Why bother with Rules?

It doesn’t matter if you’re reading this below or above the 49th, or on the other side of the pond; lately investing has been fraught with uncertainty, if not outright danger. Saudi influences on oil prices, US frackers’ ‘damn the torpedoes’ attitudes or, up here, Albertans’ ‘damn the torpedoes’ attitudes have wreaked havoc on energy stocks. EU obstinacy, or Greek obstinacy, take your pick, is messing up my bank stocks, and I have no idea why my telecoms have been slapped down. So, yeah, times are interesting.

You will know that we hit bottom when you feel like vomiting. It’s a simple as that. When it happens, buy. —@sm_sears

And so it was that I approached the first week of May, an anniversary date for my RRSP rebalancing, with fear and trepidation and that feeling of nausea. Alberta, home to much of Canada’s energy sector, had just elected a far left – read anti-corp, anti-big-oil, tax&spend – government. Out of the gate, this government will add 20% to corporate taxes, will not support pipelines and will review the energy royalty structure to ensure that Albertans are getting their fair share. Energy stocks got hammered. Those stocks that I considered targets for my rebalancing act got hammered harder of course, and so I sat on my thumbs and waited. Waited and pondered. Sought advice and opinions and pondered some more.

A week had now passed and I was still no closer to a decision.

And then it hit me: I have rules to govern this annual rebalancing: Sort the TSX60 by yield; discard those pesky income trust conversions; discard miners; sell anything not in the top-5-by-yield; buy and balance across the top-5-by-yield. And do this once a year; forget timing. There’ll always be something going on that sends Mr. Market off in a tizzy, let that go; embrace it knowing that you’ve been doing this for 17 years and it works. It worked in ’08 when you picked up banks paying twice the dividend they are today…

And remember this: the reason the ‘DOGS’ method bears fruit consistently is that at any given point in time, a stock or a sector is being frowned upon by smart money, driving the yield up. That stock is still one of Canada’s largest 60 companies; it will get it’s poop in a group or be acquired. Smart money isn’t that smart, but it does move the market for you, so grab those opportunities.

A week late, but the dirty deed is done. I applied my rules and a bit of caution. I have some level of confidence that a big player like Cenovus is not going to go up in smoke; regardless of my personal political leanings I am confident that Rachel Notley and her motley crew of yoga instructors and 20-year old college students will not burn the province to the ground, and that if I’m wrong this year, there’s always next year. After 17 years of this, I can say that with confidence.

Next up: my 2015 RRSP update.


3 thoughts on “Why bother with Rules?

  1. hello. when you do your annual rebalancing, does it matter when you do it as long as you stick to the same date every year? also, why do you only choose the top 5 instead of the top 10? thanks!


    • Interesting question: I manage two of these portfolios, with rebalancing occuring 6 months apart. Because of that difference, their composition may be completely different, with completely different results. As one portfolio, my RRSP Dogs or DOGS-1, is now 13 years old, and my unregistered Dogs, or DOGS-2 is barely 2 years old, it is hard yet to draw comparisons.

      Why only 5 stocks? At the time I had limited funds and to spread across 10 stocks would have left me with ‘odd lots’ if I wanted to balance. In hindsight, I used 5 stocks when I modelled the portfolio. Those 5 stocks produced a gain of 98% over 5 years, so it made sense to go with what I’ve tested. I’m sticking 5 stocks now, because that’s what has worked for all those years.

      Thanks for reading, and thanks for the follow. I hope I can help!


  2. Pingback: 2014 Portfolio Update – May 13, 2015 | Day Early, Dollar Short

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