Posted by Tim Stobbs on February 3, 2011
I finally got my account summaries for three of our accounts last week and I was a little surprised by the investment returns. You see my wife’s RRSP, my RRSP and my LIRA accounts were all setup with the same set of index mutual funds and same asset allocation. As such they should in theory produce the same return. Yet the fact was in 2010, that didn’t happen.
The variation wasn’t huge, in fact the accounts got 8.24%, 8.5% and 9.18% returns which is to be expected since both the RRSP accounts continue to get contributions while the LIRA account does not. So my RRSP gets even contributions all year long while my wife’s RRSP tends to be topped up in the last quarter. Yet here is the interesting part. Guess which account had the highest return? Come on now, give it a second and pick which account in your head.
Ok, are you ready? The account the got the highest return of 9.18% was the LIRA account with no contributions at all. Huh?! Didn’t Robert just have a post about funding flows and how the affects your returns? Shouldn’t putting in money during the last year helped the returns rather than reduce them? Well this is where things get interesting.
Since I can’t contribute to the LIRA account I tend to not look at it closely except during when I usually do my annual rebalancing. Yet last year the funds hadn’t shift that far in that account so I decided to skip rebalancing the LIRA account and rebalance only the RRSP accounts. This has resulted in a slightly overweighting in the Canadian index funds which was the second best performance out of the asset classes. Thus giving in the end the slightly higher return at the end of 2010.
So obviously you don’t need to rebalance every year and in some cases that might even help you out. While this wasn’t my intent, these results are making me consider if I should bother balancing every year or instead use a 5% shift rule where I have to see a drift of at least 5% off the original asset class prior to rebalancing (ie: if I’m trying for 25%, I would only rebalance when it hit either 20 or 30%). So what method do you use to rebalance and how has it worked for you?