# Mid Year Rebalancing Questions



## Belguy (May 24, 2010)

After a rather turbulent six months, some of us will be looking at rebalancing our portfolios and so I thought that I would start a thread where questions could be posted concerning asset allocations and rebalancing.

I will begin by asking about my emerging markets allocation which currently targets for 10 per cent of my overall portfolio. The sole investment is the Vanguard Emerging Market ETF (VWO):

https://personal.vanguard.com/us/FundsSnapshot?FundId=0964&FundIntExt=INT#hist=tab:1

One year return -20.76%, five year return -0.29%.

Do you consider this to be a reasonable target allocation in a reasonable investment taking the different factors, including past performance into consideration? What do you feel are the prospects for emerging market equities going forward given today's economic climate?

Thanks for any thoughts and assistance and feel free to post your own asset allocation and rebalancing questions on this thread.


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## mrPPincer (Nov 21, 2011)

When I readjusted my portfolio earlier this year I added emerging markets as a separate allocation.
I was originally planning to go 10% as well, but for 2 reasons I went 5% instead, only one of which likely applies to you Belguy.

The first is dividend withholding tax, the tax paid in the non-US countries before VWO even sees the dividends, (don't know what that is but I'm guessing 10%ish on the the overall dividends), and this tax is unrecoverable for us Canadians (I don't know if US holders of VWO have a way to claim it).

The second, and bigger reason (probably not applicable in your case due to higher income level or RRIF space) is withholding tax, the tax paid when the dividends come across the US border.
I found that my SDRIF did not have room for all the stuff that should be in there, and I have my income low enough at this point that I can not use the foreign dividend tax credit most years, so I'd be hit with another 15% which makes the penny pincher in me 's toes curl.

I see no problem with that high an allocation otherwise if you are seeking extra amounts of low correlations than buying total market cap brings you but that's just one guy's opinion, to be taken with a grain of salt.


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## Belguy (May 24, 2010)

Thanks, but I should have mentioned that this is in an RSP account (soon to be a RIF account).


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## mrPPincer (Nov 21, 2011)

I'm at 90% equity, with probably 10-15 years or so before I fully retire, so my situation is different in that way too.
Another thing, that I didn't think of earlier.
If you're 50% equity, then 10% EM does seem like a lot, it's really 20% of equity, which seems closer to gambling territory to me.
Again, just one opinion.


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## CanadianCapitalist (Mar 31, 2009)

IMO, your allocation to emerging markets is rather aggressive. IIRC, your allocation to equities is 50%. Assuming you have 20% allocated to Canadian stocks, your allocation to more volatile emerging markets is about 1/3rd of your international allocation (10 percent out of 50 percent stocks minus 20 percent Canadian stocks). Emerging markets make up 14% of world market capitalization, so your emerging markets allocation is double their weighting in world markets. Is there any reason for overweighting emerging market stocks? You need to think hard about this because you are not comfortable with volatility, yet you have over weighted more volatile stocks.


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## Belguy (May 24, 2010)

I guess that I bought into the argument a few years back that emerging markets would be where most of the world's growth should come from in the following years. When I originally set up my allocation, I understood that emerging markets would potentially add volatility to a portfolio but, with risk comes potential reward. In other words, maybe a little bit of greed crept into my thinking here. Anyway, so far at least, I have experienced the added volatility without the accompanied reward.

My other international holding is an 8 per cent allocation to VEA which has had a similar recent performance history:

https://personal.vanguard.com/us/funds/snapshot?FundId=0936&FundIntExt=INT#hist=tab:1


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## Financial Cents (Jul 22, 2010)

VEA seems like a decent buy around $30.


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## doctrine (Sep 30, 2011)

No emerging market has had superior stock market returns over the long run as compared to first world stock markets. Economic growth and stock market performance are not necessarily linked. My emerging markets exposure is 0%.


