REBALANCING YOUR SAVINGS
Rebalance your 3 index funds once per year so you keep the 1/3 Canadian stocks , 1/3 world stocks and 1/3 Canadian bonds.
In a past post, I told you to purchase low cost index funds from Vanguard Canada or Ishares Canada using the split you see below.
Invest 1/3 in a low cost all Canada stock index fund
Invest 1/3 in a low cost all world stock index fund
Invest 1/3 in a low cost Canadian bond fund
This was before Vanguard introduced their one stop shopping funds that do all the rebalancing for you.
However, if you still choose to buy the individual Vanguard funds (VCN, VXC, VAB), then you’ll have to rebalance from time to time. Here’s an explanation on how it could be done.
Over time, the one third/one third/one third balance may change if, for example Canadian stocks outperform world stocks, or the stock market crashes (as happened in 2008) and Canadian bonds significantly outperform stocks.
When this happens, it is important to try to maintain that proper balance by changing how much you buy of each fund in the following year.
So if you notice that your mix is now 40% Canadian stocks, 40% World stocks and only 20% Canadian bonds this year, next year buy only Canadian bonds to boost the percentage of bonds in your savings.
If the mix has really gotten out of whack, for example, after a market crash, you may need to sell some of your Canadian bonds and redirect that money to Canadian and world stocks.
You may be asking why go through the hassle of rebalancing. We’ll according to much research by academics, rebalancing has a fairly significant positive effect on overall investment success. Some say it the only “free lunch” in investing.
Because your savings are in tax sheltered accounts, you won’t pay tax on your profits when you rebalance and the brokerage fees to buy and sell and very reasonable (between $6 and $30, depending on your discount broker and the amount of your savings).