Using Vanguard mutual funds that are available to all individual investors, I have tracked the performance of hypothetical portfolios following AAII’s moderate asset allocation model that could have easily been replicated by individual investors. The results show that rebalancing lowered the level of volatility. At the same time, the risk-reduction strategy enhanced returns, which is a reflection of the last two bear markets and the positive role rebalancing played.

In this article, I review the updated numbers. (No rebalancing was required at the end of 2012.) I also point out an important consideration for retirees holding one fund with comparatively lower long-term rates of return relative to the other funds in their portfolio. Finally, I discuss alternatives and options as well as explain how to rebalance within a specific asset class, such as stocks.

As you review the data and my observations, I want you to look at rebalancing from the context of behavioral finance. Rebalancing is a strategy designed to maintain your long-term portfolio allocations. Unlike strategies designed to maximize your performance, rebalancing strikes a balance between risk and return. Its success comes from both alerting you to buy low and sell high and giving you a strategy for coping with whatever the market throws at you.

A Primer on Rebalancing

As some of you may recall from my article last year, “Portfolio Rebalancing: Diversification, Risk Control and Withdrawals” (March 2012 AAII Journal), rebalancing is the process of shifting your portfolio dollars out of asset classes that are overweighted and into asset classes that are underweighted, according to your personal goals and tolerance for risk. It is a strategy that complements diversification by ensuring that your portfolio does not stray too far from your allocation targets.

Here is a simple example I like to use when discussing rebalancing. Let’s say a portfolio is evenly split between large-cap stocks and long-term Treasury bonds (a 50% allocation to each asset class). After one year, volatile market conditions send stock prices lower and bond prices higher. As a result, the portfolio’s allocation shifts from 50% stocks and 50% bonds to 44% stocks and 56% bonds. Rebalancing would move 6% of the portfolio’s dollars out of bonds (lowering the allocation from 56% to 50%) and into stocks (raising the allocation from 44% to 50%), returning the portfolio to its target allocations.

This process preserves the benefits of diversification, as long-term data from the Ibbotson SBBI Classic Yearbook (Morningstar, 2012) demonstrates. A portfolio that started with the simple allocation of 50% large-cap stocks and 50% long-term government bonds that was never rebalanced eventually evolved into nearly an all-stock portfolio. Over the period of 1926 to 2011, the allocation for such a portfolio evolved to 96.3% stocks and 3.7% bonds. Worse yet, the portfolio became nearly 40% more volatile than it would have been if it had been rebalanced on an annual basis.

Even though the study was conducted over a very long period (1926 to 2011), the lesson is clear: The benefits of diversification will be limited if an investor does not rebalance on a regular basis. Rather, risk will increase, even though a big reason for diversifying is to reduce risk. To put things bluntly, if you think diversification is important, you should also think rebalancing is important. Without periodic rebalancing, diversification fails.

Two Replicable Rebalancing Models

I’ve been maintaining two hypothetical portfolios to demonstrate the effect rebalancing has on total return and volatility. These portfolios had a starting value of $100,000 at the beginning of 1988 and followed the recommendations of AAII’s moderate asset allocation model. This model is one of three we track on our website at www.aaii.com/asset-allocation. As shown in Figure 1, the moderate asset allocation model uses a 70% allocation to domestic and international stocks and a 30% allocation to bonds

The non-withdrawal portfolio assumes no money is withdrawn and the 4% withdrawal portfolio assumes 4% of the year-end value is withdrawn on an annual basis. Four percent is a rule-of-thumb percentage suggested by many financial advisers as a withdrawal rate in retirement that can be sustained without incurring longevity risk—the risk of running out of money before you die.

Figure 1. Suggested Allocations for the Moderate Investor Profile

 

Both portfolios use Vanguard mutual funds. I specifically chose index mutual funds to limit the impact of active management, keep expenses to a minimum and to show as close to real-world results as possible. It is very possible for an investor to have mimicked the models and achieved similar results in a tax-deferred account. The specific target portfolio allocation was 20% in the Vanguard 500 Index fund (VFINX); 20% in the Vanguard Mid-Cap Index fund (VIMSX); 10% in the Vanguard Small-Cap Index fund (NAESX); 20% in the Vanguard Total International Stock Index fund (VGTSX), which invests in both developed and emerging market countries; and 30% in the Vanguard Total Bond Market Index fund (VBMFX).

