Ok, you did it! You’re finally on your path to financial independence. You’ve killed your debt, read through our Investing 101 series, set up your brokerage account, decided what to invest in, decided to go the DIY investing route, and invested some of your savings. Now what?
Most people don’t realize it, but that’s just the beginning. The hard part of DIY investing is really to stay the course and keep going. You need to keep contributing, keep your portfolio balanced, and keep your sanity.
If you decided on a single ETF for your portfolio (such as an Asset Allocation ETF from Vanguard), ok you get to skip on ahead, you slick sly dog, you are done. But most people have anywhere from 2-5 ETFs in their portfolio (if not more) and try to keep a certain percentage of their investments in each fund.
Now if you’re in the States, rebalancing is quite easy thanks to spiffy Fintech platforms like M1 Finance out there that make this super easy. In Canada, our Fintech industry is a few years behind the States so hopefully we will see super slick ways to quickly rebalance in the future and this post will be a mute topic. (I’m honestly shocked at how difficult some of the banking related things are in Canada compared to how smooth it is in the States. Setting up auto-pay on your credit card is just one example. Anywho, I digress.)
In this post, we’ll cover what rebalancing is, how it works, and how to manage your investments for the long run, without pulling your hair.
What Is Rebalancing
When you first created your investment portfolio, you hopefully determined what asset allocation would be best for you. You chose what proportion of your portfolio would be made up of equities (such as stocks) and what would be fixed income assets (such as bonds). Within each asset class, you probably also determined a geographical or industry split to diversify your risk. Are your stocks only tracking the Canadian TSX? Are you diversified into the US market too? Any non-North America developed countries? Developing countries?
Whatever the allocation you choose for yourself, rebalancing simply means bringing your portfolio allocations back in line with your target. Not all assets will change value at the same rate, so you need to adjust your portfolio regularly, and/or after each big market fluctuation. By this, I mean that some of your funds will outperform the others in a given time frame tilting your holding percentages out of whack vs what your original intentions were.
Rebalancing is not meant to bring you the highest possible returns. By making buying and selling a process triggered by criteria (your portfolio is out of balance), the goal is to manage risk and emotions, which could derail your investment plan. However, rebalancing makes you buy the underperformer in your portfolio (buy low) and sell the overperformer (sell high), which would still result in profits.
For example, say you decided you want to be 10% Canadian index stock market ETF, 50% US index stock market ETF, 10% non North American developed index stock ETF, 10% emerging market index stock ETF, 20% Canadian bond index ETF and you had $1,000 to start things off. You’d buy $100, $500, $100, $100, and $200 worth of the above ETFs respectively to get you to your desired allocation. Say you never added in another penny and over the course of a year the Canadian stock market grew by 15%, the US stock market grew by 10%, the developed market was down 4%, the emerging market was up 8%, and bonds were up 1%. Well you now have $115 Canadian, $550 US, $96 developed, $108 emerging, and $202 bonds.
The good news is that your portfolio is up for the year by an average of 7.1% leaving you with $1,071. But now your allocations are out of whack in comparison to your original split. You are now sitting at 10.7% Canadian, 51.3% US, 8.9% developed, 10% emerging, and 18.8% bonds.
See the problem?
There are two main ways to rebalance your portfolio:
- Sell some of your overweight assets and use that cash to buy underweight assets.
- Contribute to your investment portfolio consistently and keep buying the underweight assets.
In both cases, rebalancing consists of calculating the number of units to buy and/or sell to maintain the desired allocation of your portfolio, and then place each trade in your brokerage account(s).
There are many spreadsheets available online to help you with rebalancing, and if your portfolio is pretty simple, it might work fine for you. We use a free tool for our investments, called Passiv that can help us stay on track, and save time and worry.
How To Rebalance With Passiv
Passiv works on top of your brokerage. It connects to your account through your brokerage’s official API. Without getting into the details, it means Passiv never has access to your login credentials, and connects through a secure access token instead.
You can connect as many accounts as you want, so you can be your own family wealth manager if you’d like.
Once you connect your brokerage, you set up your allocation targets to build your own balanced fund. You basically tell Passiv what you want your portfolio to look like.
Based on that, and a number of other settings, Passiv recommends the trades that you need to make to keep your portfolio balanced.
If you’re good with the recommended trades, you can either login to your brokerage to place the trades, or Passiv can place these trades for you at the click of a button.
Passiv automates the tedious tasks of managing an investment portfolio. Depending on your situation, for example if you manage multiple accounts, are trying to invest in a tax-efficient way, or in multiple currencies, it may become complicated and time-consuming. Passiv does it all for you, and you can customize the calculations in many ways.
