As regular readers of this blog know, I’m not a big fan of owning bonds for savings that won’t be needed for at least three years. It may not be for everyone, but I invest 100% of my long-term savings in stocks (with no leverage). For money I’ll need in less than three years, like University tuition for one of my sons, I buy bonds that expire close to the date I’ll need the money.
This means that I don’t get the advantage of rebalancing a portfolio between stocks and bonds. By trading to maintain constant percentages in stocks and bonds, investors are forced to buy low and sell high (as long as they actually do the rebalancing). Too often investors delay rebalancing when an asset class is priced low and the news is full of doomsday stories.
My latest idea is to change my portfolio to include fixed allocations to different stock asset classes. I’m sure that other people have thought of this before, but it’s the first time I have seriously considered committing my money to it.
My first thought is to include low-cost index ETFs for Canadian and US large and small cap stocks as well as possibly a few company stocks. I would define a percentage allocation to each stock class and rebalance whenever the percentages went outside of preset bounds.
All simulations I’ve ever done indicate that rebalancing gives a portfolio a small boost, but not enough to overcome the penalty of including an asset class with low expected returns, like bonds. Thus, I want to stick to stocks. I’m interested in reader feedback on this idea along with suggestions for which ETFs (and possibly individual stocks) make sense to use.