Opinions March 5, 2007
IMHO: "Never, Ever" Land
It's an undisputed fact that the vast majority of
retirement plan participants never rebalance their
accounts.
Reported by Nevin E. Adams
It’s one of the reasons that that initial investment decision, particularly in a default situation, is so crucial. And most of us would guess that those participants who do make changes probably make a mess of it.
However,
new research
from the Vanguard Center for Retirement Research tells a
different story. Their report indicates that
“traders” outperformed nontraders by 0.55% on an
annualized basis.
Not that we should draw
much comfort from that result. First, only 17% of the
one million or so participants in the Vanguard sampling
were “active” traders (averaging just a bit under
three trades each, but most did only one)—and, according to
the Vanguard researcher, on a risk-adjusted basis, these
same traders fared no better than nontrading
participants. In effect, the extra risk they took
on—during the relatively mild investing climate of 2003 and
2004—wiped out the benefit of their trading (though, at the
end of the day, I’m not sure participants are willing
to undertake the statistical analysis to appreciate that
impact
(1)
.
Realign Mien?
The more interesting
conclusions, IMHO, dealt not with trading, but with
rebalancing; the realignment of the investment portfolios
within a reasonably tight percentage of a target
allocation㬆 percentage points, in the Vanguard
evaluation. This group Vanguard termed “active”
rebalancers” because they took action to maintain an asset
allocation. Another group, which Vanguard termed
passive rebalancers, never traded on their own and invested
their entire balance in a balanced fund or a lifestyle fund
during the period. Their accounts were presumably
rebalanced, but without their involvement or
intervention.
Compared with nontraders,
on a risk-adjusted basis, these passive rebalancers
realized excess annual returns of 84 basis points. The
active rebalancers didn’t fare quite as well—but still
earned 26 basis points in excess risk-adjusted
returns. So, at least on a risk-adjusted basis,
rebalancers did better than nontraders—but only 6% of the
research sampling were passive rebalancers, and only 3%
were active rebalancers. In total, these rebalancers
were just half the so-called “active” trader total of
17%. The remaining 72%, of course, were
nontraders.
Not So Fast
The research results,
while intriguing, must be considered with care. A
lucky asset allocation, left unattended, could prove to be
quite profitable in the long run. Meanwhile, a more
balanced portfolio, rebalanced on a systematic basis, could
well experience losses in the short-term that an
undiversified portfolio during that same period might
avoid. Still, the research would seem to support the
notion that a well-diversified portfolio, regularly and
professionally managed, can be prudent and
profitable.
Moreover, these days, an
“active” rebalancing program can frequently be put in place
with the click of a button—a passive rebalancing program
with the mere selection of an appropriate target-date
offering.
The challenge is to help
move the remaining majority of participants—who never, ever
touch their accounts—to a rebalancing model that can make a
real difference in their retirement security.
(1) Editor’s Notewas
better to be active than passive, and better to be
a nontrader than a passive rebalancer.
Active rebalancers enjoyed an annualized return of
18.86% during the period of study, outpacing the 16.90%
of active traders, and the 16.77% of
nontraders. Passive rebalancers were at the bottom,
gaining just 15.25%. Now, that’s not on a
“risk-adjusted” basis – but it’s real
money.
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