Though exchange-traded funds (ETFs) could have been used, I chose mutual funds because of their longer history. Vanguard’s Admiral funds were not used because of their higher minimums. Changing to either would have reduced the expenses factored into the calculated results.

The study was started at the beginning of 1988 and has now been extended through the end of 2012. I chose 1988 because that was the first year enough index funds were available to conduct the study. A 20% allocation to Vanguard International Value fund (VTRIX), an actively managed fund, was used through the end of 1996, when Vanguard Total International Stock Index fund (VGTSX) was launched. A 30% allocation to the Vanguard Extended Market Index fund (VEXMX) was used from 1988 until 1998, when Vanguard Mid-Cap Index fund (VIMSX) became available. At the start of 1999, the VEXMX allocation was split between VIMSX (two-thirds) and Vanguard Small-Cap Index fund (NAESX) (one-third) to achieve the desired 20% mid-cap and 10% small-cap allocation.

25 Years of Return Data

An investor starting a portfolio 25 years ago with the aforementioned mutual funds and allocation would have realized a greater profit by rebalancing than if they didn’t rebalance. The non-withdrawal portfolio grew to $907,694 with rebalancing and $882,268 without rebalancing. This equates to annualized returns of 9.2% and 9.1%, respectively. The 4% withdrawal portfolio grew to $329,165 with rebalancing and $329,017 without rebalancing, a post-withdrawal annualized return of 4.9% for each. The performance advantage is admittedly small, which is not surprising given that the main purpose of rebalancing is to reduce risk. Table 1 shows a summary of the results, including a breakdown of returns and withdrawals for the periods of the tech bubble, the lost decade and the current market rebound.

The numbers show that rebalancing did its job, significantly reducing risk for both portfolios. Rebalancing reduced the volatility of the non-withdrawal portfolio by 10.3%. Rebalancing reduced the volatility of the 4% withdrawal portfolio by 10.8%. These differences reduced the size of the losses incurred during 2008 by 19.2% and 17.9%, respectively—differences that may have kept an investor from panicking and selling at or near the bottom of the last bear market.

On Wall Street, there is never a free lunch. An investor wanting to reduce the downside volatility of his portfolio must be willing to forgo upside return. The fact that the rebalancing has led to (slightly) higher returns demonstrates just how much the last two bear markets have impacted portfolio performance. During the lost decade years of 2000 through 2008, the non-withdrawal portfolio realized a 2.5% return with rebalancing and a 1.0% annualized return without rebalancing. In other words, it wasn’t that the trade-off of risk and return stopped existing, but rather that risk increased to a level where it significantly and adversely impacted return. When downside volatility characterizes market conditions, risk-reducing strategies should produce better performance than strategies designed to maximize returns.

Compare this to the current market rebound period of 2009 through 2012: The non-withdrawal portfolio realized an annualized return of 12.9% when rebalancing was used (rebalancing occurred in 2010) and a 14.2% annualized return when no rebalancing was used. As the riskier asset—stocks—rose, the risk-reducing properties of rebalancing hurt performance. The loss of upside was even more evident during the technology bubble of 1995 through 1999 when the portfolio appreciated at a 16.9% annualized rate with rebalancing and an 18.6% annualized rate when no rebalancing was employed. However, volatility was approximately 10% higher when rebalancing was not employed, so greater risk was taken in order to achieve the higher performance.

A similar trade-off for risk and return occurred for the 4% withdrawal portfolio. Table 2 and 3 show how the 4% withdrawal portfolio has evolved over the past 25 years, with year-by-year return figures. You will notice that rebalancing reduced the cumulative amount of withdrawals by $3,519, or approximately $140 per year. This is largely due to the strength of the 1990s tech bubble. With rebalancing employed, the 4% withdrawal portfolio provided $47,342 in withdrawals between 1995 and 1999. Without rebalancing, the 4% withdrawal portfolio provided $49,169 in withdrawals. Again, the portfolio gave up some upside in order to reduce risk. (Tables showing the year-by-year performance for the non-withdrawal portfolio and the years when rebalancing was triggered are shown below.)

