(PUB) Investing 2016

risk. I took a look at the 60/40 portfolio in McNabb’s example and extended its performance out to the end of March 2016, the period covered by the most recent fund reports. I also took the same portfolio and rebalanced it at the end of 2013, 2014 and 2015, as McNabb suggests. The differences are hardly worth talking about. At the end of the period, the non- rebalanced portfolio generated a 34.5% total return. The rebalanced portfolio gained 34.2%. Okay, so far McNabb is correct: Rebalancing doesn’t maximize returns. Now, how about the risk side of the equation? Well, first off, I think the chart to the left pretty much tells the story—there’s almost no difference in the path of the two portfolios. So I dug deeper. Would rebalanc- ing somehow make the investor sleep better at night? Well, at its best, the rebalanced port- folio saved 59 basis points worth of worry, or 0.59%, during January 2016, as its 2.8% drop was less than the no- rebalance portfolio’s 3.4% decline. On the other hand, the rebalanced portfo- lio lagged the simpler strategy by 68 basis points, or 0.68%, three months earlier, in October 2015. > your accounts to make sure that noth- ing goes awry in the consolidation pro- cess. Second, watch that any automat- ed transactions related to your money market accounts are tied to your new Federal Money Market account, or develop a process for moving money from that account to your primary money fund like, say, California Tax- Exempt Money Market . Third, check that reinvestment instructions, RMD instructions and the like are carried over when the process appears com- pleted. Finally, let me know if you run into any problems by emailing me at service@adviseronline.com. And good luck. n

But here’s the rub. McNabb doesn’t tell investors just what the impact of rebalancing would have been from that point forward. Plus, in using 2013 in his example, McNabb uses a year where the divergence between stocks (the S&P 500) and bonds (the Barclays U.S. Aggregate) is the second-largest over the past 40 years. Only 2008, when bonds outperformed stocks by 42.2 percentage points, saw a bigger divergence. Take 2008 and 2013 out of the equation, and the average calendar- year difference between stock and bond returns is just 12.3 percentage points. But let’s use McNabb’s time-depen- dent period to see how he’s minimizing Finally, you may recall my warn- ings over the past several months to keep a close eye as Vanguard con- solidates fund and brokerage accounts into one. I’ve heard plenty of horror stories, and I’m expecting more. Why? Because now Vanguard is consolidat- ing accounts for investors like me, who didn’t voluntarily do so. Under the pretext of complying with federal rules governing “prime” money market accounts, Vanguard is converting all settlement accounts to Federal Money Market and, at the same time, working to finish up the consolidation project. I expect a mess. So, a few recom- mendations. First, keep a close eye on

VANGUARD IS AT it again, pushing rebalancing as “a way to minimize risk rather than maximize returns.” Minimize risk? Really? The whole premise here is false, since the only way to minimize risk would be to, say, put your money into a short-term Treasury bond or cash account. Reduce risk? Maybe. Minimize it? Not a chance. The push for rebalancing comes in the Chairman’s Letter leading off a series of semiannual reports released mid-May. Automatic rebalancing is one of the main features promoted by robo advisers including Vanguard’s own quasi-robo, Personal Advisor Services. But its value is in the mar- keting, not in the investing. (I should note, by the way, that in this latest round of reports, Vanguard varies the language occasionally, writing about “managing” risk rather than minimiz- ing it.) Still, the push is on, and Vanguard Chairman Bill McNabb makes the case for rebalancing by focusing on the 2013 markets, when stocks soared and bonds produced minimal returns, to illustrate how a portfolio allocated 60/40 between stocks and bonds would have moved to a 67/33 split by the end of that year. signal that the optimists had taken back momentum, though the fund remains up 51.6% on the year, the best showing among all of Vanguard’s offerings by a long shot. Energy , up 17.0%, is the year’s next-best performer. Foreign holdings lagged during the month, with Total International Stock losing 1.0% compared to Total Stock Market ’s 1.8% gain. Long-term bonds have been sur- prisingly strong in 2016, with all of Vanguard’s long-term funds and ETFs up over 8%. And after a rough start to the year, High-Yield Corporate , up 4.9%, is well ahead of Total Bond Market ’s 3.5% gain. REBALANCING Taking Risk to Zero? $100 $105 $110 $115 $120 $125 $130 $135 $140

Why Rebalance?

Rebalanced Annually No Rebalancing

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The Independent Adviser for Vanguard Investors • June 2016 • 13

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