% target for some asset like REITs or emerging markets. using 5% absolute means it would have to go to 10% of my portfolio before rebalancing, which is double its target. So in that case use 25% relative, so if something has a 5% target then rebalance if it gets +/- 25% of its target or as low as 3.75% or as high as 6.25%. At a 20% allocation target then 5% absolute and 25% relative are the same.
http://www.finiki.org/wiki/Rebalancing#When_to_rebalance.3F

2. I would consider RESP its own asset allocation because the timeline for using it is probably different than your retirement assets. High growth assets up to about 10 years before expected withdrawals, then gradually move to a more conservative portfolio as the child(ren) get closer to school age. With 6 years left before withdrawals you could also consider setting up a 5 year GIC ladder that would give more certainty to funding availability.
http://www.finiki.org/wiki/Fixed_income_ladder#GIC_ladders

The links I posted above are from www.finiki.org which is an excellent Canadian investing wiki.
« Last Edit: October 08, 2017, 05:06:40 AM by GreatLaker »

Sun Hat

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Re: Rebalancing across Accounts
« Reply #9 on: October 08, 2017, 09:47:55 AM »
PTF.

I'm trying to figure out a plan for my situation too. To keep my initial setup last spring easy, I purchased one asset class per account, but am realizing the limitation of that plan for rebalancing. All that I've decided for sure is to keep bonds out of my TFSA to maximize the potential tax-advantaged growth. I may be able to manage reallocation by having a range of asset classes in my taxable accounts.

Goldielocks

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Re: Rebalancing across Accounts
« Reply #10 on: October 08, 2017, 11:02:01 AM »
The only reason to be rebalancing 3-4/y is you are contributing this often, in which case I would simply try to contribute to the lowest value allocation.  Both our RSPs hold bonds and equity and both have contribution room. 

Most important is to maintain bond/equity allocation.  To me, the breakdown of equities (C/US/Int) is not as critical to keep balanced perfectly.


 That taxable US account is something I would avoid investing in unless I was filthy rich and travelling a lot to the US.

Taxable US account is set up with my current investment brokerage, and is just for buying and selling in US currencies only.   The key benefit is that dripped funds / dividends don't get hit with the exchange fee each time, neither when you buy and sell whole stock positions.   This reduces overall drag on the account by about 1% per year, depending on how active you are.   If you buy and hold and use the dividends to buy Canadian dollar stocks, then there is little to worry about.   

So, if you invest in US listed stocks, outside of registered funds, it is worth the consideration.   I have only started the non-registered funds under my own control, so don't have quite enough to worry about.

Greatlaker -- good advice on the 5%/25%.  I like it.   I think I was very close to the 25%, plus had $75k cash to invest, and needed to move some money out of CDN index funds in the RESP, now that it was high, and move it to BOND, because we will withdraw a large amount in February 2018. That triggered the review for rebalancing and my wondering if the new higher BOND amounts in the RESP should be considered in the overall asset allocation.

Re: Rebalancing frequency..  With FIRE this past year and my oldest starting college, it has generated a lot of account and money shuffling.   Two years ago it was rolling old employer accounts into one main account.   Realizing that we "made" more in investments in the past 6 months than DH made working... that managing it efficiently is more valuable than all the time I have spent saving grocery money.... well, it is triggering round two of the clean up of accounts.   I will take to heart the advice not to rebalance too often, though!

setting up a 5 year GIC ladder
   I looked into just buying 1yr and 2 yr bonds or GICs for the RESP.   Honestly, when I saw the very very low returns, often 1% or less, and the total money of about $30k to set up across 1-3 years.. (remainder I am ok staying partly in index funds).   well I just caved and upped the bond fund.   $30k x 1% = $300.  The bond fund may lose a few percent, or gain a few percent, but $300 is not worth crying about and gives me flexibility, and was a lot easier.  My goal is to keep most of the grant money..and be happy.   I will probably regret it, but only a little bit because the overall risk is low,  (my DH is against bond funds right now, so I will get an "I told you so").
« Last Edit: October 08, 2017, 11:58:43 AM by Goldielocks »

Goldielocks

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Re: Rebalancing across Accounts
« Reply #11 on: October 08, 2017, 11:05:23 AM »
Bogleheads has good material on how to set up multiple accounts. See in particular, Considerations about rebalancing section.

https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts

Thanks!  That link was a perfect description of the challenge, better written.
I find Boggle heads to be large, and sometimes dry, so having someone point out the exact link was helpful.

The article was a bit general, did not get to any tangible suggestions until this (which several of you have mentioned)..

"Generally, if you have smaller accounts, try to fill those up with a single fund. In your largest account, where you will likely need to hold two or more funds, it can be advantageous to arrange your holdings so that you can have a fund from each of your asset classes. Depending on your overall portfolio, doing so can mean that you can do all your rebalancing in one account simply by making exchanges between the funds in the largest account."


I still need to figure out why this seemed so complicated this week for rebalancing.  It may just be needing to add up all the asset allocations in a spreadsheet, and going to 2 different on line places to pull all the numbers (takes time).  Calculating the rebalancing (easy), and making a decision on which funds to sell / buy to do it (this was the challenge for some reason).   