Table 2. 4% Withdrawal Portfolio With No Rebalancing

Annual withdrawals equaling 4% of the year-end portfolio value were taken evenly from each fund.
		Vanguard	Vanguard	Vanguard	Vanguard	Vanguard	Vanguard
	Vanguard	Ext Mkt	Mid-Cap	Small-Cap	Int’l	Total Int’l	Total
	500 Index	Index	Index	Index	Value	Stock Idx	Bond Idx	Total
Year	(VFINX)	(VEXMX)	(VIMSX)	(NAESX)	(VTRIX)	(VGTSX)	(VBMFX)	Portfolio
Starting	$20,000	$30,000	—	—	$20,000	—	$30,000	$100,000
1988	23,244	35,924	—	—	23,756	—	32,205	115,129
1989	29,021	43,152	—	—	28,475	—	35,289	135,937
1990	26,743	35,923	—	—	23,791	—	36,865	123,322
1991	33,219	49,207	—	—	24,804	—	41,066	148,295
1992	34,091	53,673	—	—	21,287	—	42,409	151,460
1993	35,798	59,716	—	—	25,802	—	44,853	166,169
1994	34,539	57,031	—	—	25,409	—	42,042	159,021
1995	45,289	74,178	—	—	26,116	—	47,806	193,388
1996	53,274	84,992	—	—	26,653	—	47,515	212,435
1997	68,127	104,983	—	—	—	24,339	49,675	247,124
1998	84,472	111,075	—	—	—	25,280	51,254	272,081
1999	98,976	—	83,718	44,028	—	29,308	48,164	304,196
2000	87,796	—	95,996	40,486	—	22,678	50,939	297,896
2001	75,146	—	93,145	39,284	—	16,205	52,650	276,431
2002	56,780	—	77,650	29,650	—	11,883	54,604	230,568
2003	70,592	—	101,687	40,493	—	14,088	54,854	281,714
2004	75,678	—	119,671	45,848	—	14,300	54,831	310,328
2005	76,686	—	133,514	46,558	—	13,658	53,605	324,021
2006	85,682	—	148,724	50,849	—	14,013	53,191	352,459
2007	87,329	—	154,689	48,585	—	12,931	53,857	357,390
2008	53,199	—	88,328	29,232	—	5,630	53,573	229,963
2009	64,965	—	121,273	37,286	—	5,182	54,801	283,507
2010	72,045	—	149,303	44,725	—	3,238	55,906	325,217
2011	70,811	—	143,606	40,944	—	544	57,334	313,239
2012	78,385	—	162,669	44,633	—	643	56,396	342,726
Ending
Value	$74,958	—	$159,241	$41,206	—	$643	$52,969	$329,017
Ending
Allocation	22.80%	—	48.40%	12.50%	—	0.20%	16.10%
Total Return (withdrawal-adjusted price appreciation)								229.00%
Standard Deviation								13.60%
Annualized Return (post-withdrawals)								4.90%
Total Withdrawal Amount								$246,161
Largest Annual Loss (2008; loss calculated before withdrawals for the year were taken)								-35.70%
All numbers are rounded.

It is also worth noting what has happened to the Vanguard Total International Stock fund position in the 4% withdrawal portfolio when rebalancing was not employed. The balance in this fund fell to $637 in 2010 after withdrawals were made. During 2011 and 2012 no withdrawals were made from this fund because they would have completely drained the balance. Rather, I split the annual withdrawals among the four other funds. In contrast, when rebalancing was used, the post-withdrawal, 2012 year-end balance in the fund was $58,951. In other words, periodic rebalancing allowed the portfolio to remain diversified.

