Q:        Hi Chip,

I like the idea of following your asset allocation, but I don’t see myself as someone who would adjust my allocation every month to make sure my portfolio is perfectly aligned with your allocation.  How important is this really?

Thanks,

A:        For many people, just taking the time to figure out where their assets are currently located is an insurmountable task.  I applaud you on taking the initiative to become actively engaged in trying to optimize your portfolio’s allocation.

I must admit I hadn’t really looked at the level of importance that monthly (vs. quarterly, biannually, annually) rebalancing played in my results.  Now that I have five-and-a-half years of documented portfolio performance, I can do some tests.  I looked at how well the Plumb Performance Portfolio^© would have performed if I had done less frequent adjustment to the allocations.

Over the last five-and-a-half years, with monthly allocation adjustments, the Plumb Performance Portfolio^© has had a compound annual return of 11.15% per year.  For comparison:

• With quarterly allocation adjustments, the return would have been 10.80% per year.
• With biannual allocation adjustments, the return would have been 10.33% per year.
• With annual allocation adjustments, the return would have been 9.70% per year.

For someone who had invested $1,000,000 in the Plumb Performance Portfolio^© on September 30, 2004:

• With monthly allocation adjustments, the portfolio would have grown to $1,788,910.
• With quarterly allocation adjustments, the portfolio would have grown to $1,758,188.
• With biannual allocation adjustments, the portfolio would have grown to $1,716,913.
• With annual allocation adjustments, the portfolio would have grown to $1,664,051.

Whether this difference is worth the extra time devoted to one’s portfolio is an individual decision, but this can at least give you some indication of what kind of difference it might make.

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