By filling up small accounts with one asset class, and "spilling over" the excess to another account meant that the spill over was a very small fund, then was insufficient to sell to rebalance as much as needed, creating a need for another split in another account.  (e.g., international, if I needed to sell $25k international, and buy US VTI, but the one large "rebalancing" account with both US VTI and International in it only has $17k international because a another account holds the remainder).



« Last Edit: October 08, 2017, 11:31:14 AM by Goldielocks »

Stasher

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Re: Rebalancing across Accounts
« Reply #12 on: October 08, 2017, 11:55:40 AM »
Quote

"Generally, if you have smaller accounts, try to fill those up with a single fund. In your largest account, where you will likely need to hold two or more funds, it can be advantageous to arrange your holdings so that you can have a fund from each of your asset classes. Depending on your overall portfolio, doing so can mean that you can do all your rebalancing in one account simply by making exchanges between the funds in the largest account."


Great idea and advice, I have 3 accounts right now ... TFSA/RRSP/RRSP(wife) which each have 3 funds in them. That could easily be $90 per rebalance. I tend to do my rebalance each quarter after dividend distributions and try to just plug my values into my spreadsheet and top up the fund that excel says needs the most cash. I will try to put a bit more into one fund or the other rather than having to buy into each ETF. So say VCN needed $1000 bought and $100 into VAB... I would just put $1100 into VCN. Then next quarter see how things are looking. Might not be perfect but saves that $10 per rebalance.

Telecaster

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Re: Rebalancing across Accounts
« Reply #13 on: October 08, 2017, 12:09:59 PM »

By filling up small accounts with one asset class, and "spilling over" the excess to another account meant that the spill over was a very small fund, then was insufficient to sell to rebalance as much as needed, creating a need for another split in another account. 

I think you are making this too hard, at least IMO.   Your asset allocation is a bit arbitrary anyway, right?   For example, lets say it is 20% bonds, 15% international stocks, 5% Reits, and 60% domestic.    Is that fundamentally superior to 21% bonds 13% international, 4% Reits, and 62% domestic?

The answer is no, it probably doesn't make any difference at all.   And if it does, you won't know for decades.  Your trading costs do make a difference though.

Goldielocks

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Re: Rebalancing across Accounts
« Reply #14 on: October 08, 2017, 12:10:33 PM »
Here is a new question. 

Between Taxable, TFSA's and RESP's, our investments not subject to income tax like RRSP's are 25% of our portfolio.

Does anyone else take into consideration during rebalancing the fact that some accounts are worth more because of lower taxes to withdraw than others?  My TFSA is made up of a single asset class right now because it is one of the smaller accounts.   Should I think of it as worth 1.2x what it would be worth in the RRSP?

GreatLaker

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Re: Rebalancing across Accounts
« Reply #15 on: October 08, 2017, 12:33:00 PM »
Your asset allocation is a bit arbitrary anyway, right?   For example, lets say it is 20% bonds, 15% international stocks, 5% Reits, and 60% domestic.    Is that fundamentally superior to 21% bonds 13% international, 4% Reits, and 62% domestic?

The answer is no, it probably doesn't make any difference at all.   And if it does, you won't know for decades.  Your trading costs do make a difference though.

Agreed. A percent or two either way won't make a huge difference. The important thing is pick an asset allocation and risk level you are comfortable with and follow it consistently. Only change it because your attitude to risk or your financial situation or timeline have changed. Don't change it just because you get the jitters or get greedy over bear or bull markets.

GreatLaker

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Re: Rebalancing across Accounts
« Reply #16 on: October 08, 2017, 12:41:25 PM »
Here is a new question. 

Between Taxable, TFSA's and RESP's, our investments not subject to income tax like RRSP's are 25% of our portfolio.

Does anyone else take into consideration during rebalancing the fact that some accounts are worth more because of lower taxes to withdraw than others?  My TFSA is made up of a single asset class right now because it is one of the smaller accounts.   Should I think of it as worth 1.2x what it would be worth in the RRSP?

Hmmmmm... good question.

I don't look at it that way. Your asset allocation is used to get diversification, manage risk and control volatility of your portfolio. Those things are related to the gross (before tax) value of the investments, not the after-tax value.

The after-tax value of tax-deferred (RRSP, RRIF, LIRA) accounts is important for determining if you have enough to stop working/saving. Understanding tax rates of each account is important. I don't decrease the value of those accounts when calculating my net worth. Rather, when projecting my future withdrawals and income I calculate gross income, tax and after-tax income in the year I will receive it or make the withdrawals. That seems to be the way that financial advisors and financial planning software run the numbers.

GreatLaker

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Rebalancing Spreadsheet
« Reply #17 on: October 08, 2017, 01:00:53 PM »
Justin Bender of Canadian Portfolio Manager Blog has a rebalancing spreadsheet for multiple accounts on this page: http://www.canadianportfoliomanagerblog.com/calculators/

or you can link directly to the Excel spreadsheet here:
http://www.canadianportfoliomanagerblog.com/wp-content/uploads/2017/03/CPM-Rebalance-Your-Portfolio-2017.xlsx

Canadian Couch Potato has a discussion of it here: http://canadiancouchpotato.com/2012/03/15/a-spreadsheet-to-manage-multiple-accounts/ (but I think it links to an older version of Justin's spreadsheet).