Table 3. 4% Withdrawal Portfolio Rebalanced at 5% Thresholds

Annual withdrawals equaling 4% of the year-end portfolio value were taken evenly from each fund. The portfolio was rebalanced only when the allocation to one or more funds was off target by five percentage points or more.
		Vanguard	Vanguard	Vanguard	Vanguard	Vanguard	Vanguard
	Vanguard	Ext Mkt	Mid-Cap	Small-Cap	Int’l	Total Int’l	Total
	500 Index	Index	Index	Index	Value	Stock Idx	Bond Idx	Total
Year	(VFINX)	(VEXMX)	(VIMSX)	(NAESX)	(VTRIX)	(VGTSX)	(VBMFX)	Portfolio
Starting	$20,000	$30,000	—	—	$20,000	—	$30,000	$100,000
1988	23,244	35,924	—	—	23,756	—	32,205	115,129
1989	29,021	43,152	—	—	28,475	—	35,289	135,937
1990	26,743	35,923	—	—	23,791	—	36,865	123,322
1991	33,219	49,207	—	—	24,804	—	41,066	148,295
1992	34,091	53,673	—	—	21,287	—	42,409	151,460
1993	31,956	49,941	—	—	37,948	—	47,843	167,689
1994	30,637	47,413	—	—	38,177	—	44,938	161,165
1995	39,895	61,281	—	—	40,093	—	51,203	192,472
1996	46,658	69,830	—	—	42,068	—	51,043	209,599
1997	53,600	76,474	—	—	—	39,931	66,063	236,068
1998	65,924	80,304	—	—	—	43,433	69,168	258,829
1999	60,166	—	57,595	30,290	—	64,563	73,976	286,590
2000	52,630	—	65,310	27,251	—	52,548	79,848	277,587
2001	44,350	—	62,775	25,806	—	40,185	84,172	257,287
2002	32,924	—	51,847	18,993	—	32,376	88,896	225,036
2003	55,521	—	57,959	31,461	—	60,637	67,383	272,960
2004	58,037	—	63,075	31,418	—	63,329	81,946	297,804
2005	58,309	—	69,148	31,173	—	70,436	81,473	310,539
2006	64,556	—	75,727	33,181	—	86,052	82,361	341,877
2007	69,178	—	69,593	33,200	—	75,829	105,274	353,074
2008	41,790	—	38,843	19,419	—	40,809	107,623	248,484
2009	60,347	—	66,896	32,470	—	65,231	75,807	300,751
2010	66,580	—	80,910	38,398	—	69,811	78,113	333,812
2011	65,354	—	62,740	31,149	—	54,760	103,406	317,409
2012	72,753	—	69,712	33,771	—	61,694	104,952	342,880
Ending
Value	$70,010	—	$66,969	$31,027	—	$58,951	$102,209	$329,165
Ending
Allocation	21.30%	—	20.30%	9.40%	—	17.90%	31.10%
Total Return (withdrawal-adjusted price appreciation)								229.20%
Standard Deviation								12.10%
Annualized Return (post-withdrawals)								4.90%
Total Withdrawal Amount								$242,642
Largest Annual Loss (2008; loss calculated before withdrawals for the year were taken)								-29.60%
All numbers are rounded.

The difference should be noted by retirees who make withdrawals from several funds. If withdrawals are evenly split across all funds (e.g., you withdraw 20% of your required minimum distribution from each of five funds), there is a risk you will end up draining the amount held in the worst-performing fund if you never rebalance. If you hold funds designed to produce returns that are different from traditional stocks and bonds, this is a possibility you should keep in mind. Furthermore, when interest rates finally do rise (and nobody knows when or by how much rates will rise), this scenario could be a potential risk for bond funds. If you rebalance regularly, however, the risk of not being able to maintain an allocation to a specific asset class can be alleviated as long as your starting allocation is of significant size. (The portfolios in this analysis used a starting allocation of 20% to international stocks.)

 

How Have You Reacted to Bear Markets?

 

It is easy to look at the numbers and make the assumption that the potential for future underperformance does not justify periodic rebalancing. To answer such a criticism, I would ask a simple question: What did you do during the past two bear markets? Did you leave your portfolio alone and ride out the volatility or did you sell stocks and stock funds to avoid incurring further losses?

If you pulled out of the stock market during the last bear market, you were not alone; many investors panicked and sold stocks and stock funds. Mutual fund flow data from the Investment Company Institute (ICI) shows that, in aggregate, individual investors have historically bought high and sold low. Inflows have historically increased during bull markets, while outflows intensified during bear markets. This behavior is why updated preliminary data from DALBAR published by the New York Times (“Joining the Bandwagon? Don’t Lose Your Balance,” March 9, 2013) says the average stock mutual fund investor has realized a 4.25% return on their investments over the last 20 years. In contrast, the S&P 500 index has risen 8.21%.

