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Part 10: After the Purchase

Once you have gone through the options in the previous post and set your course, opened your accounts, picked which of your tax shelters to use first (not covered in this series), you’re well on your way to using the power of investing to meet your financial goals. While an index investing strategy can be very hands-off, it’s not quite zero work after you make your purchases.


The first task you may find yourself facing is rebalancing. The all-in-one fund or robo-advisor options will do this for you, which is part of the convenience you’re paying for, otherwise you’ll have to do it yourself.

Whatever asset allocation you decided on will not stay as you set it for very long: the different components will have different returns. So as one part, goes up in price and becomes more valuable, it starts becoming a larger part of your portfolio. Or if a component declines in value, as all your equity funds may do in a market crash, you may find yourself with less of your portfolio allocated to them than you had planned. Rebalancing is the process of bringing your portfolio back to its planned configuration and balance.

You can get your portfolio back into balance either by selling some of the funds that are over your target weighting, and buying some of the ones that are under. Or, if you’re making regular contributions, you can direct your new purchases to the parts that are under-weighted to bring them back up to your goal. When you first start out, new purchases will almost certainly be enough to fix any imbalance; as your portfolio grows to become much larger than your regular purchases, a big swing may require that you sell a component.

It’s important to set a threshold for how much of a deviation is worth rebalancing to you. Being off by a percentage point or less is just a rounding error in investing, and can happen on an almost daily basis and so isn’t worth trying to constantly fix. But at some point you should step in. For example, you could say if you were more than 10% off your target, or 3 percentage points, you would step in (i.e., if your 30% target in Fund X went under 27% or over 33%). You can also set a schedule, checking in once a year to bring things back to your target.

As markets fluctuate, rebalancing may provide a boost to your returns as you buy low and sell high. However, the main reason to rebalance is to control your risk: if you decided on a 60-40 portfolio but strong stock returns had it drifting up to 70-30, that’s riskier than what you had originally signed on for. Rebalancing helps you stick to your plan.

When to Change the Plan

It’s important to understand it early, and repeat it often: returns are not guaranteed and will be variable. Investing involves risk, and at some point markets will crash – but you can not predict when, so you’ll have to ride it out.

The middle of a market crash can feel very scary, especially your first one as you feel the connection your hard-earned money has to your gut. You may suddenly decide that you don’t want to have so much of your portfolio invested in risky equities (even if that’s the best long-term plan). But market returns will be unpredictable and highly variable, and you should not change your plan in response to what the market is doing. Remember that as an index investor part of the philosophy is that it is too hard to predict market moves, and that over time investing should produce positive returns for you – but to get to over time you have to ride through some very painful periods.

You should revisit your plan from time-to-time however. Changes in your life, employment situation, or goals may affect your risk tolerance and investment plan. Leaving your government job with a pension to start a sole proprietorship may mean taking more personal risk, which may mean that you want to revisit how much risk you take in your investment portfolio.

When to Consider the Next Shiny Thing

While the core principles of index investing haven’t changed, and it’s a good strategy for its constancy, the index fund products themselves are in a competitive marketplace and constantly changing. All-in-one ETFs for example made it that much easier to become an investor, and were just launched in 2018. Tangerine just released lower-cost mutual funds. And within each category of ETF or mutual fund your favourite model portfolio provider may change the specific fund(s) they recommend. When does it make sense to switch to the newest innovation?

For the most part, if what you have is working for you, there’s usually no need to change. The difference between similar products can be extremely minor, and while it may make sense to update a model portfolio for new people to use the latest innovation, it’s not even worth the time spent worrying about it for people with the nearly identical old version. If you are investing in a tax shelter, like a TFSA or RRSP, there’s no tax hit for switching, but in a taxable account that can be another reason to stay put.

Ask yourself if the new product is going to make any real difference, and if it’s one that matters to you. An all-in-one ETF may be easier to manage, but you may already have a system that you’re perfectly comfortable with for rebalancing four individual ETFs. Ask yourself what the switching costs are: potentially commission fees, time spent out of the market as money moves, and tax consequences.

Remember the Core Principles

Keep it simple. Don’t try to out-smart the market, and invest for the long term, even when the short term is painful. Diversify broadly and manage your risk.

Costs matter – but so does actually being able to stick to your plan. There can be a lot of value in simple solutions (hey that’s the title of the book!) – the absolute lowest-cost ETF combination is not going to be the right answer for everyone. Paying more for a robo-advisor or a Tangerine fund may be a perfectly sensible thing to do if it helps you get over the hurdle to actually invest or to sleep better at night.

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