Despite my masterly inaction, the Sleepy Portfolio, which I use to benchmark our personal portfolios is up 34% since its inception in 2005. As you might expect, the allocation between the major asset classes has diverged from the initial targets, during that time frame, as you can see in the following table:

Asset Class Current Original After Rebalancing
Cash 8% 5% 6%
Bonds 15% 20% 20%
Canadian 24% 22% 24%
US 20% 22% 20%
EAFE 15% 15% 15%
Emerging Markets 12% 10% 9%
REITs 5% 5% 5%

It is not surprising that bonds have fallen significantly from the original allocation because almost the entire returns from bonds over the past two years have come from interest payments that go into the cash component. Among equities, emerging markets have been red-hot, returning more than 80%, or more than twice the portfolio’s return.

Rebalancing an all-ETF portfolio to its precise original targets is not very cost effective because the hefty commissions incurred are likely to erode the benefits. We’ll settle for an approximation of the original targets with the following three transactions:

  1. Buy 310 units of Altamira T-Bill fund
  2. Sell 30 shares of EEM at $120
  3. Buy 225 shares of XBB at $29

That’s it! Apart from the initial set-up, we have spent just $60 in commissions over more than two years. Now we can go back to snoozing our way to investment success.

This article has 13 comments

  1. Looks good. Have you thought about constructing an index to compare it to? I know it’s a low cost portfolio but it would be interesting to see exactly how close to an index it comes.
    It might also be interesting to compare it to an index of high cost mutual funds…although that might be more work!

  2. If you were constructing a new one completely from scratch today, with everything that has occured, would you still have the 5% REIT component?

  3. I’m still learning, but definitely interested in your investing approach. What is the process of converting the interest from the bonds into cash vehicles?

  4. Canadian Capitalist

    Steve: Personally, I think REITs are currently overpriced and would stay away for a while. But then, of course, it is a form of market timing 🙂

    Will: I am not sure I understand your question. Interest from bonds are directly deposited as cash into the self-directed account. All you have to do is then park the cash in a money market account.

  5. I’m a big fan of passive portfolios like this, but I have to wonder why everyone builds them from ETFs instead of low MER index funds like the TD e-Funds series. e-Funds and ETF MERs are comparable and there’s no commissions to buy/sell or transfer between e-Funds, so you can rebalance to the penny. If one is in accumulation mode with, say, monthly purchases (“pay yourself first”) the ETF commissions have to be significant. Less of an issue if one plunks a sum in once or so a year, but that forgoes the dollar cost averaging effect.

    One could build an e-Funds analog of the Sleepy Portfolio with MMF, Cdn Bond Index, TSX Index, and int’l choices from S&P Index, Euro Index, Japan Index, or Int’l Index. Only thing missing would be a REIT – guess you’d have to use an ETF for that, and it would be the only component for which you’d pay commissions.

    My wife and I have 4 e-Funds portfolios built along the lines described above, growing via monthly pre-approved purchases, and more than satisfying our ROI objectives for a little over 5 years now.

  6. CC..

    For not understanding, you answered perfectly. I suspected something along the lines of what you indicated (though not re: the money market funds). That helps a lot though.

  7. Canadian Capitalist

    Doug: I am a big fan of TD eFunds for smaller portfolios (and I personally have a few of them).

    There are a few reasons why my benchmark is built using ETFs. 1) Some ETFs are vastly cheaper than TD eFunds, even after taking commissions into account (VTI is 0.07% compared to 0.33% for the eFund. You can make the commission back in a year if you have $12,000 invested) 2) A more serious problem is that portfolios built entirely using eFunds will have no exposure to US small caps, emerging markets etc. 3) You have to open a TD Waterhouse account to access eFunds.

    Still, a hybrid approach of using both eFunds and ETFs might be a better option.

  8. To #5:
    The choice of eFunds is very limited. Even for the simple portfolio like in this post, 2 components are missing: REITs and Emerging Markets. There is nothing for lower-cap/value-growth tilt/sectors etc. Even existing eFunds are more expensive in terms of MER (compare 0.48% International with Vanguard’s 0.18% VGK+VPL, or 0.33% US Index with 0.07% VTI).

    There are commissions for ETFs purchase, but Interactive Brokers charge 1USD commission, so I am purchasing into my ~10 positions portfolio monthly for 10$; hardly a high overhead.

    Even for registered portfolios there is Questrade with 5$ commissions.

    Now, eFunds are great choice to start with (I still use them for annual accumulation in RRSP), but they are not that beneficial as you may think…

  9. Re #7: You do not have to have TD Waterhouse to have eFunds. I simply have EasyWeb and access my eFunds online through that method. I do not have a TDW account.

  10. Pingback: My Portfolio - Asset Classes

  11. Hi,

    Thanks for a great blog and all the useful info it provides us less informed investors.

    Just a quick question about how one would, or even if one should rebalance an all ETF portfolio. My wife and I have 4 trading accounts – an rrsp account for each of us, a spousal rrsp account and a joint non-rrsp account. Our portfolio is simple at this stage and consists of 6 different etf’s spread between these accounts. However, each account does not have the same mix of all 6 etf’s. 1.e. you may find one etf located in only one account and not the others.

    This poses a problem for rebalancing as one cannot transfer funds between the rrsp accounts. e.g. if XIC located in my rrsp account goes up and VTI in my wifes rrsp goes down as a percentage of the overall portfolio, I cannot sell some of my XIC shares and shift the cash into my wifes rrsp account to buy more VTI to rebalance the overall portfolio. The only way to do this as far as I can see is to hold all 6 etf’s in all 4 accounts and then rebalance each account each year. This however costs a fortune in transaction fees.

    Would the best way to do this therefore be to simply buy more of the etf’s that have gone down as a percentage of our portfolio and not buy those that have gone up in value and therefore now comprise a greater percentage of the portfolio?. i.e. in the previously mentioned scenario, I would simply buy more VTI this year and not buy anymore XIC to bring the portfolio back to its original allocation.

    Thanks for your help and I look forward to your comments.


  12. Canadian Capitalist

    Paul: Great question and an interesting post idea. I’ll think through and write a post on this. I personally don’t face this issue because our two RRSP accounts are large enough that 6 buys every year (total: $60) is a tiny expense compared to the size of the portfolios. Our smaller accounts (like kids’ RESPs) are in TD e-Series funds.

  13. Paul, just a thought: Let’s take your XIC/VTI example. XIC goes up and now you want to rebalance by shifting some XIC to VTI. But you say the problem is that VTI is in your wife’s account.

    If you consider the sum of your accounts as one big pool, then you could just sell some XIC in your account and buy whatever amount VTI in your own account. You won’t balance out the amount of money between your wife’s RRSP and yours, but the commissions would be the same and there would be an equal chance that in another year, your portfolio would grow slower than hers.

    So in other words my advice is: Calculate the amounts you would like to buy/sell and execute those transactions using the least amount of fees possible, even if it means your accounts end up lopsided. If you need to sell X number of shares VTI down the road to rebalance, sell them in the account that has that many shares and buy in that same account whatever is unrepresented in the joint portfolio.