Compared to this common behavior, rebalancing delivers superior returns. It gives you a strategy for coping with volatile markets. Rather than worrying about what to do, you have a game plan that is simple to follow and positions you to benefit from the eventual market rebound. (Historically, stocks have always rebounded no matter how bleak the future seemed during the bear market.) Furthermore, rebalancing keeps you focused on the long term, instead of worrying about short-term market swings. You know that if the bull-bear pendulum swings too far one way or the other, you will simply follow Warren Buffett’s sage advice to buy fear and sell greed.

How to Rebalance

Vanguard’s Francis M. Kinniry Jr., Colleen M. Jaconetti and Yan Zilbering suggested rebalancing on an annual or semiannual basis when allocations are 5% or more off target (see “Best Practices for Portfolio Rebalancing” in the May 2011 AAII Journal). This strategy strikes a balance between risk reduction and cost control. It will result in fewer transactions over the long term. It also gives you enough flexibility to let your winning investments run upward, while still having boundaries set up so that your allocation does not stray too far from its target.

I personally follow this strategy, checking my portfolio in May and November. I specifically picked these months because the best six months for stocks is November through April and the worst six months is May through November. Rather than trying to time the market, I’m using historical trends as a trigger to check my allocations. If my allocations are not more than five percentage points off target, I don’t adjust my holdings.

It is more important to check your allocations on a regular basis than to adhere to my May and November dates. Checking your portfolio once a year in January is fine. Focus more on adhering to the process of rebalancing than which month you choose to do it in. I used year-end rebalancing for this article because of the simplicity of using full-year return data. So circle a date on your calendar to check your portfolio and then set up reminders to review your portfolio’s allocations every six or 12 months in the future.

When reviewing your allocations, focus on asset classes and major investment categories (e.g., large-cap stocks, small-cap stocks, bonds, etc.). Shift portfolio dollars out of the overweighted categories and into the underweighted investment categories. Again, look for broad categories that are at least five percentage points off target. If large-cap stocks should make up 20% of your portfolio, but currently make up 22%, don’t feel obligated to rebalance. Investing is messy and you can drive yourself crazy trying to maintain a perfect allocation all the time (not to mention the transaction costs you could incur).

Rebalancing Within Asset Classes

The rebalancing covered here is intended to cover your major investment categories. Within each asset class, it is also useful to periodically rebalance to reduce the risk that any single asset has on your portfolio.

We use average position size for rebalancing within the various AAII model and tracking portfolios. As the name implies, we calculate the market value of each position we hold and then average those values to determine the average position size. When a stock is sold, the average position size is used as a basis for purchasing the next security.

If you are taking required minimum distributions (RMDs) or other portfolio withdrawals or are looking to adjust your individual security holdings as part of the overall portfolio rebalancing process, you can use average position size. Sell shares of your largest positions in an amount that brings them down to your average position size. Then use that cash to either fund your withdrawals or rebalance your broad portfolio.

Alternatives to Rebalancing

There are a few alternatives to the strategy I’ve discussed here.

The first, and the easiest, is to use a fund that handles the allocation process for you. Target date funds are a good example. These funds not only periodically rebalance, but they also change to a more conservative allocation as the target date nears and is passed. Each fund family uses a different allocation methodology, so read the prospectus. (See my article “Target Date Funds: A Simple Premise, but Underlying Complexities” in the October 2012 AAII Journal for more on target date funds.) There are also various funds that follow a fixed allocation and periodically rebalance their holdings. Included in this group are the Permanent Portfolio Fund (PRPFX) and Vanguard’s Wellington (VWELX) and Wellesley Income (VWINX) funds. By using such funds, you give up control over security selection, allocation and rebalancing decisions as well as how taxes are realized.

