John Bogle on Rebalancing and a Suggested Portfolio

John Bogle, the founder of Vanguard, has a blog on which he occasionally answers reader's questions. A reader recently asked about rebalancing his portfolio. Here's Bogle's answer (my emphasis in bold):

"We’ve just done a study for the NYTimes on rebalancing, so the subject is fresh in my mind. Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually. That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary."

"We also did an earlier study of all 25-year periods beginning in 1826 (!), using a 50/50 US stock/bond portfolio, and found that annual rebalancing won in 52% of the 179 periods. Also, it seems to me, noise. Interestingly, failing to rebalance never cost more than about 50 basis points, but when that failure added return, the gains were often in the 200-300 basis point range; i.e., doing nothing has lost small but it has won big."

"My personal conclusion. Rebalancing is a personal choice, not a choice that statistics can validate. There’s certainly nothing the matter with doing it (although I don’t do it myself), but also no reason to slavishly worry about small changes in the equity ratio. Maybe, for example, if your 50% equity position grew to, say, 55% or 60%."

What to take away from this
Bogle doesn't rebalance!
He believes statistics don't validate the need for rebalancing.
Balancing the stock/bond ratio seems more important than balancing within the stock or bond portions.
Not rebalancing can hurt you by as much as 1.5% in a particular year - but it can HELP you by as much as 2% or 3%.

Bogle suggested a portfolio, and I'll add that to the portfolio page. Note that he suggested Vanguard's new All World ex-US index. Right now I'm tracking the appropriate ETFs, but I may change that to the appropriate Vanguard funds.

So You Want the EAFE Index?

I had today's post all planned out. Then I hit Roger Nusbaum's post this morning, followed the link to an article on Seeking Alpha about a WisdomTree ETF, did a bit of research, and thought WOW.

The article mentioned the DWM ETF, which is a Wisdomtree-ized version of the EAFE index. Many people use the EFA ETF to invest in this index, which covers developed markets in Europe, the Far East, and "Australasia." DWM has a 4% dividend! Note: Wisdomtree's website lists the index yield as 3.59%; I don't have an obvious reason for the discrepancy.

That stat caught my eye, so I did some research. First, look at the lovely chart from Wisdomtree comparing the indexes:

SHOCKING. Someone created a new index to sell, and it beats the existing index, eh? But let's face facts, 50% better performance over the last 10 years and a current yield of 4% is nothing to sneeze at.

What are the differences?
Expense ratio: DWM = 0.48%, EFA = 0.35%
Total assets: DWM = $232m, EFA = $47b
Yield: DWM = 3.59%, EFA = 1.9%
P/E: DWM = 15, EFA = 18
Top 5 countries in order: DWM = U.K., France, Australia, Japan, Italy. EFA = U.K., Japan, France, Germany, Switzerland.

What's good:
The theoretical performance
If you think dividends are a good indicator of a healthy company, you may like Wisdomtree's indexes.


What's bad:
Wisdomtree's ETFs have no real history. Yes, they've got back data for the indexes, but as you've heard, past results do not indicate future performance.
The total assets in Wisdomtree's ETFs are pretty small. I doubt you'd have any trouble buying/selling the shares of the ETF, but it's still something to take note of.

It's certainly an interesting investment. If you're invested in EFA, dropping a few percent into DWM could boost your performance.

Business Week Mutual Fund Scoreboard

Business Week's mutual fund rankings are out. The handy thing? They're searchable!

Merriman's Vanguard Portfolios

I'm impatient. If I'm comparing portfolios, I want to know right off what the performance differences are, then delve into why. So on that note, here's a comparison of 3 different investments:

1. The S&P 500
2. Merriman's suggested Vanguard buy and hold Balanced Portfolio (60% equities, 40% bonds)
3. Merriman's suggested equities portfolio (100% stocks, no bonds)


Remember, the Vanguard balanced (60% equity, 40% bond) portfolio is:

6% Vanguard 500 Index (VFINX)
6% Vanguard Value Index (VIVAX)
6% Vanguard Small Cap Index (NAESX)
6% Vanguard Small Cap Value Index (VISVX)
6% Vanguard REIT Index (VGSIX)
12% Vanguard Developed Markets Index (VDMIX)
12% Vanguard International Value (VTRIX)
6% Vanguard Emerging Markets Index (VEIEX)
20% Vanguard Intermediate Term U.S. Treasuries (VFITX)
12% Vanguard Short Term Treasuries (VFISX)
8% Vanguard Inflation Protected Securities (VIPSX)

The all-equity portfolio simply leaves out the bonds.

What's good:
You lose a LOT less money in down years with Merriman's balanced portfolio.
In up years, you usually make more money. Not necessarily a lot more.
Vanguard's low costs
Vanguard mutual funds give you low expense ratios and a history to compare to.

What's bad:
There are 11 different pieces to the suggested balanced portfolio.
Vanguard has no micro-cap index fund. Note this fund has both small cap and small cap value, instead of Merriman's suggested small cap value and micro-cap.
Vanguard also doesn't have an international small cap fund.