(PUB) Investing 2016

Far from “minimizing” risk, the rebalancing strategy simply reduced monthly volatility by a smidge while reducing the long-term return by a touch. But it also required several transactions, which most likely created taxable events, since the investor was selling the better-performing fund. And, let’s not forget that Vanguard chose one of the most divergent years over the past 40 to make its rebalanc- ing point. Now, to give Vanguard another opportunity to prove its point, I looked at the past 40 years and applied the annual rebalancing strategy. In the chart >

to the right, I’ve plotted the perfor- mance of the two portfolios on a loga- rithmic scale, which is better at showing percentage changes rather than absolute changes in values. This is important over long periods, because a 5% move when a portfolio is worth $200 (worth just $10) isn’t going to register the way a 5% move (worth $100) will on a $2,000 portfolio if both are plotted on a simple, graduated scale. And yet both 5% moves reduced the portfolio’s value by the same percentage amount at different times. Even over 40 years, you can see only one period—the years leading up to and the aftermath of the tech bub- 40 Years Of Annual Rebalancing (log scale) Annual Rebalancing No Rebalancing 12/75 12/79 12/83 12/87 12/91 12/95 12/99 12/03 12/07 12/11 12/15 $10 $100 $1,000 $10,000

ble—when the differences between the two portfolios really diverged. And, believe it or not, after three years, when the non-rebalanced port- folio underperformed the rebalanced portfolio, by the end of 2002, the two were of almost equal value, diverging by less than 1% of their starting val- ues, or less than $1 on an initial stake of $100. By the way, if you thought rebal- ancing could somehow turn red ink into black, there was not a single year when the no-rebalancing portfolio lost money that the rebalanced portfolio didn’t also lose money. However, in 1994, when the no-rebalancing port- folio gained just 0.2%, the rebalanced portfolio lost 0.4%. Jeff and I have done lots of work on rebalancing to show that for all the white papers and research notes and articles written about its purported benefits, there are only a handful of times when rebalancing can materially impact your portfolio, and those times are only known in hindsight. Plus, the best times to rebalance are when the markets truly become disconnected, and it’s a good bet that an investor fac- ing a massive dislocation in stocks is going to have a tough time holding his nose and buying when the rest of Wall Street is madly selling. For my money, I’ll let my per- sonal portfolio as well as the Model Portfolios in this newsletter ride, and make subtle changes as the times, the fund managers or my investment tem- perament dictate. n

DISTRIBUTIONS TO COME Semiannual Dividend Payouts

JUNE IS UPON US , and that means a big distribution month, as funds and ETFs that pay out semi- annually or quarterly will take interest and dividends earned in the first half of the year and, after expenses, distribute them to shareholders. With so many funds distributing, you’ll need to watch the calendar and listen to the Hotline as Vanguard begins releasing actual distribution dates. Remember that for tax reasons, you don’t want to “buy a distribution,” so if you’re planning an investment in a taxable account, please hold off until after the “record date,” which is the date ownership is determined for distribution purposes. (If you’re investing in a tax-deferred account, you don’t need to worry about this.) The funds or ETFs that are scheduled to distribute are listed below. Note that even though Short-Term Inflation-Protected Securities Index is supposed to be a quarterly payer, it hasn’t paid out a quarterly dividend since its inception, storing up what little it’s earned for a year-end dividend. With inflation subdued, short-term Treasury yields still extremely low, and the fund’s yield a reported -0.87%, there’s probably not much for the fund to actually pass on to shareholders. So don’t hold your breath. The same goes for big brother Inflation- Protected Securities , which paid a fractional distribution last March but otherwise has skipped several recent quarterly payouts. The funds and ETFs that will pay out in June include the following and, unless otherwise noted, both fund and ETF shares will both pay distributions during the month: 500 Index, Balanced Index, Consumer Discretionary Index, Consumer Staples Index, Convertible Securities, Developed Markets Index, Dividend Appreciation Index, Dividend Growth, Emerging Markets Stock Index, Energy Index, Equity Income, European Stock Index, Extended Duration Treasury ETF, Extended Market Index, Financials Index, Global ex-U.S. Real Estate Index, Growth & Income, Growth Index, Health Care Index, High Dividend Yield Index, Industrials Index, Inflation-Protected Securities, Information Technology Index, International Dividend Appreciation Index, International High Dividend Yield Index, LargeCap Index, Materials Index, MegaCap Growth ETF, MegaCap ETF, MegaCap Value ETF, MidCap Growth Index, MidCap Index, MidCap Value Index, Pacific Stock Index, REIT Index, all seven Russell ETFs, S&P 500 Growth and Value ETFs, S&P MidCap 400 ETF, S&P SmallCap 600 Growth and Value ETFs, Short-Term Inflation-Protected Securities Index, SmallCap Growth Index, SmallCap Index, SmallCap Value Index, Social Index, STAR, STAR LifeStrategy funds, Target Retirement Income, Tax-Managed Balanced, Tax-Managed Capital Appreciation, Tax-Managed SmallCap, Telecommunication Services Index, Total International Stock Index, Total Stock Market Index, Total World Stock Index, Utilities Index, Value Index, Wellesley Income, Wellington, Windsor, Windsor II, World ex-U.S. Index, World ex-U.S. SmallCap Index.

14 • Fund Family Shareholder Association

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