A second option is to use a bucket strategy. This strategy categorizes the portfolios into different buckets, each assigned with a certain level of risk or goals. As Noelle Fox suggested in the April 2012 AAII Journal (“Comparing a Bucket Strategy and a Systematic Withdrawal Strategy”), you can designate one bucket to hold cash needed within the next five years, a second bucket to hold bonds (money needed in the next six to 15 years) and a third bucket to hold stocks (money not needed for at least 15 years). Each year, you shift one year’s worth of estimated withdrawals from the stock bucket to the bond bucket and from the bond bucket to the cash bucket. Though the bucket strategy is different than the methodology I discuss here, it is a form of rebalancing. The bucket strategy simply uses a different manner of allocating portfolio dollars.

The third option is to let the market decide your allocation. Rather than worrying about your stock and bond allocations, you simply let the market determine your allocation. As long as you have a significant allocation to stocks, this strategy should produce the highest long-term returns. In order to follow this strategy, you have to be willing to stick with stocks through bear markets. This is something many investors fail to do, so review your brokerage statements to see what you actually did during the last two bear markets.

You can, of course, attempt to time when to get in and out of stocks. If you can successfully do this, you don’t need diversification and rebalancing. Most people, including professionals, fail at doing this. If you think you are the exception and can time the market, review several years of brokerage statements (more than a decade’s worth if possible) to see if it has really been the case.

The Optimal Strategy

The most optimal strategy is the one that helps you stick to your long-term investing plan. For many people, an optimal strategy gives them an action plan for dealing with bear markets.

While many strategies assume investors stay rational regardless of market conditions, behavioral scientists have found that humans often do not act rationally. Thus, a strategy that helps channel your desire to do something when markets become volatile, while keeping you on track to achieve your long-term financial goals, can be very beneficial. Rebalancing is one such strategy.

Table 4. 4% Withdrawal Portfolio Annual Allocations Prior to Rebalancing

		Vanguard	Vanguard	Vanguard	Vanguard	Vanguard	Vanguard
	Vanguard	Ext Mkt	Mid-Cap	Small-Cap	Int’l	Total Int’l	Total
	500 Index	Index	Index	Index	Value	Stock Idx	Bond Idx	Total
	(VFINX)	(VEXMX)	(VIMSX)	(NAESX)	(VTRIX)	(VGTSX)	(VBMFX)	Allocation
Year	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(%)
Starting	20.0	30.0	—	—	20.0	—	30.0	100.0
1988	20.0	31.5	—	—	20.5	—	28.1	100.0
1989	21.2	32.0	—	—	20.8	—	26.0	100.0
1990	21.5	29.3	—	—	19.1	—	30.1	100.0
1991	22.3	33.5	—	—	16.4	—	27.8	100.0
1992	22.4	35.9	—	—	13.6	—	28.1	100.0
1993	18.8	30.0	—	—	22.5	—	28.7	100.0
1994	18.8	29.6	—	—	23.6	—	28.0	100.0
1995	20.5	32.1	—	—	20.7	—	26.7	100.0
1996	22.1	33.7	—	—	19.9	—	24.3	100.0
1997	22.6	32.7	—	—	—	16.6	28.1	100.0
1998	25.5	31.3	—	—	—	20.0	26.8	100.0
1999	21.0	—	20.1	10.2	—	22.6	26.1	100.0
2000	18.9	—	23.7	9.4	—	18.9	29.1	100.0
2001	17.1	—	24.6	9.6	—	15.4	33.2	100.0
2002	14.4	—	23.2	8.0	—	14.2	40.3	100.0
2003	20.4	—	21.3	11.2	—	22.3	24.9	100.0
2004	19.5	—	21.2	10.2	—	21.3	27.8	100.0
2005	18.7	—	22.4	9.6	—	22.8	26.5	100.0
2006	18.8	—	22.2	9.3	—	25.4	24.3	100.0
2007	19.6	—	19.7	9.0	—	21.5	30.2	100.0
2008	16.7	—	15.5	7.3	—	16.3	44.3	100.0
2009	20.1	—	22.3	10.4	—	21.8	25.4	100.0
2010	19.9	—	24.4	11.1	—	21.0	23.5	100.0
2011	20.6	—	19.8	9.4	—	17.1	33.1	100.0
2012	21.3	—	20.3	9.4	—	17.9	31.1	100.0
Highlighted cells point out allocations that are more five percentage points or more off target. The entire portfolio was rebalanced during those years.

