Wednesday, May 4, 2016

Reader Question: Changing Asset Allocation

Reader R.V. wants to change his asset allocation but is unsure how to proceed. Here are his portfolio details and questions (lightly edited):
My current asset allocation is as follows: 25% each for Canadian stocks, US stocks, International stocks, and Bonds in TD e-series funds for my TFSA, and for my RRSP I have exchange-traded funds VXC/VAB in a 70/30 mix. Now that my portfolio is getting larger, I'm thinking about moving to TD Direct Investing using ETFs VXC, VAB, and VCN.

For the past 12 months, I've read hundreds of articles and now I believe that I can handle a 90% equity portfolio.

Thus I’m wondering what would be the best way to make that change. Part of me wants to just do it next time I'm putting money in, but another part of me is quite afraid that I'm timing the market.

What do you own in your portfolio? I was thinking of going 80% VXC, 10% VCN, and 10% Bonds.
As always, I don’t give specific advice, but I can discuss how I think about my own portfolio. On the question of moving from TD e-series mutual funds to ETFs, I recommend reading Canadian Couch Potato’s article on this subject.

I tend to think of all my investment accounts as a single portfolio, and I don’t worry about the percentages in any one account. Having a fixed allocation within each account can lead to more trading but careful planning can keep these costs reasonable.

Having different asset allocations in the two accounts can lead to a drifting overall allocation if new contributions make the RRSP and TFSA grow at different rates. However, this is unlikely to cause any serious problems.

Costs are an important part of how to go about making this change. Because R.V. has just RRSP and TFSA accounts, he won’t face the biggest potential cost: taxes. The main remaining costs are trading commissions and bid-ask spreads. If this is truly a one-time change, then these costs are fairly minor. If he changes his asset allocation frequently, these costs can add up. I tend to be impatient and just make such changes quickly, but your mileage may vary.

If R.V. ends up making frequent asset allocation changes, costs may be the least of his worries. Many people are making the decision to increase their stock allocation right now, and too many of them will decide after the next big drop in stock prices to sell stocks and buy more bonds. These people will lose a lot of money buying high and selling low compared to investors who stick with an asset allocation through thick and thin. R.V. needs to satisfy himself that he’s making a change because of his personal situation rather than reacting to recent price changes. The fact that he is aware of the possibility of engaging in market timing is an excellent start.

Another concern is whether R.V. is correct in deciding that a 90% stock allocation is right for him. It’s been about 7 years since we saw a serious drop in stock prices. This can make us feel very safe. If a 90% stock allocation is right for both R.V.’s temperament and his personal financial situation, then making this change and sticking to it is likely the right thing to do.

A possible compromise would be to make the switch from TD e-series but maintain the current asset allocation when buying ETFs initially. Then buy stock with all new contributions to drive the asset allocation toward the new percentage targets over time. This may take a long time, but it reduces the extent to which this change amounts to market timing if R.V. decides to make more asset allocation changes in the future.

For the question about my own portfolio’s asset allocation, I described this in detail in an earlier article. I wish R.V. good luck with his portfolio.


  1. "Because R.V. has just RRSP and TFSA accounts, he won’t face the biggest potential cost: taxes."

    He will be taxed -- eventually -- on the RRSP.

    1. @SST: I was referring to additional taxes associated with making this change. I should have explained in more detail. Because R.V. does not have non-registered accounts, he will not trigger capital gains taxes by selling his current positions.

  2. Hi MJ,

    Thanks for the post! You're right in that I don't know whether 90% allocation to stock is right for me, because I haven't really fully endured a recession even though I've had mutual funds since 2007.

    The thing is that once I've decided on an allocation that is right for me based on my risk tolerance, I should just stick to it come what may.

    What made you choose to go 100% on equities?

    1. @R: I'm 100% in stocks because I have the temperament to accept a big drop in stock prices, and because my wife and I both have the capacity to earn enough to make up for disappointing returns. I'm not basing this on feeling comfortable with my current employer. Most of the people I work with are delusional about how safe their jobs are. Any one of us can be fired at any time. The difference with me is that I get job offers regularly. My wife could walk into a good paying job as well.

      This will become less true as we age. Sometime before I retire I will shift money into fixed income. We haven't decided when that will be exactly, but it's something I think about regularly.

    2. Thanks for the reply. How much would you shift to Fixed Income?

    3. @R: My current thinking is that I would maintain 5 years worth of spending in fixed income during retirement.