For example, some people keep their portfolio balanced simply by buying more of their underweight assets when they contribute to their investments. This is why the default setting in Passiv is buy-only, but you can enable selling to perform a full rebalance.
You can set up all your brokerage accounts, and even your spouse’s or your children’s, as one portfolio and rebalance them all together in one-click. If you set up regular contributions to your brokerage account(s), you can essentially build your own customized robo-advisory service and manage all of it in a few clicks per month (and lower fees than what robo advisors charge).
If you have both CAD and USD assets, like we do, another useful feature is currency separation. It allows you to separate your currencies to avoid forex conversion fees.
It also notifies you whenever your portfolio is out of balance, or when you have new cash (from dividends for example) waiting to be invested in your account(s).
Passiv even goes a step further and also tracks your performance. The Reporting tab shows you your average monthly dividends, total dividend income, contribution history, and investment gains. Not that we are dividend chasers, but for those who are interested in building a dividend income over the years, this is a great way to track your goals along the way.
Which Brokerages Does Passiv Work With?
Passiv works with both online brokerages and cryptocurrency exchanges, so if you have some coins, you can manage them alongside your traditional assets in your Passiv account.
In Canada, Passiv works primarily with Questrade. However, they also built an integration with Wealthica, which allows read-only* access to most Canadian institutions with investment accounts.
In the US, Passiv has built integrations with Alpaca, Interactive Brokers (available internationally), TD Ameritrade, and Tradier.
They also support Zerodha in India.
The supported cryptocurrency exchanges are Bitbuy, Kraken, and Unocoin.
*Read-only gives you access to most of Passiv features, but you won’t be able to place the recommended trades directly from Passiv into your brokerage account at the click of a button.
How Much Does Passiv Cost?
Passiv has two tiers: Community which is their free version, and Elite, which costs $99.
However, you know we are all about cost savings so listen up.
The cool thing for Canadians is that Passiv has partnered with Questrade to offer Passiv Elite to all their clients for free. FREEEEEE. If you’re in the US, don’t have Questrade, or simply want to support this blog, you can use this affiliate link to sign up to get 30% off your first year of Elite.
Rebalancing is an important task that DIY investors have to deal with on a regular basis (we personally rebalance about annually). It helps to manage risk for your portfolio and can also be used as a reflective time on your investments. However, it can become complicated and time-consuming depending on your situation. Passiv can help you keep your portfolio on target painlessly in under a minute, so you can spend more time doing what you love. Save time and money by accessing Passiv for free, sounds good to me!
Hopefully today’s post helped to clarify what rebalancing is if you had heard of it but weren’t sure what is it or how it works. Any questions for us about rebalancing?
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We believe in stacking up life hacks to keep your enjoyment levels to the max without depleting your bank account. Here are some ways to further educate yourself and save thousands of dollars over your lifetime by making some simple adjustments:
- Investing Newbies: Check out our free Investing 101 Series.
- How much are you paying for your phone plan? Canadians, learn more about Public Mobile, and see how we are paying $3/mo for our cell phone plan.
- How much are you paying for internet? Canadians, learn more about the various Independent Service Providers out there to see who services your area so you can lower your monthly bills.
- How much are you paying for home insurance? We were able to reduce our rates by 25% by switching over to Square One Insurance. If you live in BC, AB, SK, MB, and ON, check out Square One for your home insurance, landlord insurance, and/or tenant insurance. Use this link to receive an extra $15 off your quote. (Note that you must use this link to start the process to get the $15 off even if you prefer to pay over the phone.)
- How much are you paying for your monthly utility bills? Fellow Albertans, see how you can likely save on this monthly expense.
Thank you girls for this great article.
We are a lazy couple, no balancing. My investment are with a robot advisor who does the job. For sure it costs more but keeps me away from my portfolio and enforce simple and zen living. My resolution for 2022 is to check my portfolio once a year.
Thank you
Noor
You’re welcome Noor! Lazy simple investing is the way to go in my books 🙂 Like you said, it may come with a bit of a price but it allows for zen living. And love your New Year’s resolution!
If I still managed my own investments, I would definitely use Passiv. It’s an amazing tool, and even more so when paired with my favourite brokerage—Questrade!
I’m glad you tried it out and found it helpful for you and Nic!
Rebalancing is definitely a good strategy. Whenever I started investing, I had something like 90% equities and 10% bonds and that quickly turned into 95% equities and 5% bonds. Being the lazy person I am, I never rebalanced, ha.
However, I still see how rebalancing can be great for people who wants to manage their risk tolerance levels.