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## andrewf (Mar 1, 2010)

Why not keep it simple and use VXUS and VTI for your international ex-US and US equity respectively? Add in some XIU for whatever degree you want to overweight Canada and you're done.


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## Sampson (Apr 3, 2009)

doctrine said:


> No emerging market has had superior stock market returns over the long run as compared to first world stock markets.


I don't invest in emerging markets for superior returns. I do it to diversify. Many studies have shown weak correlation of emerging markets with developed markets.

I agree with CC that you have far too much exposure to these markets. Right now might be a terrific opportunity to shift monies out of emerging markets and into markets equally hit hard over the past year.... Europe. Just think before you sell low and buy high (e.g. sell out of emerging markets and into North American ones).

However, I disagree that one's breakdown of allocations among different equity markets should be proportional to their size. I've never understood why it makes sense to invest more money in a larger market, nor have I seen an argument for why it is beneficial. I see it like a cap-weighted vs. fundamental-weighted index - cap-weighted is conventional, but not necessarily better.


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## Belguy (May 24, 2010)

VXUS, as an international ETF investment has experienced a more modest loss over the past 12 months:

https://personal.vanguard.com/us/funds/snapshot?FundId=3369&FundIntExt=INT#hist=tab:1

VTI is up approximately 4 per cent over the past 12 months:

https://personal.vanguard.com/us/FundsSnapshot?FundId=0970&FundIntExt=INT#hist=tab:1

Would these two investments along with XIU (down 14 1/2 per cent over the past 12 months) constitute a valid diversified portfolio as suggested by andrewf above?

http://ca.ishares.com/product_info/fund/performance/XIU.htm


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## mrPPincer (Nov 21, 2011)

VCE has more holdings than XIU and a lower MER
https://www.vanguardcanada.ca/individual/etfs.htm

VTI and VXUS both have exposure to small cap and have very low mers.
VXUS also has EM exposure.
The only thing I don't like about VXUS is that the income on it's canadian component get taxed as foreign income and the canadian dividends get hit with an unrecoverable foreign withholding tax when they go from canada to the US. I think most people think this is a small price to pay for an otherwise such an excellent ETF.

I'm in agreement with andrewf. You could get all the equity exposure you need at a low cost with just 3 funds and it would make rebalancing a lot simpler.


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## Belguy (May 24, 2010)

And so, have we arrived at some kind of a consensus with a portfolio consisting of the following three broad-based, low fee ETF's for one's equity allocation:

Canadian equities: VCE
U.S. equities: VTI
International equities: VXUS

Now, how much in each--1/3 of your equity allocation?


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## slacker (Mar 8, 2010)

I use this:

https://personal.vanguard.com/us/funds/snapshot?FundId=3141&FundIntExt=INT#hist=tab:2

If you like overweighting Canadian, you can just move the Canadian portion up, and keep everything else proportionally lower.


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## Belguy (May 24, 2010)

Is there some valid reason(s) why you are recommending the Vanguard U.S. offerings (VTI, VXUS, VT) over the Vanguard Canada offerings (VUS, VEF)?


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## mrPPincer (Nov 21, 2011)

VUS and VEF and VEE are all based in Canada but holding US etfs, so these canadian versions get hit with 15% dividend withholding tax.which, when in your RSP is not reclaimable. 
The core holdings however, would not get hit with the US withholding tax when held by you directly, inside your RSP.
Also, VUS and VEF are hedged to the CDN$ and there have been a number of people that have made observations that hedged funds seem to lose ground over time due to tracking error.


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## mrPPincer (Nov 21, 2011)

Belguy said:


> Now, how much in each--1/3 of your equity allocation?


That's the way I've done it for years now, a total of 1/3 each in Canadian, US, and foreign equity to keep things simple (but furthur broken down within).

Here's a comparison of the holdings and MERs of the 3 US based funds under discussion:

Total International Stock VXUS 6416 Holdings	0.18% MER
Total Stock Market........ VTI ... 3289 Holdings 0.06% MER

Total World Stock......... VT .... 3744 Holdings	0.22% MER


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## Sampson (Apr 3, 2009)

What happened to believing in small-cap and value outperformance?


