Ricardo and his wife Angela have been married over 26 years. Their two daughters have strong artistic interests including piano and choir, which is no surprise. Their grandmother was an art critic, and their mother is an architect who also creates imaginative desserts for her catering business.

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Alison received a Bachelor of Arts from California State University in Chico with a major in economics. A California native, she spends her time off-duty snowboarding and wakeboarding and camping with her young children. Alison frequently is shuttling her son to wrestling meets and her daughter to softball games.

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Naturally, his initial investment portfolio contained a high percentage of technology stocks. Watching his retirement funds fluctuate unpredictably was unnerving enough to compel Todd to try to find a less risky, more predictable way to save for his retirement. He applied his engineering mind to the investing puzzle and came away convinced that well-balanced, highly diversified, low-cost index investing was the sensible route toward building lifetime wealth.

Todd became an advisor at Portfolio Solutions, a $1 billion investment advisor that shares the Rebalance IRA approach to long-term, low-cost index investing. There, Todd was mentored by Richard Ferri, an author and respected authority on passive investing. During his time at Portfolio Solutions, Todd worked with hundreds of clients, helping them move their investment funds from expensive, improperly allocated portfolios to well-constructed, low-cost strategies.

With his knowledge of, and passion for, index-based investing fully developed, Todd joined Rebalance IRA, where his mission is to help our clients understand why their retirement savings should be invested according to proven Rebalance IRA methods.

When Todd isn’t focusing on client portfolios, he builds custom furniture. Laura, his wife of 21 years, and his twin daughters, still allow him time to retreat to his furniture workshop on their family farm, as long as he keeps making beautiful pieces for their home.

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For instance, during the turbulent period from 2000 to 2010, an investment in a seemingly diversified broad stock index such as the S&P 500 generated a return of 1.4% per year. That same money invested into a truly diversified portfolio returned 8.3% per year!

Many investors, however, believe that “diversification” perhaps means owning more than 10 stocks, or maybe buying bonds on the side. Years of research has demonstrated that true diversification in a portfolio looks like the world: U.S. stocks, foreign stocks, real estate, bonds, and small company stocks.

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Today, Stephen and his firm, Primark Benefits, provide retirement plan support for more than 400 firms and thousands of employees. Rebalance IRA clients have full access to Stephen, his team, and their comprehensive knowledge and expertise in retirement planning.

Stephen is licensed to practice before the IRS as an Enrolled Retirement Plan Agent. He is a Certified Pension Consultant and Qualified Plan Financial Consultant. He also has achieved the designation of Accredited Pension Administrator. Stephen continues to play a role in enhancing America’s retirement system and helping small businesses solve the nation’s retirement crisis. He meets regularly with members of Congress and officials from the IRS and the Department of Labor to promote greater savings opportunities for all Americans.

Stephen and his wife Donna have been married for more than 20 years and are avid travelers who enjoy exploring sites of historical and cultural significance in Europe. A San Francisco native, Stephen developed an early interest in California wines. The hobby evolved, and today he farms grapes in Sonoma and Napa Counties.

Stephen’s lifelong commitment to helping everyday Americans retire with more, combined with his expertise and professionalism, make him a valued member of the Rebalance IRA team.

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In practice, as an asset class outgrows its slice of the pie, gains are trimmed and added to underperforming asset classes, bringing the portfolio back into line with the original targets. This can be emotionally difficult to do. Yet research and backtesting demonstrate that this simple discipline adds to performance year-over-year and, more importantly, manages risk. Rebalanced portfolios earn 0.4% more per year on average compared to portfolios that are not rebalanced, and do so with less risk.

When it comes to rebalancing, our software is designed around a proprietary algorithm that guides portfolios back to target allocations as specific conditions are met. When an asset class is out of balance, an alert is generated for our traders and the entire portfolio is soon rebalanced.

Rebalance IRAs are rebalanced on average twice a year. Client account withdrawals and contributions also can trigger rebalancing.

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ETFs allow you to invest in practically any market at very low cost. They trade on the stock exchange and can be purchased through any discount broker—just like a stock—at a cost averaging between $4 and $10 per trade (and commission-free at some brokers). ETF management fees for Rebalance IRA average less than 0.2% per year.

More than 1,200 ETFs have been created. As a group, these funds now hold $1 trillion in assets. Understandably, the wide variety of ETFs has led to investor confusion about which funds are most suitable for building an asset allocation.

Not all ETFs are created equal, it’s true. Fund selection is based upon several criteria:

1. Exposure to Core Asset Classes.

Since our methodology is based upon modern portfolio theory, we seek exposure to broad asset classes that have three common characteristics:

• they provide a valuable counterbalancing effect within an investment portfolio. For example, real estate offsets inflation, but bonds protect against a financial crisis,
• they rely fundamentally on market-generated returns, not on active management of portfolios. In most asset classes, active managers cannot outperform the market. Because meeting our investment objectives is critical, a core asset class cannot be based on “lucky picks” and
• they are selected from broad, deep, liquid markets, for safety and flexibility.

As a core building block of a portfolio, we focus on well-established marketplaces, not sector funds (such as technology) or indexes based upon a fashionable, “flavor-of-the-month” thinking, such as a quant method of reweighting stocks.

