How I Re-balanced my TFSA in 7 seconds (and why)
The other day my friend asked me to look at their portfolio and give them my thoughts/recommendation.
I noticed they were doing many things right. They had set up automatic month deposits, a good asset allocation, had a savvy strategy for their portfolio and a reason for what they owned. They also weren’t trying to get rich quick, didn’t try to day trade, were diversified, and even owned some index funds.
The one thing I did notice was that it was very messy. What do I mean by messy?
Lots of individual company stocks,
Multiple index funds
Multiple REITs,
Multiple Banks
Since they never sold, it was a complete history of the different investing ideas they had gone through. Different strategies pieced together over the years into a tangled mess.
And while it’s not bad, it’s overly complicated, complex, and inefficient. The worst part is that there isn’t any upside in return. These portfolio’s usually underperform the market.
I also realized that my portfolio was very similar. So I decided to take my own advice and change that.
I too went down the route many new investors go down. Researching the latest hot stocks, reading “expert” opinions, learning about new innovative industries, social media feeds filled with investing guru’s talking about the newest stock to promote. I like many new investors thought I was smarter than the average person, thinking if I do enough research I’ll be able to find the best deals, undervalued companies, or jump on the trends early. Even with a finance degree, I fell into the same traps many of us do.
Over the years I started reading more personal finance books,
and learned the truth:
Trying to beat the market is a fool’s game.
I started buying strictly index funds and ETFs, but I never sold any of the stocks I orginally bought. Over time I found myself in a similar position to my friend, an investor who step by step accumulated a messy investment portfolio.
This was my model portfolio I’ve been using from Sept 2021 to Dec 2023:
For over two years I bought strictly VEQT, GLDM, and MCHI.
In 2021 everything was rising, and things were good.
In 2022 everything started crashing back to reality, but we kept buying the same.
Every 2 weeks like clockwork, we get paid, and we buy a couple shares of those index funds.
It wasn’t easy, it feels like your portfolio is going nowhere.
You continue to watch yourself shovel money into a void, just watching your portfolio go down in value even though you’ve been putting in thousands of dollars of money into it over the last 2 years.
Slowly watching the market go down and down.
But then 2023 was a good year, and all those red months accumulating shares paid off, and our TFSA grew to new record highs.
However, while it grew a lot this year, it also grew messy. Since I never sold any share since changing my investing approach, this is what my portfolio actually looked like as of (Dec 28th, 2023):
Not pretty right?
Overlapping ETF’s,
Niche Tech sector ETFs
SPAC’s (remember those)
And a few 90% drops.
I noticed most my big losses came from trying to beat the market, and my “boring” diversified VEQT index funds were one of the few winners. Just buying one index fund for 2 straight year did better than hours spent researching companies, spotting trends, and trying to overcomplicate the process.
I could probably still go through each of these “investments” and make a case for why their a good long term play. AI, Robotics, Biotech/Gene Editing, Space Exploration, etc. but the point isn’t to optimize returns, it’s to optimize how well you sleep at night (and funnily enough you get better returns in the long run too).
Hence the portfolio rebalance.
But how do you rebalance a portfolio?
Rebalance is just a fancy way to say: Buy and/or Sell investments that you have too little, or too much of.
But to know that you need to know your target portfolio (which is a post in of itself).
And while making a portfolio can be an endless rabbit hole, I’ll just show you what I went with for myself.
This is my new portfolio:
Reasons:
80% - VEQT: I am still a big fan, it’s a 100% Stock World diversified ETF with 13,527 different companies, from around the world and an ultra low MER of 0.24%. Can’t go wrong.
10% - GLDM: Tbh, I think it’s the Tamil in me, there’s something reassuring about holding gold to me. It’s built into my DNA, generations deep. Gold has been a store of wealth for over a thousand of years in Sri Lanka, and that track record is reassuring for me.
So I use this as my alternative to bonds. and with interest rates going crazy I feel even better with gold. I use the “120 Minus Your Age” rule to determine the percentage I have in Bonds. For example I rounded my age up to 30 to keep the numbers clean so the formula would be: 120 - 30 = 90.
Therefore 90% of your portfolio should be in stocks, and 10% should be in bonds or any “safer” equivalent. In my case instead of bonds I use gold.
5% - XEC: If you look at my original portfolio above you will see that I was holding both XEC and MCHI. I originally bought XEC in 2017 betting on the emerging markets like China and India. In 2021 I decided to add a China specific ETF (MCHI) to my portfolio to boost the weight. My thought process at the time was that if any country would overtake USA as the #1 superpower it would be China.
However moving forward I’m only keeping XEC, which only has a 23% weight in China, but I get more exposure to other emerging countries like India, Korea, Brazil, Mexico, Thailand, etc.
The extra diversification, plus the lower MER (0.28% vs 0.58%) made me lean toward XEC.
5% - HXQ: VEQT already is 18% in Tech, but I wanted a little extra exposure since I’m comfortable betting on technology. As seen above, I already had a few Tech based investments (XLK, HXQ, IDRV, IRBO, ME, SPCE) and decided to combine them into HXQ. Lower MER and simple. I looked at QQC since they had the lowest MER, but they were also doing some additional option trading strategies to boost returns, which made me uncomfortable. Overall my exposure in Tech actually dropped from ~25% to ~23%.
Once I created a portfolio I was happy with, I needed a way to rebalance my portfolio, which is just fancy talk for selling items that you have too much of, and buying items you don’t have enough.
You could do this manually, but this would come with a few extra steps to calculate the correct percentages of each.