Moneysense has a simpler spreadsheet that looks at a portfolio but not individual accounts here:
http://www.moneysense.ca/invest/portfolio-rebalancing-tool/
That's the one I use, then I have my own spreadsheet for calulating my buy/sell across accounts.

It really can be finicky work until you get used to it. As mentioned upthread don't sweat the details too much in search of perfection down to tenths of a percent. The dream of a perfect portfolio is the enemy of a good portfolio,

Heckler

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Re: Rebalancing across Accounts
« Reply #18 on: October 09, 2017, 12:26:20 AM »


Does anyone else take into consideration during rebalancing the fact that some accounts are worth more because of lower taxes to withdraw than others?  My TFSA is made up of a single asset class right now because it is one of the smaller accounts.   Should I think of it as worth 1.2x what it would be worth in the RRSP?

No.  The current cash/fixed income/equity split is what determines your current risk level.  Its today that you will panic if your 100% S&P500 portfolio crashes.

 

Goldielocks

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Re: Rebalancing across Accounts
« Reply #19 on: October 10, 2017, 04:30:52 PM »


Does anyone else take into consideration during rebalancing the fact that some accounts are worth more because of lower taxes to withdraw than others?  My TFSA is made up of a single asset class right now because it is one of the smaller accounts.   Should I think of it as worth 1.2x what it would be worth in the RRSP?

No.  The current cash/fixed income/equity split is what determines your current risk level.  Its today that you will panic if your 100% S&P500 portfolio crashes.

Thanks...   I never have and was overthinking it.  It would only change allocations by about 5%...

Goldielocks

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Re: Rebalancing across Accounts
« Reply #20 on: October 10, 2017, 04:44:42 PM »
Thanks for all your help, ideas and links.   I have spent 2 days now on both Finiwiki.org and Justin Bender's site, reviewing Foreign tax withholding, and Norbert's Gambit, and ideal Asset allocations across multiple accounts.

End result is that I am finally setting up a proper Norbert's Gambit to get the lowest MER and FWT tax optimized funds, realized that I was missing out on the TAX FREE DIVIDENDS for elgibile dividends in taxable accounts (up to max income of $50k per year), and have sold more funds to properly structure the majority of my accounts for my new (FIRE) situation moving forward.

Once done (one more day to complete), I will have reduced my MER and fees by about 0.2% on my overall portfolio, which is well worth the time invested.

Hopefully I have made the rebalancing easier for next time around, which is planned for February, when another $20k in Cash appears due to tax-strategies..moving between account types.. but I will just buy to the underperforming allocations, no selling.

My investment situation today is:
FIRE but hold off selling any investments except RESP optimization, for 15 years.   Make just enough income to live on for now.   


It is quite a new approach from my previous "OMG how much is my marginal tax?  Where can I put it?!" strategy.  Especially as I have moved from the upper marginal bracket to the lowest.  So, as I move forward, I will need to research tax loss harvesting (I can't see the true lifetime benefit of this yet, but there are SO MANY PAPERS on it), and how / if to harvest from RRSP in low income years prior to age 65 and if so, what is the threshold marginal tax rate to do so....

talltexan

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Re: Rebalancing across Accounts
« Reply #21 on: October 11, 2017, 12:30:15 PM »
Rather than rebalancing, I just check my 401(k) quarterly, and switch contributions to be 100% in whatever class is lowest relative to its target allocation. This means I never have to sell.

It also sometimes means I get yelled at for making 100% of my contributions into the company stock.

Goldielocks

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Re: Rebalancing across Accounts
« Reply #22 on: October 11, 2017, 01:52:08 PM »
Rather than rebalancing, I just check my 401(k) quarterly, and switch contributions to be 100% in whatever class is lowest relative to its target allocation. This means I never have to sell.

It also sometimes means I get yelled at for making 100% of my contributions into the company stock.

That's a great way to do it.  I did it that way for 20 years.   Eventually, though, your funds will be in need of an annual rebalance when your cash contributions are only half of what is needed.   This is also about the time that worrying about optimizing an additional 0.2% to 0.4% MER starts to make sense.

talltexan

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Re: Rebalancing across Accounts
« Reply #23 on: October 13, 2017, 06:59:13 AM »
It's also nice to be able to do it in reverse: when you're in the FIRE phase, you can sell whichever thing is worth the most over your target %.

dreams_and_discoveries

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Re: Rebalancing across Accounts
« Reply #24 on: October 15, 2017, 02:10:46 AM »
I've been rebalancing via my contributions so far, and am now getting to the place where it's getting harder.

Although I can move about 1.5% each month, I've made some big changes to my target asset allocation, and am modelling whether to do make transactions (rough cost 25)  or just do month by month with contributions.

I'm leaning towards waiting and seeing, as the pound is so unstable nowadays you have to remember some 'gains' are just devaluing of the pound.