Table 5. Non-Withdrawal Portfolio with No Rebalancing

		Vanguard	Vanguard	Vanguard	Vanguard	Vanguard	Vanguard
	Vanguard	Ext Mkt	Mid-Cap	Small-Cap	Int’l	Total Int’l	Total
	500 Index	Index	Index	Index	Value	Stock Idx	Bond Idx	Total
Year	(VFINX)	(VEXMX)	(VIMSX)	(NAESX)	(VTRIX)	(VGTSX)	(VBMFX)	Portfolio
Starting	$20,000	$30,000	—	—	$20,000	—	$30,000	$100,000
1988	23,244	35,924	—	—	23,756	—	32,205	115,129
1989	30,533	44,580	—	—	29,925	—	36,598	141,637
1990	29,520	38,319	—	—	26,256	—	39,763	133,858
1991	38,440	54,356	—	—	28,870	—	45,827	167,494
1992	41,293	61,132	—	—	26,353	—	49,099	177,876
1993	45,377	69,990	—	—	34,389	—	53,852	203,607
1994	45,912	68,755	—	—	36,196	—	52,420	203,282
1995	63,106	91,992	—	—	39,687	—	61,950	256,735
1996	77,545	108,226	—	—	43,743	—	64,168	293,681
1997	103,282	137,108	—	—	—	$43,404	70,225	354,019
1998	132,882	148,561	—	—	—	50,176	76,250	407,869
1999	160,881	—	$114,784	$60,366	—	65,188	75,671	476,889
2000	146,305	—	135,557	58,757	—	55,010	84,290	479,919
2001	128,719	—	134,881	60,579	—	43,924	91,395	459,497
2002	100,208	—	115,177	48,450	—	37,299	98,945	400,078
2003	128,767	—	154,501	70,556	—	52,345	102,873	509,042
2004	142,597	—	185,947	84,595	—	63,252	107,234	583,625
2005	149,398	—	211,851	90,824	—	73,101	109,808	634,982
2006	172,764	—	240,656	105,043	—	92,573	114,497	725,533
2007	182,076	—	255,146	106,257	—	106,942	122,420	772,842
2008	114,672	—	148,434	67,930	—	59,780	128,602	519,418
2009	145,048	—	208,131	92,465	—	81,735	136,228	663,608
2010	166,675	—	261,121	118,097	—	90,824	144,974	781,691
2011	169,958	—	255,611	114,790	—	77,600	155,934	773,894
2012	196,846	—	295,998	135,498	—	91,676	162,250	882,268
Ending Value	$196,846	—	$295,998	$135,498	—	$91,676	$162,250	$882,268
Ending Allocation	22.3%	—	33.5%	15.4%	—	10.4%	18.4%	100.0%
Total Return								782.3%
Standard Deviation								14.1%
Annualized Return								9.1%
Largest Annual Loss (2008)								-32.8%