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## doctrine (Sep 30, 2011)

^^concur. I prefer to diversify over sectors, in market capitalization and in terms of value as opposed to by country.


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## mrPPincer (Nov 21, 2011)

Sampson said:


> What happened to believing in small-cap and value outperformance?


VXUS and VTI both do hold small cap and mid cap at a very low cost.
I believe value does outperform, but with ETFs, does it outperform by the difference in MERs versus those very broad market etfs (which include all those value stocks) over time? I'm not convinced this is always the case.


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## Belguy (May 24, 2010)

HAPPY CANADA DAY TO EVERYONE!! It's pretty quiet on the old forum today. Everybody must be sleeping!!

How does VEU fix into the picture? How does it differ from VXUS?

Also, could just VT itself comprise a properly diversified portfolio? As suggested, one could add VCE if they wanted to bump up the Canadian component. If so, what percentage would you set aside for VCE while investing the rest in VT?

Talk about a low fee, broadly based, easy to manage portfolio which holds only one or two investments!!

Any takers?


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## Sampson (Apr 3, 2009)

mrPPincer said:


> I believe value does outperform, but with ETFs, does it outperform by the difference in MERs versus those very broad market etfs (which include all those value stocks) over time? I'm not convinced this is always the case.


The extra cost of VB and VTV are only 0.1% and 0.04% respectively compared to VTI.

Here's a comparison of the performance since inception (about 2004). 








VTI:33.4%
VB:61.8%
VTV:15.4%
VOO:22.3%

Small-caps killed over that period, well worth the 0.1% per annum.


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## fatcat (Nov 11, 2009)

mid-year ?
i was under the impression you were re-balancing every 3 or 4 days ... :biggrin:


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## lonewolf (Jun 12, 2012)

According to Sy Harding since 1986 the buy date & the sell date that beat the dow buy & hold over most time periods is buy Oct 16th & sell April 20th so maybe those 2 dates should be used for rebalancing. Perhaps the seasonal low & high dates for the bonds could be used as well for the coach potatoe investor.


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## mrPPincer (Nov 21, 2011)

Sampson said:


> The extra cost of VB and VTV are only 0.1% and 0.04% respectively compared to VTI..


Ok, 0.1% and 0.04% are not that much of an extra cost for those who wish to keep different equity types separated.
I had the idea that the costs were higher because I only had room in my RIF for VTI, VNQ, and VWO, and did not want to buy US based ETFs outside my RIF, and when I shopped around for canadian based specialized ETFs I found them all overpriced.


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## Belguy (May 24, 2010)

Wow, even when you get into a narrow discussion of the available Vanguard ETF's, you start to get many varying opinions. I guess that the moral of the story is that there is no overwhelming argument that would point to the correct investments to select even when the options are relatively few.

If you told a hundred investors that they had to construct a portfolio using any number of only Vanguard ETF's, I wonder how many identical portfolios you would end up with.


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## mrPPincer (Nov 21, 2011)

I still think andrewf's idea might be right for you because if you are not comfortable with volatility simply buying the whole market with exposure to ALL the stocks at once will spread out the risk.
With VTI plus VXUS you get almost three times as many stocks (with slightly lower total MER) as you would only holding VI instead.

Two reasons for having a larger number of the US Vanguard offerings are 1. separating asset classes to benefit from low corelations at times of rebalancing and B. or whatever number we're on now, tilting your portfolio to sectors like you did with emerging markets.


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## slacker (Mar 8, 2010)

You should consider increasing the amount of fixed income allocation in your portfolio, to match the amount of volatility that you can handle.


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## Belguy (May 24, 2010)

Generally speaking and considering the current world economic climate, what would be an appropriate asset allocation for a retired investor? Would you still go by the age factor--that is percentage of fixed income should correspond to your current age such that a 70 year old investor would have 70 per cent fixed income to 30 per cent equities?