2. Asset Size

Rebalance IRA only uses the largest ETFs, averaging $6 billion in net assets with volumes of more than 1 million shares per day. This affords sufficient liquidity and provides narrow bid/ask spreads, reducing both cost and risk.

3. Fees

The typical weighted portfolio of ETFs we use features an average fee of less than 0.2%. Low fees are the key to achieving higher returns.

4. Sponsors

Rebalance IRA uses ETFs sold by proven, well-known providers, such as Vanguard, iShares, and State Street Bank and Trust. These three firms account for nearly 90% of all ETF assets and are the most highly regarded in the industry. Vanguard is a not-for-profit institution and has the lowest fees, so it tends to keep the other ETF providers “honest.” In addition, the skill sets and technology for managing and constructing ETFs are highest among these three firms.

5. Index Construction

ETFs are evaluated based upon index construction. We seek funds that precisely replicate a given index’s performance over long periods. There are as well various ways to index a market. For example, small cap U.S. stocks are generally indexed using the Russell 2000 Index. But the S&P SmallCap 600 Index is a superior alternative, due to its construction and how it avoids the drag from what is known as the annual “Russell 2000 trade.”

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Over the years, a significant amount of research has shown that between 80% and 90% of actively-managed mutual funds underperform the market—despite the fact that fund managers are being paid to do just the opposite. In 2010, Morningstar admitted that its rating system does not successfully identify mutual funds that will outperform the market in the future.

As a result, the passive “index” fund was developed. An index fund holds stocks in all of the companies within an overall market, as defined by that index. Some of the most popular indexes are the S&P 500 (which tracks large U.S. public companies), the Russell 2000 (small U.S. public companies), and the MSCI EAFE (tracking the largest companies in developed foreign countries). When one invests in an index fund, rather than trying to select a few securities that will “beat” the index, the investor receives nearly the exact return of the total market as represented by that index.

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Rebalance IRA portfolios are constructed by carefully weighting each factor. We ask several subjective questions in order to learn the level of risk an individual is willing to undertake and the consistency in his or her answers. In addition, clients are asked objective questions. The target, using as few questions as possible, is to learn whether the investor is likely to have enough money saved at retirement to meet his or her real spending needs. The greater the “excess” income, the more risk the client is able to take. Our approach also considers behavioral finance research, which shows that individuals have a propensity to overstate their true risk tolerance.

After the interview, Rebalance IRA calculates a specific “score,” which is then used to select a portfolio that has appropriate levels of bond and equity exposure for that investor.

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It starts with you. The first step is to identify your personal, acceptable level of risk tolerance. Then we build a diversified portfolio that offers the maximum return for your chosen risk level.

Diversification is more than simply putting your eggs into different baskets. It actively lowers risk. That’s because asset classes generally are “uncorrelated,” that is, as one declines in value, another rises. For instance, you likely have noticed that when stocks fall in price, bonds rise, and vice versa. The stabilizing effect of diversification is amplified by adding up to six asset classes to your portfolio. A thoughtful collection of asset classes thus offers a lower investment risk than any single asset. Interestingly, research shows that adding asset classes that some might perceive as “risky” in fact lowers the overall risk in a portfolio. For this reason, diversification rightly has been described as “the only free lunch in the investment game.”

MPT is the opposite of “stock picking.” Analysts who pick stocks attempt to find a small group of stocks or bonds that they believe will outperform entire markets represented by a corresponding index, such as the S&P 500. Instead of analyzing and purchasing single companies or sectors, however, MPT counsels you to buy the index itself.

The theory assumes that investors are rational and that markets are efficient. Over time, owning an index is likely to lead to a higher return compared to owning a subset of individual stocks chosen by an analyst. Research has shown this to be true: You can get a solid, wealth-building return while taking far less risk.

An important concept to understand is volatility, a measurement of how far below average an investment’s “bad years” are likely to be. Short-term volatility can be thought of as “risk.” How much might a single asset decline in value? How would you, as an investor, react to such a short-term decline?

Using modern portfolio theory, investments are statistically measured in terms of both their expected long-term rate of return and their short-term volatility. A portfolio is then created that combines assets in such a way that the return is the weighted average of the assets held within.

By combining assets whose returns are uncorrelated, MPT seeks to reduce the total variance of the portfolio. A reliable return with lower risk and lower cost, compounding over time, creates a winning retirement portfolio.

In a given year, different asset classes perform differently, making it difficult to predict which asset will perform best. It might be entertaining to try to predict the “best” asset class, but such forecasting is risky and unsustainable. Research demonstrates that people who jump from asset to asset—leaping from rock to rock, faster and faster across a rushing stream—usually finish with worse results than an investor who undertakes a careful, disciplined process. People simply can’t predict the future, and when they try they often end up knee-deep in trouble.

Finance research experts, major endowments, pension funds, and private investment professionals broadly agree that MPT is a safe, solid, repeatable method for managing a portfolio. Historically, however, MPT-based advice has been available only through high-end financial advisors who typically require minimum account sizes of $1 million and who charge annual fees of at least 1% of assets under management.

Rebalance IRA seeks to “democratize” modern portfolio theory by bringing this level of advice to everyone for a fraction of the cost.

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