As my own investment portfolio has shifted from individual stocks to index ETFs, I've given more thought to portfolio rebalancing (see my earlier post on a rebalancing trap). I've discovered a number of barriers to the seemingly simple act of rebalancing a portfolio.
Life would be simpler if we had fewer accounts. Here are some common investment account types:
– Regular taxable
– Locked-in RRSP (withdrawn from a former employer's pension)
– Spousal RRSP
For a couple there would be two of some of these accounts.
When there are so many accounts, rebalancing can become quite complex. What starts in theory as a single sell order and a single buy order may become multiple trades in practice.
We have reason to prefer holding certain assets inside or outside an RRSP for reasons such as taxes on interest or dividends. If rebalancing requires buying a particular asset, but the available cash is in the wrong account, then tax planning becomes more difficult.
Another complication is the desire to avoid selling investments in taxable accounts. If we can limit trading to within RRSPs, then we avoid paying capital gains.
However, trying to limit rebalancing trades to within RRSPs doesn’t solve all problems. If we have assets in U.S. dollars and have accounts with an institution that doesn’t permit U.S. dollars in RRSPs, trying to avoid excessive currency conversion costs can be challenging.
I have a spreadsheet that calculates when it makes sense to rebalance our family portfolio, but the problems I’ve mentioned have always complicated the process. It seems that it should be possible to develop a purely mechanical strategy that takes into account all relevant factors, but I'm not there yet.