At age 69, my current asset allocation is 50 per cent equities to 40 per cent fixed income to 10 per cent cash in a HISA.

Is this too aggressive?

And then, there is the ongoing dilemma of what to invest in for the fixed income portion given low bond yields and, sooner or later, a rising interest rate environment.

I realize that there is no pat answer however as everyone's circumstances are different however, I do not have a private pension plan and will depend on my investments to see me through the rest of my retirement.

After that, not so much!!:frown::highly_amused::uncomfortableness::wink:


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## Sampson (Apr 3, 2009)

Belguy said:


> Generally speaking and considering the current world economic climate, what would be an appropriate asset allocation for a retired investor?


I think this is impossible for anyone to answer.

The amount of risk one exposes themselves to in equity markets should be directly linked to their goals/objectives. Someone wanting to buy a new Ferrari every year, or leave $10 million to their children will have very different investment return requirements than a senior living off of $10,000 per year.

I would suggest that retirement certainly isn't the time in one's life to try and grow their assets, one has gained the opportunity and right to simply enjoy.


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## Belguy (May 24, 2010)

You know, a few years back, I wouldn't have hesitated to allocate 70 per cent of my portfolio to fixed income via bonds, but now it somehow seems like a more difficult thing to do!!

OK then, maybe a five year ladder of bonds or a HISA or a combination of both is the best way to go for 70 per cent of my portfolio. The other 30 per cent would go into two or three low-fee, broad-based equity ETF's-likely VCE, VTI, and VXUS.

What da ya think? Does that sound like a valid plan?

Decisions! Decisions!!:05.18-flustered::disturbed::topsy_turvy::concern:


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## Sampson (Apr 3, 2009)

It does sound like a valid plan.

And I can understand your worries about bonds and future bond returns (or a potential crash in bond prices when rates rise), but I think you still have to allocate some monies to bonds.

No one was thinking about bonds back in 2008 except PIMCO, but their returns have killed equity markets over the past few years. What might be a very good strategy is to overweight cash at this moment, waiting for bond prices to tank and yields to go up. Then you can shift to a larger bond allocation when some of this uncertainty settles.

Keep locked-in cash durations short, and bond maturities short-term and the portfolio should weather interest rate fluctuations with lower volatility.


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## kcowan (Jul 1, 2010)

Sampson said:


> I think this is impossible for anyone to answer.
> 
> The amount of risk one exposes themselves to in equity markets should be directly linked to their goals/objectives. Someone wanting to buy a new Ferrari every year, or leave $10 million to their children will have very different investment return requirements than a senior living off of $10,000 per year.
> 
> I would suggest that retirement certainly isn't the time in one's life to try and grow their assets, one has gained the opportunity and right to simply enjoy.


This is good advice and not just for belguy. But we have seen it before. He will not take any advice. That is good because then he cannot blame anybody else.

(He needs to stop obsessing about his portfolio and try to enjoy his remaining years. If he spends $20k out of that portfolio each year, he is good for 20+ more years. Much better to enjoy those years than to spend the time indoors on the computer.)


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## Belguy (May 24, 2010)

Can anyone tell me why I keep hearing on the stock channels that 20 year treasuries are currently a good bet?:confused2:

Also, I have placed 1965 posts on this forum while kcowan has entered 2433 comments. So, what does the statement "much better to enjoy those years than to spend the time indoors on the computer" mean?

Could this be another example of the pot calling the kettle 'black'?

Besides, I love my computer!!:love-struck::tickled_pink:


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## Spudd (Oct 11, 2011)

I think the stock channels tend to focus on the shorter term. At the moment, 20-year treasuries prices are on an uptrend. However, there is a limit to how high they can go (because price varies inversely to yield and nobody in their right mind would buy a bond they have to pay to own). I would not take this as advice to buy treasuries with a 20-year time horizon.


