The idea of rebalancing a portfolio to maintain target asset allocation percentages is simple in theory, but tricky in practice. It is not obvious how far asset class percentages should be away from their targets before it makes sense to rebalance. I have recently improved a scheme that I have now fully automated in my portfolio spreadsheet. Instead of obsessing over my portfolio’s returns, a script emails me when I need to rebalance. Investors should use any new savings or withdrawals they make as opportunities to rebalance by buying low asset classes or selling high ones. However, as a portfolio grows, rebalancing with new savings and withdrawals is unlikely to be enough to maintain balance when asset classes have big swings. Common advice is to rebalance a portfolio on a fixed schedule, such as yearly. This has the advantage of allowing investors to avoid obsessing over their portfolios all the time, but has the disadvantage of missing potentially profitable opportunities to reb...

For some reason, people seem wired to want to take their CPP and OAS benefits early, myself included. They grasp for reasons to justify this emotional need even though a rational evaluation of the facts often points to delaying the start of these pensions to get larger payments. I recently read about another emotional reason to justify taking CPP and OAS early. We can choose to start taking CPP anywhere from age 60 to 70, but the longer we wait, the higher the payments. Less well known is that we can start taking OAS anywhere from age 65 to 70 with higher payments for waiting loger. It’s hard for us to fight the strong desire to take the money as soon as possible, and we tend to latch onto good-sounding reasons to take these pensions early. But the truth is that most of us have to plan to make our money last in case we live long lives. Taking CPP and OAS early would give us a head start, but the much-higher payments we’d get starting at age 70 allow us to catch up quickly. If...

Here are my posts for the past two weeks: Mortgage Deferral Cost $10,000 Interest in Pictures Worried about Your RRSPs? So is CRA Asset Allocation: Should You Account for Taxes? Here are some short takes and some weekend reading: Dan Hallett explains that rebalancing a portfolio isn’t about trying to catch the bottom. If an asset is outside its allocation range, then it’s time to rebalance. Tom Bradley at Steadyhand has an interesting take on oil cycles. He says that while the coronavirus is making the current cycle “far more dire,” “There will be many cycles between now and when it’s replaced by renewable alternatives.” Canadian Mortgage Trends says that it’s getting much harder to refinance a mortgage. They also see some early indications of real estate prices dropping. Preet Banerjee explains the Canada Emergency Wage Subsidy and has a calculator on his website for working out how much subsidy your organization can get. Big Cajun Man has some new RDSP in...

We can only buy food with after-tax money, so it might seem obvious that we should take into account taxes in any financial decision. However, Justin Bender, portfolio manager at PWL Capital, has some reasons why you might ignore income taxes when when calculating your portfolio’s asset allocation. Justin has created a series of excellent articles going over a great many issues do-it-yourself (DIY) investors need to understand. The articles are organized as a series of portfolios with decreasing costs, but increasing complexity. The portfolio names are inspired by the comedy movie Spaceballs : Light , Ridiculous , Ludicrous , and Plaid . My focus here is on accounting for taxes in your asset allocation, but this is only a small part of the many useful ideas Justin explains in this series. The main difference between the latter two portfolios in the series is that the Ludicrous portfolio ignores taxes when calculating asset allocation, and the Plaid portfolio takes taxes into ac...

It’s tough to watch your hard-earned savings dwindle in the COVID-19 stock market crash, particularly if you’re retired or getting close to retiring. For this older crowd, retirement savings mostly means declining RRSPs or RRIFs. But I have some good news. When you withdraw from your RRSP or RRIF, the amount becomes taxable income for the year. This leads to paying income taxes on the withdrawal. Suppose you’re destined to pay 25% tax on your withdrawals. Then you might as well think of your RRSP or RRIF as being 75% your money and 25% CRA’s. CRA is right there beside you watching its share bounce up and down over the years. So, if you’ve seen your tax-deferred savings drop $100,000 recently, only $75,000 of it is your loss. The remaining $25,000 is CRA’s loss. Focusing on CRA’s loss might make this whole experience a little less painful. Many thanks to Justin Bender at PWL Capital for inspiring this article when he told me “During the March 2020 downturn, I didn't re...

