Asset Allocation Drift

As part of my pre-retire to do list I started to take a good hard look at my investments and evaluate if I need to change anything.  So I started pulling together the numbers for my asset allocation (just fixed income vs equities) and got a bit of shock.  I had drifted off course by more than a little bit, in fact my target is 60% equities and 40% fixed and I was at 34% fixed and 66% equity. Yikes!

How did this happen?  Well I fell victim to the tendency to compartmentalize things. You see I knew my pension was about 50/50  and I knew my RRSPs were a bit off at 35% fixed income, but not too bad.  Yet I failed to realize in the last few years that the majority of our money has been going into the TFSA and taxable accounts which is almost all equities.  So without really meaning to I drifted off target because in my head I was fine in some of my accounts and I don’t run a total of the entire portfolio all that often for calculating my overall asset allocation.  It is a bit of work to look up the split by each account and then roll it up to the total portfolio amount and often doesn’t change that much, so I got lazy about checking it.

But rather than be mad at myself I decided to have a look on ways to fix the issue.  One of the first and easy ones was shift my risk profile in my pension.  I have always planned on that account to be a bit heavy in fixed income and so I moved a step in my pension options from ‘moderate’ down to ‘conservative’.  In a practical sense that shifted the pension money from a 50%/50% split to 70% fixed income and 30% equities.  The net result was to shift ~$40,000 from equities to fixed income in one mouse click in a single day which was completed two weeks ago.  With that I should be around 40% fixed if I put all the cash in the various accounts into fixed income.

So the that is what I started doing.  First up was the fixing the heavy equity weighting in the TFSA and taxable accounts by investing their cash into fixed income.  In those accounts my wife and I choose to expand our investing wings a bit and try out a preferred share ETF (stock symbol CPD), so yes it isn’t a bond, but it isn’t fully equity either.  A bit of hybrid which works well to boost the cash flow of the fixed income portion of our portfolio.  After all the current trailing yield is around 5%, which is a lot higher than a straight bond fund.  But to keep things in check we only plan to keep the that ETF to no more than 10% of the entire investment portfolio.  So that was just finished up this last week.

The next phase is to re-balance our RRSP accounts to the 40% fixed income weighting via bond ETFs, which shouldn’t require much of an adjustment, but I figure it will be done by the end of next week at the latest.  With that we should be sitting around target of 40% fixed income.

Beyond that our final part of the investment plan is actually really boring…cash.  Lots of cash.  Why?  Well there are several reasons including: an emergency fund in the event our investments drop badly, starting cash for our early retirement period and finally a bit of savings for a few expenses we plan in the next year or two (vacations and renovations).

So did you ever drift badly on your asset allocation?  If so, how much and how did you fix it?

3 thoughts on “Asset Allocation Drift”

  1. I can’t say that I have ever drifted that far off course, Tim. But I have different AAs for each part of my portfolio. In my taxable (non-retirement) account, I allow for a wider degree of variation from my AA because I rely in its monthly bond fund and quarterly stock fund dividends to cover my expenses. So, if I make any big changes to it, I would alter my cash income. I am more likely to change the AA if my dividend income changes (read: drops) too much.

    In my IRA, I monitor its AA much more. I don’t add any money to it and I don’t take any withdrawals from it (yet), so if the balances of the stock fund and bond fund fall far enough away from my desired AA (currently, 50/50), then I will rebalance it. That happens a few times a year, usually moving from stocks to bonds but not always. Also, as I age, my AA will shift slowly toward more bonds. I will probably move it to 55/45 in favor of bonds as I near age 55 (I am 53 now).

  2. Interesting, I guess the issue for you soon will be whether this is a question of asset drift, or what asset allocation is more suitable for draw-down in retirement, which is a related but different issue.

    A book that really deals with this well (though expensive) :

    There is a free PDF that covers the main parts.

  3. I love it when my portfolio naturally drifts away from its original allocation. Usually I will let it go to a delta of 5-6% for a given asset class, which at that point is a great opportunity to sell high and buy low!

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