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## Belguy (May 24, 2010)

In a portfolio of broad-based ETF's, is there any need or place for separate investments in either REIT or Precious Metal ETF's and, if so, what percentage of an overall retired person's portfolio should be in each.

Also, what about a separate investment in a Real Return Bond ETF? If recommended, what percentage of a retired person's portfolio should be allocated to RRB's?

Also, any suggested ETF's for these assets would be appreciated. Many thanks!!


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## Sampson (Apr 3, 2009)

Diversifying among asset classes ALWAYS has a role, whether in a retiree's or someone else's portfolio.

What you have to decide is why you want to diversify into these asset classes. You could be looking to improve risk adjusted returns (which could mean lower overall returns), you could be looking for poorly or slightly negatively correlated assets (i.e. to dampen the downturns in your portfolio, like when bond returns and equity returns move in different directions and the overall portfolio is stable), or you could be looking to enhance your returns by taking on more risk (e.g. adding asset classes that have higher volatility, like merging markets, small cap stocks etc).

What you might actually want to do is meet with a financial adviser. One that can help you model different types of portfolios, give you potential outcomes of investing in those strategies/allocations, then decide from that meeting. You could certainly try to do it yourself, but I can only assume it is very complicated and requires lots of maths, and probably a CFA-type designation or advanced knowledge in portfolio theory.

The common ETF suggestions for the asset classes you list are:
XRB
XRE or ZRE

can't suggest a metals ETF, why does it have to be precious metals? and not industrial metals?


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## kcowan (Jul 1, 2010)

Sampson said:


> can't suggest a metals ETF, why does it have to be precious metals? and not industrial metals?


I assume you are talking at belguy. Based on your post, belguy should get steve41 to run his numbers for him. Without some visibility on that, he will just continue shadow-boxing, sadly!


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## Belguy (May 24, 2010)

Any thoughts on an appropriate allocation in real return bonds for a retired senior?

Business Week magazine suggests ten percent of a total portfolio.

http://ca.ishares.com/product_info/fund/performance/XRB.htm


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## leoc2 (Dec 28, 2010)

I say 40% of fixed income allocation as I need to protect DB pensions from inflation. Your mileage may vary.


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## Belguy (May 24, 2010)

And so, my target asset allocation is moving towards a 40 per cent equity/40 per cent fixed income/20 per cent cash position (HISA)

Should I stick with just three or four broad-based funds (VCE, VTI, VXUS, and PH&N Bond Fund D or break out emerging markets (VWO), precious metals (RBC Global Precious Metals Fund D), Reit's (ZRE), and real return bonds (XRB) into separate investments?

Also, do you consider RRB's to be part of a fixed income allocation?


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## leoc2 (Dec 28, 2010)

The third letter in XRB is BOND. Thus it is fixed income. VTI, VXUS has VWO covered. VCE has precious metals covered. Unless you are trying to tilt your allocation there is no need for anything else.


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## Cal (Jun 17, 2009)

Belguy, out of curiosity, I think you should sit down and calculate, were you to cash out of your diversified portfolio, and invest in dividend paying companies, how much cash flow it would provide, and whether it would be sufficient for you to live off of in retirement.

I am not recommending changing your investing goals. Invest in a way that you are comfortable with. I am just curious to know if the portfolio (reasonably invested, not by picking high yielding companies) would be able to provide you with the necessary income you require in retirement or not.

I am not sure what type of work you do, but perhaps you could do some contract work, to supplement your retirement to a point that you feel more financially comfortable.


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## Belguy (May 24, 2010)

Cal, the vast majority of my investments are in a RSP which I will be converting to a RIF in the relatively near future. Also, I have no plans on returning to the working world.

leoc2, OK, with VCE, I don't need to breakout precious metals. 

With VXUS, do I need to break out emerging markets?

What about REITS?


