My IPS, 5 of 5: Rebalancing and other considerations

This if the fifth and final post setting out my Investment Policy.  My Investment Policy Statement is here, and I have set out the detailed reasoning behind it in four prior posts here, here, here and here.

The key questions I haven’t tackled so far is how and when I trade.

My underlying philosophy here is simple:

  • Sell very rarely.  I almost never sell an ETF, and try only to sell an individual company if my investment thesis has materially changed.  I’m not above some tactical selling, or even bed-and-breakfasting, to optimise my annual capital gains allowance, but ideally that is about it.
  • Buy continually, prioritising underweight exposures.  I generally try to keep my cash deployed.  I have pockets of it, in structures that are hard for me to manage directly (like offshore bonds) where it tends to accumulate; but in accounts which I control directly I find myself investing cash almost as soon as it appears. As I always prefer Inc holdings to Acc holdings, my cash holdings build up quite quickly – a quality problem that I enjoy solving.
  • Gradually reduce the number of holdings.  I try to avoid opening a new position, and always prefer to topup existing holdings.  This is a lesson I draw from experience; I used to think relatively little of opening small positions ‘to watch and learn’ but I have concluded that such positions can’t move my needle and just clog up my reporting complexity.

I generally try to keep all of my country/asset-type exposures (e.g. Australian/Equities) within +/- 2% of their target allocation (i.e. if the target exposure is 20% of my portfolio, then the acceptable range is 18-22%). For my smaller exposures, such as Australian Fixed Income, I would regard a +/20% of their target pound value (i.e. if the target exposure is 4%, then 3.2-4.8% is the acceptable range) as a trigger for aggressive rebalancing.

I will always prioritise buying holdings that are below my acceptable range.  Unless I have a particular stock on my watchlist that i want to accumulate, I will go top up one of the core ETFs in my portfolio.

In theory when an exposure is more than 5% out of line (which my UK Equities exposure is right on the cusp of) then I would sell to rebalance.  In practice this has not happened to me (except for recently, when I increased my US Equities target from 15% to 20%, but I’m happy for this adjustment to take a couple of years), and over the last few years dividend income has appeared quickly enough for me to buy the underweight sectors fast enough to prevent dramatic unbalancing.

This all being said, none of these principles are rigid tram tracks; recently for instance even though my UK Equities exposure is too high and I am trying to increase my exposure to US Equities, I took the opportunity in my ISA/SIPP accounts (which are not ideal accounts for US Equity exposure due to US withholding taxes) to buy FTSE-100 ETFs as the FTSE-100 index fell almost 10% to 6500.  With FTSE up 2%+ a week or two later, I am not feeling too bad about this deviation from my desired strategy.

I do, to my chagrin, pay attention to trading charts. For instance right now I am a buyer of FTSE at 6500 and would be reluctant even to mechanically top up above 7200.


7 Comments on “My IPS, 5 of 5: Rebalancing and other considerations”

  1. Amit says:

    Would you mind recapping why income over accumulation units?

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    • Amit – my approach is to use dividend income to buy in whatever sector (geography / asset type combination) is underweight at that point in time. I don’t like Acc funds because they automatically reinvest dividends in the same security; I want to point dividends at the ‘cheapest’ asset rather than the same asset it came from.

      Another reason I like Inc funds not Acc funds is because I take the view that my investment portfolio’s primary purpose is to provide an income. There is, as Rockefeller said, something very satisfying about seeing cash pile up from actual dividends. He didn’t say that about Acc funds.

      Right now I am choosing to reinvest those Inc dividends but I could very easily choose to spend them. This makes Financial Independence feel very real to me.

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      • amit says:

        Thanks – that makes sense – especially if you invest in multiple shares/funds/etc rather than say a single lifestrategy position. Great point re making it “real”.

        Liked by 1 person

  2. […] the next, and final post in this series, I discuss my approach to rebalancing and a couple of other fiddly […]

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  3. Excellent summary of your underlying principles. Very sound ones indeed!

    Just a quick question. What do you mean by ISA/SIPP accounts being “not ideal accounts for US Equity exposure due to US withholding taxes.” Certainly true with regards ISAs. However, at the moment I am looking into exactly this. SIPPs seem pretty good to me for US exposure. The US has 0% withholding tax on investments held in UK pension schemes. Many (if not most) SIPP providers therefore provide US dividends net of all withholding taxes.

    The same applies for other countries (such as Belgium and the Netherlands) but this is less consistently applied for by SIPP providers.

    How do you currently handle the withholding tax issue and reduce how much it affects you with US investments?

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    • @DD – the way I handle withholding taxes is that I do zero work about it. I don’t know whether my SIPP and ISA providers handle it correctly. So I assume the worst. And as a result I leave US dividend stocks out of my tax-sheltered UK accounts. In theory I suppose my non-dividend US stocks like GOOG and AMZN would sit fine in such accounts but I don’t even do that. @Monevator has a the go to reference on this stuff but my eyes glaze over I’m afraid. So basically I orientate my tax-sheltered accounts to UK dividend-producing holdings, and use other accounts for US / overseas holdings.

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      • Haha, I see. In ISAs there is certainly little benefit to holding foreign stocks from what I can gather.

        As I say, with SIPPs it is a different matter. I am planning on writing a little post asking opinions on it shortly. However, those SIPP providers which do handle it correctly can have a massive impact on dividend income. For example, I think AJ Bell and HL get dividends from the US paid gross into pension accounts. In other words, you get 15% more of your dividend income from US stocks when held in a SIPP. That pricks my ears up!

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