A key aspect of my investment philosophy is to have targets for each of the asset classes I invest in. Because I like to keep things simple, my asset classes are rather broad¹:

• Cash, which includes ultra-short-term bonds (bonds with durations measured in days, not years)
• Bonds², which means corporate and government bonds from multiple geographies with various and assorted durations
• Canadian Equity: Canadian stocks
• US Equity: US Stocks
• International Equity: Stocks that don’t sit in North America

The targets I’ve used for a few years now are

• 5% Cash
• 15% Bonds
• 20% Canadian Equity
• 36% US Equity
• 24% International Equity

But where did those target numbers come from?

The easy answer is that they are based on the target number of the Canadian 80/20 fund I use in my retirement portfolio, namely XGRO, one of my ETF all-stars. XGRO’s makeup is actually

• 20% Bonds
• 20% Canadian Equity
• 36% US Equity
• 24% International Equity

The immediately obvious difference between XGRO and my target is the presence of “Cash” in my target, something XGRO doesn’t have³. “Cash” was a recent arrival to the portfolio, a decision I took to accommodate the presence of a Cash Cushion in my portfolio. The Cash Cushion is an integral part of my chosen decumulation strategy, VPW. So rather than keep the Cash Cushion as something set apart from my asset allocation model, I chose to create a new asset to track. 5% was a small and round number, and is about 2x the value of the Cash Cushion today.

That 5% is almost all invested in ultra-short term bond funds so perhaps you could also argue that I never stopped holding 20% bonds in my portfolio⁴; I just segmented that category a bit more precisely.

But why 20% bonds? Shouldn’t a retiree have a greater portion of bonds to protect against market downturns⁵? Habit, I suppose. I’ve held 20% bonds for decades now, since well before I retired. I don’t see any reason to change that now. I’m hoping my retirement will go on for decades, and so having a good chunk of equity is a good way to make sure my portfolio returns outpace inflation and offer some protection against outliving my money.

So 80% equity it is; but are the allocations between Canada, the US and International markets the right allocations? Like I said, I basically picked the equity targets to match what the percentage allocations are in XGRO. If I look a bit further at the other *GRO funds (TGRO, VGRO, ZGRO), I find that XGRO is a bit of an outlier with respect to International Equity allocation:

ETF	% CAD	% US	% Int’l
XGRO (Blackrock)	20	36	24
TGRO (TD)6	26.7	35.6	17.8
VGRO (Vanguard)	25	35	20
ZGRO (BMO)	20	40	20
Average for all	22.9	36.7	20.4

This tells me a few things

• My US allocation target of 36% is justified by looking across multiple funds
• My International Equity target is probably too high if I rely on the wisdom of (small) crowds.

Since I like dealing with round numbers, a case could certainly be made for my targets to instead look like

• 23% Canadian Equity
• 37% US Equity
• 20% International Equity

Using these targets and looking at my current holdings would require me to move about 3% of my International equity holdings into Canadian equity.

I can control my equity allocations in normal monthly transactions, somewhat — since a good chunk of my retirement salary is funded by selling non-registered assets, I get to choose (somewhat) what equity class to liquidate. Here’s the problem I see — my International Equity component in my non-registered account is SCHF, which trades in USD. Liquidating SCHF is possible. but the small problem with SCHF is that it’s denominated in USD, and thanks to my current credit card lineup, I don’t have a way (or need) to spend USD natively anymore.

Sigh. Actually, there’s really no good reason for me to hold *any* USD assets in my non-registered accounts. USD assets are now, for me

• Difficult to spend as USD
• Problematic because they are counted against my “foreign income”, per CRA’s T1135; hold too much foreign income, and you have to file additional paperwork at tax time. I hate paperwork.

So, in conclusion,

• I think I will shift my asset allocations slightly, tilting a bit towards Canadian Equity at the expense of International Equity; this will take time as I draw down SCHF from my non-registered portfolio
• I will get rid of USD-denominated assets from my non-registered accounts. This will start with reversing the decision I took about a year ago when I went with a majority of ICSH in my Cash Cushion.

1. 5 categories could easily morph into 20 if you were particular about things. For example, bonds could be split by geography, and/or by duration and/or by bond quality. The US and Canadian equity categories could be split into sectors and/or company size. The international equity categories could be split by region, country, sector, company size. The possibilities are endless, and so could the number of assets you actually hold to meet them. I don’t claim that my 5 are the right ones for you, but I’ve used them for quite a while now. ↩︎
2. For the longest time, and for many earlier posts, I refer to this segment as “Income”. This made some sense in the days where I didn’t track “Cash” as a distinct category. But it’s time to move on. What lives here are bonds, and only bonds. ↩︎
3. Of course, all ETFs hold some portion of cash, it’s pretty much unavoidable as you shift assets, collect dividends and so on. I don’t worry about this sort of thing; my assumption is that the ETF manager is doing their job and adhering to their published targets. That MER has to be worth something, right? ↩︎
4. Questrade (my primary broker) doesn’t offer high interest savings accounts; at my previous broker (QTrade) this cash cushion really was cash held in a high interest savings account. ↩︎
5. And there will always be market downturns. SORR is a common acronym thrown around; it stands for “Sequence of Returns Risk”. Basically this is the admission that there will be market downturns during retirement; SORR is the risk that those downturns happen really early in retirement and blow up your well-crafted plan because you are forced to sell into a down market. My mitigation strategy concerning SORR? I can always find a job if things got really bad… ↩︎
6. The reason TGRO’s numbers aren’t round is because the other *GRO funds hold 80% equity while TGRO holds 90% equity. I’ve scaled TGRO’s holdings accordingly. ↩︎