Trying to balance active and passive investing styles - MoneySense

Trying to balance passive and active investing styles

When adopting a DIY strategy does it make sense to keep aspects of your old portfolio?


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Q I am in the process of moving all my money over from BMO Nesbitt Burns to an online broker to become a DIY investor. I like the simple approach of the Couch Potato portfolio as I was not happy paying for high commissions and having a mix of mostly Canadian blue chip stocks and mutual funds. My money is split 31% in taxable accounts, 49% in RRSP and 20% in a TFSA. I have just retired and now have time to research and manage my own money. I have a very small pension, so I need my money to grow as I am only 56 years old, but also want to sleep at night.

My partner and I have done a financial plan and have set out our goals clearly. But I am left confused as to how to get to my desired asset allocation of 55% equity/45% fixed income between three accounts and especially whether to sell almost everything and start over with just a handful of ETFs, or hold on to some of the better stocks? I definitely want to sell the mutual funds, but not sure about the rest. I have a pretty good understanding of tax implications, but look forward to sorting out this muddle and getting to a simpler, easier, tax efficient portfolio. Any advice, suggestions would be appreciated.
— Lauren

Lauren, let me say right from the beginning that it may be best to burn it down and start over. Reconstructing your investments one item at a time is fraught with emotion and can lead to confusion and indecision. This is especially true for people choosing between do-it-yourself (DIY) and advisory help.

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I’m not against DIY per se. But most of us benefit from an outside perspective. Your decision to pursue a Couch Potato investment approach does not exclude you from the benefits of professional help. Being part of a community of advisors who are fully supportive of this investment philosophy, I can assure you there are a wide range of services and support available.

Active vs. passive

Of course, there is an ongoing debate between active investing and passive investing. But the reason to own individual stocks is because you believe they will perform better than the majority of their peers. Some investment managers judge their own performance based on their ability to pick these “winning” stocks. This is known as active investing. The opposite is passive investing: tracking the performance of markets as a whole, whilst keeping costs and taxes low. Right now the majority of what you’re doing is active. It’s best to pick a side and have a consistent strategy. My vote is for passive.

Pay tax now vs. pay tax later

Portfolio adjustments in your RRSP and TFSA can likely be done with minimal cost (just trading commissions). Your taxable account, however, is much more complicated. You will “realize” gains and likely have to pay taxes on positions that you sell. These taxable gains can be offset by selling positions that have losses. The timing of realizing taxable gains and losses should be done strategically with your personal income tax expectations in mind.

Higher income will send you into progressively higher marginal tax brackets. If this year is shaping up to be your best income year ever you probably shouldn’t add to your tax bill by realizing gains. On the other hand, if this year finds you in the midst of career transition, sabbatical or mat leave, then realizing your taxable gains this year might be good timing, or at least have little impact.

Ian Collings is a Certified Financial Planner and Chartered Financial Analyst with Collings Financial