change in asset allocation as timeline shortens

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mcbar
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change in asset allocation as timeline shortens

Post by mcbar »

I’m contemplating a change in my target asset allocation. It is looking more likely that my timeline is shortening, and I may want to draw on my savings for a house down-payment or tuition in the next few years, but I am still undecided.

I know the conventional wisdom is to stick with cash for a timeline shorter than 5 years. I’m not exactly sure what my timeline is, perhaps 3-7 years. I feel like I could postpone a house purchase if my savings tank. I also feel like the opportunity cost of not being in the market at all may be more stressful to me than a major correction, since I’m early in the accumulation phase and my rate of savings is still fairly high relative to the value of my portfolio.*

My entire portfolio is in my TFSA.

My current allocation:
25% TD e-series Bond Index
25% TD e-series Canadian Index
25% TD e-series US Index
25% TD e-series International Index


I would like to reduce my risk while still (hopefully) obtaining a higher return than an all-cash portfolio. Proposed change:
50% XSB
10% ZRE
10% TD e-series Canadian Index
10% TD e-series US Index
10% TD e-series International Index
10% Cash

My thinking:
-reduce equity exposure
-add another assett class (REITs)
-increase bond exposure, shorten duration

Does this seem reasonable? I'm pretty comfortable with the addition of XSB - it achieves my goal of reducing risk and payback time with the reduced MER is less than a year. I'm a little less sure about ZRE - at 10% of the entire portfolio it will make up a quarter of my equity component, which seems a tad high. Less than 10% and I'm starting to look at a fairly high %age going to buy and sell comissions - so I think it's either 10% or 0%.

Of course my other two options would be to keep doing what I'm doing or go 100% cash.



*What's more likely to serve as an antecedent for irrational decision making - being out of the market and watching it go up, or being in the market and watching it go down? I'd like to say neither, of course it's difficult to say in advance...
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gsp_
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Re: change in asset allocation as timeline shortens

Post by gsp_ »

Personally I'd forget XSB and dump its allocation(50%) + the cash(10%) one in a Peoples Trust HISA TFSA earning 3%. Why take on capital risk for 1.33% net YTM when you can have CDIC protected capital and 3% return(rate can change but hasn't in over 4 years).

Sold my TFSA bond funds a while back and dumped the whole TFSA into PT HISA. A few others on the board did the same.

On the equity side, not sure there's much need for anything other than the 3 e-series funds. Allocating 25% of your equities to an asset representing roughly .1% of world market cap seems odd.
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Re: change in asset allocation as timeline shortens

Post by parvus »

If you're not comfortable with bonds, why not just dump them altogether and go for a HISA? Moving to XSB minimizes your duration risk, but doesn't eliminate it entirely. With ZRE, in some sense you are taking on duration risk, since REIT returns are somewhat leveraged to interest rates.

You really need, I think, to determine a risk horizon, not a time horizon. Will you need all of the money five year's hence? If so, then probably your equity weight should be no more than 20%, at least if you want to count on the money being there to fund your planned purchases.

Following that, then you would want the rest of your assets in something that has term-certainty -- something you can count on five years from now. It may seem sensible to buy XSB to secure this, but rates will fluctuate, and when it comes time to sell, you could still have a capital loss. On the other hand, you could earn more than a HISA or GIC ladder.

So, you have to ask yourself: what is the purpose of the funds? Is it to fund a specific project? Is it to accumulate? Is it something in-between?
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mcbar
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Re: change in asset allocation as timeline shortens

Post by mcbar »

Thank you both for the sound advice.

The PT HISA is a good suggestion that I hadn't considered. I'm trying to limit the number of accounts I have spread across different providers (I have a non-registered HISA with ING that I use for my emergency savings) however this option fits my needs fairly well and might be worth the extra bit of hassle. I'll have to make sure I don't run afoul of the TFSA contribution limits. I don't suppose there's anyways I can transfer money directly from my TFSA with TD?
parvus wrote: So, you have to ask yourself: what is the purpose of the funds? Is it to fund a specific project? Is it to accumulate? Is it something in-between?
I think this is the basis for my confusion. I opened the account and designed my original asset allocation with very long term accumulation goals in mind. Recently the prospect of buying a house or returning to school has become more realistic, however I'm still undecided. We're very comfortable with our current renting situation - this may change if our family grows.

Do I need the money in five years time? I suppose the answer is no - I can do without buying a house if the conditions are not right. I could purchase a house right now if I so chose - I am doing without it because I would rather have a bigger down payment when the time comes.

I'm a bit worried about the prospect of going 100% cash, deciding in the future not to purchase a house, and regretting missing out on (admittedly hypothetical and unreliable) market gains. I fully realize the irrationality of this position.

I think the bottom line is this: because I'm undecided, because I have time on my side, and because I'm generally a fairly patient person, I'm comfortable taking some risk, but perhaps less risk than I am now.

Thanks again for your advice.
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Re: change in asset allocation as timeline shortens

Post by gsp_ »

I don't suppose there's anyways I can transfer money directly from my TFSA with TD?
Sure. You'd have to sell the portion you want to transfer and keep it in cash. Call PT and ask for their TFSA transfer form. Problem is TDDI will charge you a transfer fee(guessing $135 + tax).

If you have the TFSA contribution room you could withdraw from TDDI and recontribute immediately. If not, then best to do this in late December so you get the room back a few days later.
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Re: change in asset allocation as timeline shortens

Post by DenisD »

If the TFSA is with TD Bank, not TDDI, I don't think there's a fee to transfer. But confirm that.
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Re: change in asset allocation as timeline shortens

Post by pmj »

Peter

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Re: change in asset allocation as timeline shortens

Post by mcbar »

:thumbsup:

I'm currently in a mutual fund account, so it looks like I'm good to go if I decide to go that route. Thanks again for the info.
"The mob rushes in where individuals fear to tread." --BF Skinner

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