(PUB) Investing 2016

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The Independent Adviser for Vanguard Investors • June 2016 • 13 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
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.
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
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.
REBALANCING
Taking Risk to Zero?
Why Rebalance?
Rebalanced Annually
No Rebalancing
3/13 9/13 3/14 9/14 3/15 9/15 3/16
$100
$105
$110
$115
$120
$125
$130
$135
$140
>
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.
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
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 And
good luck. n