Which could be done by taking your current portfolio weight, and then multiplying by the desire percentage in your model portfolio.
However one of the benefits of being a Questrade member besides ultra low fees, is that you get Passiv’s Elite Membership for free (see below).
P.S. (not sponsored by anyone, just who I use).
I like Passiv for it’s automated calculations, One-click trades, and target portfolios.
So back to rebalancing our portfolio, the easy way to do it is with Passiv. Just create your new model, apply it to your investment account, and Passiv will calculate everything you should sell, and exactly how much to buy to match the weights on your model portfolio.
I turned on the feature sell to rebalance, and “applied model” to my TFSA portfolio.
Passiv calculated exactly what I needed to buy/sell in order to achieve the correct weightings.
Then Passiv showed me the orders to confirm. I quickly reviewed it and hit confirm.
7 seconds later, I had re-balanced my portfolio.
This decision was driven not by a quest for optimal returns but by a desire to minimize the mental load associated with managing my investments over the long term.
The Overwhelming Maze of Investments:
In the early stages of my investment journey, my TFSA resembled a labyrinth of investment options, asset classes, and strategies. I found myself constantly monitoring market trends, researching new investment opportunities, and tweaking my portfolio to eke out incremental gains. While the pursuit of optimal returns is a common goal, I realized that this constant tinkering was consuming an exorbitant amount of my time, mental energy and worse results.
The Revelation: Simplification and Decluttering:
The turning point came when I had a revelation: the key to financial peace of mind wasn't necessarily hidden in the intricacies of sophisticated investment strategies. Instead, it lay in simplification and decluttering. I decided to shift my focus from attempting to optimize returns to creating a portfolio that required minimal intervention and allowed me to lead a more balanced life.
Reasons Behind the Choice:
Time Efficiency: One of the primary motivations for simplifying my TFSA portfolio was to reclaim precious time. Constantly monitoring and adjusting investments can be time-consuming and mentally exhausting. By simplifying my portfolio, I aimed to free up time for other pursuits, whether personal or professional.
Stress Reduction: The financial markets can be unpredictable and volatile. Managing a complex portfolio often meant navigating through market fluctuations with a heightened sense of stress. Simplifying my investments allowed me to reduce this stress and adopt a more relaxed and long-term perspective.
Clarity of Purpose: A cluttered portfolio often lacks a clear investment strategy. I wanted to redefine the purpose of my TFSA – to build wealth steadily over time without succumbing to the pressure of short-term market movements. Simplification brought clarity to my investment goals, making it easier to stay the course during market fluctuations.
Emotional Well-being: The emotional toll of financial decision-making should not be underestimated. Constantly worrying about market performance and portfolio adjustments can take a toll on one's mental health. Simplifying my TFSA allowed me to detach emotionally from day-to-day market movements, fostering a healthier mindset towards wealth management.
The Process of Streamlining:
Assessment of Current Holdings: The first step in streamlining my TFSA was a thorough assessment of my current holdings. I scrutinized each investment, evaluating its performance, risk level, and alignment with my long-term financial goals.
Identification of Core Holdings: I identified a set of core holdings that formed the foundation of my simplified portfolio. These were investments with a proven track record, low fees, and a strong alignment with my risk tolerance and investment horizon.
Elimination of Redundant Assets: Redundancy can often creep into a portfolio through overlapping investments. I carefully identified and eliminated redundant assets, focusing on retaining only those that added unique value to my overall strategy.
Automation of Contributions: To further streamline the process, I automated my contributions to the TFSA. Setting up automatic transfers ensured a consistent and disciplined approach to investing without the need for constant manual intervention.
The Liberating Impact:
Since implementing this streamlined approach to my TFSA portfolio, the impact on my financial well-being has felt lighter. Here are some of the notable benefits:
Peace of Mind: By removing the emotions, you also remove the constant worry and over-analysis that accompanied my older approach. Replaced by a sense of peace and confidence. Knowing that my portfolio is designed for the long term allows me to navigate market fluctuations without checking up on how a bunch of random companies are doing.
Time for Other Pursuits: The reclaimed time from managing a simplified portfolio has allowed me to focus on other aspects of life – be it spending more time with friends/family, on hobbies, or planning a trip. A more balanced life is now within reach.
Took the emotions out: Be being mostly in index funds, I’m not worried about how individual companies are doing. I spend less time checking up on how X company has been performing this year, or reading if a company beat their earnings potential, all zero value add tasks. I want to minimize the amount of time I spend thinking about my investments. Instead, I want to spend that time focusing on being present, travelling, laughing with friends, and family,
Improved Sleep Quality: While I wouldn’t say I had a lot of stress related to my portfolio, this simplified approach can only help have a positive impact on my sleep quality. A structured and simplified approach to investments can only help.
Conclusion:
In a world that often glorifies complexity in financial strategies, I found my path to financial contentment through simplicity and decluttering. My TFSA portfolio, once a convoluted maze of investments, is now a streamlined and purposeful instrument that aligns with my long-term goals. The journey to this revelation was not about maximizing returns but about minimizing the mental toll associated with managing investments. Cutting winners and losers alike, in order to lighten the load. As I continue on this simplified path, I look forward to a future where financial well-being coexists harmoniously with a fulfilling and balanced life.
P.S. I did keep my $SPCE stocks (Virgin Galactic) which consists of 0.18% of my portfolio. I did this for the sole purpose of being able to tell my grandkids that I was a pioneer investor in the Space Travel Industry ;)
