Background

I started the Sleepy Portfolio in 2005 to benchmark my personal portfolio, which at that time was mostly invested in individual stocks. The portfolio started off with an initial outlay of $100,000 but no new money has been added since. This is not simply a model portfolio; it reflects investment returns that can be obtained in the real world by accounting for costs such as spreads, trading commissions, MERs, foreign exchange conversion charges etc. The portfolio is assumed to be held in a registered account, so it does not take taxes into account. The portfolio has a target allocation of 5% cash, 15% short bonds, 5% real return bonds, 20% Canadian stocks, 22.5% US stocks, 22.5% Europe and Pacific, 5% Emerging markets and 5% REITs. The entire portfolio (apart from the cash portion) is invested in broad-market, exchange-traded funds (ETFs) trading in the Canadian and US stock exchanges. The cash portion is invested in a high-interest savings account that is available through many discount brokers.

2Q-2012 Update

The Sleepy Portfolio has gained a modest 1.5% since my previous update. The big gains were made in REITs — up 9.9% since the end of last quarter. Emerging Markets ended in the losing column with a loss of 4.5%. All other asset classes were more or less flat. The portfolio also generated an income of $761 during the quarter.

Here’s how the portfolio looked as of August 21, 2012:

Since real return bonds and REITs are significantly above their target allocations, it is time to trim them back to the original asset allocation and use the proceeds to buy into the lagging asset classes: Canadian stocks and developed market stocks.

Transactions

Sell 75 shares of XRB at $25.18. Proceeds = $1,878.
Sell 183 shares of XRE at $17.64. Proceeds = $3,218.
Buy 138 shares of XIC at $19.14. Proceeds = -$2,651.
Buy 58 shares of VEA at $33.19. Proceeds = -$1,981.

It is interesting to note that the Sleepy Portfolio has fully recovered from the temporary losses in the Great Crash of 2008-09 and set a new high watermark. I hope your portfolios are looking just as healthy.

This article has 10 comments

  1. I like the way you stick to your plan. Too many fools have some smart-sounding reason for failing to rebalance into under-performing asset classes, and they put more money into whatever performed best recently.

    • @Michael: The challenge here is sticking to a simple plan of asset allocation and rebalancing. It’s not rocket science but when markets are negative, the temptation to “do something” often leads to poor performance.

  2. Rebalancing is definitely the hardest part of managing your own portfolio. It’s a shame that services that rebalance for you are so expensive. A brokerage ought to let you set rebalance frequency and target allocations and do the transactions for you. A rebalancing in the future is easier to commit to than one right now. Human psychology is hard to manage. Status quo bias makes it difficult to pull the trigger when your gut does not agree with what the model says you should do.

  3. I always like reading these updates Ram.

    Hope summer has been treating you well.

    Cheers,
    Mark

  4. @Andrew F: I’m not sure why brokers are not making it easier for clients to rebalance. One would think that it is also in the broker’s interest to do so: more commissions!

    @Mark: Hope all is well with you Mark!

  5. Longtime lurker, first time poster.

    I have adopted this strategy (the Mini-Sleepy to be exact) sans-rebalancing with TD e-series funds. I have been putting the same amount into 4 index funds and now the mix is 36/24/19/19 (rounding). Do I rebalance now? Or do I do it over time with adjusting how the new contributions are allocated?

    I will admit that I am nervous about rebalancing, since I don’t understand if I will face any redemption fees…

    Thanks in advance.

  6. Follow on to Kyle’s questions:

    1) Do you regularly look at changes in country/region market capitalization and adjust your geographic asset allocations (i.e., do they change enough to warrant annually updates? Less frequently?)

    2) Similarly, on my daughter’s RESP with TD e-series, I’ve been annually changing the amount allocated to bonds vs equities as she gets older, aiming for 100% in bonds the year before she needs to use it. Too frequent?

    You’re blog’s indispensable – thank you.

  7. @Kyle: Thanks for reading and commenting here. Since you have equal allocation to 4 index funds, I would think that your current allocation is out of whack. You could address this in two ways: in taxable accounts, the preferred route would be rebalance when adding new contributions. In registered accounts, it doesn’t matter much because rebalancing would not incur taxes.

    @Bill: Great question. The short answer is I don’t. I keep the target allocation relatively static. That’s because I think one can take advantage of imperfect correlations by rebalancing whereas if you keep market allocations dynamic, you’ll just let it ride.

    My oldest kids turned 7, so I haven’t boosted bond allocations just yet but that’s precisely what I intend to do as well. In about 5 years or so, I’ll be boosting bond allocations by 10% per year. I do not think it is too frequent at all because with a RESP account there is no tax event triggered and with TD e-Series funds there are no trading commissions.

  8. CC,

    I have a few questions.

    1) How did you land on this asset allocation and would you do it differently if you were starting today?

    2) Do you prefer the ishares ETFs to the Canadian Vanuard ETF’s

    3) Would you consider switching to the Canadian Vanguard equivalent of VTI, VEA & VWO?

    4) Would you consider trading in all or some of the XIC to take on a dividend type fund like CDZ?

    Thanks, Scott

    • Scott:

      1) This allocation is on the aggressive side, suitable for someone in their late 20s. It’s a good question how to tweak this asset allocation. I touched upon it in this post:

      http://canadianmoneyforum.com/showthread.php/12801-Consolidating-and-Simplifying?p=144459&viewfull=1#post144459

      2) I would. Vanguard ETFs are at least 10 basis points cheaper, so when equivalents are available I’d go with the Vanguard ETF.

      3) No. The reason is currency hedging adds to the cost. See posts on currency hedging on this blog.

      4) In a tax-sheltered account, a dividend ETF is ok. I think of it as a value tilt to the portfolio. In a taxable account, I wouldn’t because the tax leakage from higher dividends is a cost that investors need to consider.