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## leoc2 (Dec 28, 2010)

Try these links from our neighbour to the south...when they talk about mutual funds just remember we cannot buy them and then be jealous of their tiny mutual fund MER's. 

http://www.bogleheads.org/forum/viewtopic.php?p=811031

http://www.bogleheads.org/forum/viewtopic.php?t=85638&mrr=1321114453

http://www.bogleheads.org/forum/viewtopic.php?t=70171

http://www.bogleheads.org/forum/viewtopic.php?t=67640

http://www.bogleheads.org/forum/viewtopic.php?t=70496&mrr=1300133415

http://www.bogleheads.org/forum/viewtopic.php?f=1&t=92932


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## Navigate Sensibly (Oct 24, 2011)

Belguy, simply check out canadiancouchpotato.com and follow the sample portfolio. Done! LOL


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## Soils4Peace (Mar 14, 2010)

Belguy, you are getting close to David Swensen's recommended portfolio for non-billionaires. Just split the US equity part into two equal parts - US and Canadian equity; Canadianize the REITs and bonds and you get:

15% Canadian equity (VCE)
15% US equity (VTI)
15% Developed equity (VEA)
10% Emerging equity (VWO)
15% REIT (ZRE)
15% 'long treasury' bonds (but use a broad index: VAB)
15% real return bonds (XRB)

EDIT: note he has real return bonds as a separate asset class.


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## Belguy (May 24, 2010)

Thank you to all for your suggestions and positive comments which are much appreciated. Thanks to leoc2 for the links which I found most interesting.

CC has already indicated to me that a 10 per cent allocation to emerging markets is perhaps not appropriate and too aggressive for a retired investor.

Also, I would not feel comfortable with only a 30% allocation to fixed income. I would also like a cash component in the way of a HISA. Maybe I could have the HISA as a 20 per cent component and the bond ETF's as a 30 per cent component but that only leaves a 50 per cent allocation for equities to split up proportionately as indicated.

I realize that there is no definitive answer as to the best allocation for retired investors but I feel that I am zeroing in on my target allocations going forward with help from all of you.

Thanks again!!

The Business Week suggested allocations for a retired investor also recommends 2.5% breakouts for each of either a Canadian or U.S. value ETF and a Canadian or U.S. smallcap ETF although I have to wonder how necessary this would be.


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## Belguy (May 24, 2010)

Gold ETF's to consider for your portfolio:

http://www.theglobeandmail.com/glob...old-now-five-etfs-to-consider/article4423063/


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## londoncalling (Sep 17, 2011)

Belguy said:


> Thank you to all for your suggestions and positive comments which are much appreciated. Thanks to leoc2 for the links which I found most interesting.
> 
> CC has already indicated to me that a 10 per cent allocation to emerging markets is perhaps not appropriate and too aggressive for a retired investor.
> 
> ...


Grats Belguy! Looks like you are finding an allocation that fits your comfort level...

:triumphant:


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## Belguy (May 24, 2010)

Many investors are forgetting the all important rebalancing chore:

http://www.theglobeandmail.com/glob...-the-big-boys-time-the-market/article4588759/


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## andrewf (Mar 1, 2010)

Rebalancing every quarter is unnecessary. Once a year is often enough. Most people can 'rebalance' strictly by buying underweight components with new contributions.


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## My Own Advisor (Sep 24, 2012)

andrewf said:


> Rebalancing every quarter is unnecessary. Once a year is often enough. Most people can 'rebalance' strictly by buying underweight components with new contributions.


+1

I might do it once or twice per year. Take cash, buy what has been beaten up, done.


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## eulogy (Oct 29, 2011)

I made the rule, currently, of rebalancing once every 4 years, while using new money to do my best to balance. Its easier with less money. The idea is just to allow things to run their course in the market. 

Studies who rebalancing often (once a year) is more beneficial in a bear market. Not rebalancing is better in bull markets. I'm not timing, just trying to find an objective middle ground.


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