Table 6. Non-Withdrawal Portfolio Rebalanced at 5% Thresholds

		Vanguard	Vanguard	Vanguard	Vanguard	Vanguard	Vanguard
	Vanguard	Ext Mkt	Mid-Cap	Small-Cap	Int’l	Total Int’l	Total
	500 Index	Index	Index	Index	Value	Stock Idx	Bond Idx	Total
Year	(VFINX)	(VEXMX)	(VIMSX)	(NAESX)	(VTRIX)	(VGTSX)	(VBMFX)	Portfolio
Starting	$20,000	$30,000	—	—	$20,000	—	$30,000	$100,000
1988	23,244	35,924	—	—	23,756	—	32,205	115,129
1989	30,533	44,580	—	—	29,925	—	36,598	141,637
1990	29,520	38,319	—	—	26,256	—	39,763	133,858
1991	38,440	54,356	—	—	28,870	—	45,827	167,494
1992	41,293	61,132	—	—	26,353	—	49,099	177,876
1993	39,094	61,095	—	—	46,424	—	58,528	205,141
1994	39,555	60,017	—	—	48,863	—	56,972	205,407
1995	54,368	80,302	—	—	53,577	—	67,329	255,575
1996	66,808	94,472	—	—	59,051	—	69,739	290,071
1997	77,269	110,245	—	—	—	$57,565	95,236	340,315
1998	99,414	119,453	—	—	—	66,546	103,407	388,822
1999	94,149	—	$90,125	$47,398	—	101,031	115,760	448,463
2000	85,619	—	106,436	46,135	—	85,256	128,945	452,391
2001	75,328	—	105,905	47,565	—	68,074	139,815	436,687
2002	58,643	—	90,435	38,042	—	57,807	151,364	396,289
2003	101,846	—	106,318	57,711	—	111,230	123,607	500,712
2004	110,898	—	120,524	60,034	—	121,009	156,583	569,048
2005	116,188	—	137,315	64,454	—	139,851	160,341	618,149
2006	134,359	—	155,985	74,545	—	177,104	167,187	709,181
2007	149,481	—	150,376	71,738	—	163,852	227,477	762,924
2008	94,143	—	87,483	45,862	—	91,592	238,964	558,044
2009	141,174	—	156,496	75,960	—	152,599	177,341	703,570
2010	162,223	—	196,339	97,016	—	169,568	188,726	813,873
2011	165,981	—	159,340	79,108	—	139,075	262,621	806,125
2012	192,240	—	184,516	93,380	—	164,303	273,257	907,694
Ending Value	$192,240	—	$184,516	$93,380	—	$164,303	$273,257	$907,694
Ending Allocation	21.2%	—	20.3%	10.3%	—	18.1%	30.1%	100.0%
Total Return								807.7%
Standard Deviation								12.7%
Annualized Return								9.2%
Largest Annual Loss (2008)								-26.9%

Table 7. Non-Withdrawal Portfolio Annual Allocations Prior to Rebalancing

		Vanguard	Vanguard	Vanguard	Vanguard	Vanguard	Vanguard
	Vanguard	Ext Mkt	Mid-Cap	Small-Cap	Int’l	Total Int’l	Total
	500 Index	Index	Index	Index	Value	Stock Idx	Bond Idx	Total
	(VFINX)	(VEXMX)	(VIMSX)	(NAESX)	(VTRIX)	(VGTSX)	(VBMFX)	Allocation
Year	(%)	(%)	(%)	(%)	(%)	(%)	(%)	(%)
Starting	20.0	30.0	—	—	20.0	—	30.0	100
1988	20.2	31.2	—	—	20.6	—	28.0	100
1989	21.6	31.5	—	—	21.1	—	25.8	100
1990	22.1	28.6	—	—	19.6	—	29.7	100
1991	23.0	32.5	—	—	17.2	—	27.4	100
1992	22.4	35.9	—	—	13.6	—	28.1	100
1993	19.1	29.8	—	—	22.6	—	28.5	100
1994	19.3	29.2	—	—	23.8	—	27.7	100
1995	21.3	31.4	—	—	21.0	—	26.3	100
1996	23.0	32.6	—	—	20.4	—	24.0	100
1997	22.7	32.4	—	—	—	16.9	28.0	100
1998	25.5	31.3	—	—	—	15.2	26.8	100
1999	21.0	—	20.1	10.6	—	22.5	25.8	100
2000	18.9	—	23.5	10.2	—	18.8	28.5	100
2001	17.2	—	24.3	10.9	—	15.6	32.0	100
2002	14.4	—	23.2	8.0	—	14.2	40.3	100
2003	20.4	—	21.3	11.2	—	22.3	24.9	100
2004	19.5	—	21.2	10.5	—	21.3	27.5	100
2005	18.8	—	22.2	10.4	—	22.6	25.9	100
2006	18.8	—	22.2	9.3	—	25.4	24.3	100
2007	19.6	—	19.7	9.4	—	21.5	29.8	100
2008	16.7	—	15.5	7.3	—	16.3	44.3	100
2009	20.1	—	22.2	10.8	—	21.7	25.2	100
2010	19.9	—	24.4	11.1	—	21.0	23.5	100
2011	20.6	—	19.8	9.8	—	17.3	32.6	100
2012	21.2	—	20.3	10.3	—	18.1	30.1	100
Highlighted cells point out allocations that are more five percentage points or more off target. The entire portfolio was rebalanced during those years.

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