(PUB) Investing 2016

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14 • Fund Family Shareholder Association
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-
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
>
40 Years Of Annual
Rebalancing (log scale)
Annual Rebalancing
No Rebalancing
12/7512/7912/8312/8712/9112/9512/9912/0312/0712/1112/15
$10
$100
$1,000
$10,000
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.