Portfolio Rebalancing Made Simple Matthew K. Willms, President QUANT IX SOFTWARE, Inc. www.investmentaccountmanager.com

Portfolio Rebalancing Made Simple What Is Rebalancing? The process of reallocating assets within a portfolio. Getting your investments back in line with your target allocation of stocks, bonds and short-term reserves. Removing money from those investments that have performed well and reinvest into your portfolio underachievers.

Portfolio Rebalancing Made Simple Why is rebalancing important? Asset allocation important determinant of portfolio return. Portfolio allocation across multiple asset classes helps to reduce risk while improving portfolio returns.

Portfolio Rebalancing Made Simple Why is rebalancing important? Rebalancing can help control risk. Over time, investment returns can lead to significant shift in your portfolio, increasing risk. Periodic rebalancing allows you to maintain target allocations, while reducing portfolio drift. Add bonds, reduce int’l stocks

Portfolio Rebalancing Made Simple Why is rebalancing important? Terminal account values of fixed income components are higher. Over longer time periods bonds and cash generate lower returns. Excess gains from other assets rebalanced into these lower return assets. create a sort of fixed-income ‘lockbox’ for liquidity, emergency needs. ARB growth of $10,000: $468,929 BH growth of $10,000: $364,835

Portfolio Rebalancing Made Simple Why is rebalancing important? Proper allocation can preserve / grow wealth – periodic rebalancing is the key. Annually rebalanced portfolios had higher ending account value in 14 out of 20 twenty-year rolling periods than the buy-and-hold portfolio. source: Financial Planning 2/2009

Portfolio Rebalancing Made Simple 5 Steps to accomplish rebalancing Step 1: Determine your asset allocation targets What allocation of stock/bond/cash is right for you? Not sure? Review asset allocation of target-date mutual funds geared towards individuals in your age range; Web sites to complete questionnaires; Morningstar, Vanguard, Fidelity;

Portfolio Rebalancing Made Simple 5 Steps to accomplish rebalancing Step 2: Determine your current asset allocation Organize investment statements; Overlap of investments by type, sector, size in aggregate; Drill down composition of fund holdings.

Portfolio Rebalancing Made Simple 5 Steps to accomplish rebalancing Step 3: Review your individual holdings use research tools to review/analyze current holdings to spot early warnings signs examine performance short and long term results contributed or detracted most to portfolio performance; consider tax consequences tax-loss selling rebalance in tax-sheltered accounts

Portfolio Rebalancing Made Simple 5 Steps to accomplish rebalancing Step 4: Implement your rebalancing plan Identify where current allocations need trimming; Shift/rebalance money from those asset types that have performed well and reinvest into your portfolio underachievers; Continually review allocation changes to get back in line with your target allocation of stocks, bonds and short-term reserves.

Portfolio Rebalancing Made Simple 5 Steps to accomplish rebalancing Step 5: Make a habit to periodically rebalance your portfolios! Set a schedule; 1 or 2x per year Year end rebalance with eye towards harvesting losses to offset gains elsewhere

Portfolio Rebalancing Made Simple Summary... Portfolio Rebalancing... Helps reduce chances for disproportionate losses if over concentrated in one asset class; Proper allocation is a cornerstone of good portfolio management; Avoiding portfolio ‘drift’ is critical to your long-term investment success; Rebalancing: helps investors to buy low and sell high; Portfolio Rebalancing can grow/preserve wealth!

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