Here's evidence that I have no artisitic skill.

COVID-19 has a lot of people hurting, personally and financially. The federal government has pushed a sensible measure onto the big banks: mortgage deferrals. Most people who take a deferral have little choice, but this doesn’t change the fact that these deferrals have a cost. Interest keeps building on a growing mortgage balance during the deferral. Let’s look at an example. Suppose you have 20 years left on a 3% mortgage whose current balance is $300,000. You’ve just made your monthly payment of $1661, and the bank grants a deferral on your next 6 payments. What effect does this have? To begin with, your mortgage balance will increase to $304,500 in 6 months. Banks may plan to have borrowers increase future payments to catch up, or they may just extend the amortization period with the same payments. Let’s assume the latter case. How many more payments will you have to make at the end of your mortgage to make up for the 6 deferred payments? The answer is just under 11. ...

Here are my posts for the past two weeks: How a Retirement Plan Responds to Market Volatility Annuities are Great, in Theory It’s Really Not Rocket Science Rebalancing Does Its Job Here are some short takes and some weekend reading: Mr. Money Mustache puts the current pandemic into perspective. It takes a 1000-foot view to see that we’ll come out of this just fine. I wish I had more confidence that the number of COVID-19 deaths won’t be higher than current estimates. Ben Carlson has a cool chart showing that “the retirement contributions you make into the stock market during a market crash will invariably be the best purchases you ever make.” Ben Rabidoux predicts that big banks will not offer HELOCs starting before the end of April in this Debt Free in 30 podcast with Doug Hoyes. He says this will include widespread taking away of any undrawn balance room on existing lines of credit. Ben also predicts that the non-permanent resident population will shrink, and t...

The COVID-19 stock market crash has certainly thrown off the balance of my portfolio.  Like most investors, my fixed-income savings haven’t done much, but my stocks have been jumping around crazily.  So far, I’ve stuck to my plan to rebalance my portfolio to fixed percentages of stocks and fixed income whenever they get out of range.  This has worked out surprisingly well, but I’m not feeling particularly good about it. When I was working, I had an all-stock portfolio invested in a few broadly-diversified Vanguard index funds.  I didn’t have to rebalance my portfolio much, because my stock ETFs tended not to get wildly different returns.  Now that I’m retired, I have an allocation to fixed income (cash, GICs, and short-term government bonds). My fixed income definitely gets different returns from stocks, particularly during the recent stock crash.  I’ve had to rebalance a few times. The thing about rebalancing is that it has you buying whatever has gone...

The latest book in the not-rocket-science series from Tom Bradley at Steadyhand Investment Funds is out (get the free PDF of It's Really Not Rocket Science ).  Like the previous two books ( It’s Not Rocket Science and It’s Still Not Rocket Science ), it’s a collection of Bradley’s excellent articles on various aspects of investing.  Unlike many investment professionals who seek to make investing seem complex and mysterious, Bradley’s writing is clear. Disclaimer: I did not receive any compensation from Steadyhand to write this review other than a free copy of the book. Here are a few parts of the book that struck me as notable: Nobody can predict the market, but “I see professionals who regularly defy all logic and evidence by explaining the unexplainable and predicting the unpredictable.”  I’ve told many people that nobody can predict the market. What baffles me is that many nod their heads in agreement and immediately ask “Where do you think the market is going?”...

I was listening to Episode 89 of the Rational Reminder podcast , an interesting interview with Wade Pfau who is an expert on retirement income. Much of the discussion was on annuities. This made me reflect on the challenges of using annuities in Canada. Pfau speaks highly of Moshe Milevsky, and both have done work showing how retirees can use their portfolios more efficiently in retirement if they put some of their money into annuities. Another expert in the same camp is Fred Vettese who advocates buying an annuity with about 30% of your savings. The math checks out on the work these experts have done to show that you can spend more from your portfolio with less risk of ever running out of money if you use annuities. However, the underlying assumptions need to be examined. Pfau says investors just don’t like handing a big chunk of their money over to an insurance company, even though buying an annuity is very helpful for dealing with longevity risk. It’s quite true that some...