ShareOwner has created 5 different Model
Portfolios using best-in-class exchange-traded funds (ETFs). The portfolios have been designed
to accommodate a variety of investment objectives ranging from the desire for maximum growth to
the need for relative safety.
Each Model Portfolio includes a mix of bonds, which are typically less volatile but which have
historically offered lower returns, and stocks, which are typically more volatile, but which
have historically offered higher returns.
Many investors focus on the micro-level details of investing such as picking
individual stocks or bonds. But a slew of academic research has confirmed that asset
allocation is the dominant determinant of an investor's returns. In fact, about 90%
of a portfolio's performance can be explained by the asset classes it owns6. In other words, the amount of your
portfolio dedicated to stocks or bonds is far more important to your portfolio's
performance than what stocks, bonds or funds you own. For those who choose to invest
passively in indexes, asset allocation determines 100% of their returns.7
The objective of portfolio management is to maximize a portfolio's expected return
for each given level of risk. A portfolio that achieves this objective is considered
"efficient". In other words it cannot possibly achieve a higher expected
return without taking on more risk or decrease risk without lowering its expected
ShareOwner's Model Portfolios have been constructed based on analyzing the risk
and return profiles of more than 20 domestic and international asset classes and the
corresponding correlation of returns between them. Each of our Model Portfolios are
designed to minimize risk for each level of desired return.
Why use ETFs?
ETFs provide the simplest way to earn the return available from any given asset
class. Management and trading fees are very low, which means more of that return
ends up in the pockets of investors. ETFs are also traded on major stock exchanges
throughout the day, which provides transparency and liquidity.
Additionally, ETFs are usually significantly more tax-efficient than conventional
actively-managed mutual funds, making them good candidates for taxable accounts. One
of the main reasons that index ETFs are more tax-efficient is because they tend to
keep trading to a minimum, which means fewer taxable gains are realized.
We use only non-proprietary ETF's in our Model Portfolios therefore we have been
able to select the best ETF for each asset class without bias or conflict of
interest. As a result, each portfolio contains ETFs from multiple providers. We have
carefully chosen each ETF to balance various considerations including; cost, market
liquidity, assets under management, number of holdings, exchange rate hedging, tax
efficiency and representation to the targeted asset class. ShareOwner monitors the
ever-changing ETF universe to ensure it has the best funds for each asset class.
Rebalancing Your Portfolio
Each model portfolio has been carefully constructed to offer a unique risk-return
profile. However, since each asset will have a different rate of return, a portfolio
will drift from its target asset allocation over time, acquiring risk and return
characteristics that may be inconsistent with its objectives. That's why rebalancing
is so important. More
In theory, an investor would rebalance a portfolio constantly. However, in
practice, this is not pragmatic because it would involve significant transaction
costs and confer only a modest benefit. Any rebalancing strategy must attempt to
balance the competing desires of keeping both transaction costs and risks low.
Many investors rely on a calendar approach whereby a portfolio is rebalanced on a
fixed schedule; say every 3, 6 or 12 months. Although this approach is simple, it
has some important disadvantages. Rebalancing a portfolio imposes transaction costs
and taxation (through realized capital gains) on an investor. If a portfolio is
systematically rebalanced even if investments have not significantly deviated from
their target weightings, costs may outweigh the benefits. If the investor decides to
reduce costs by rebalancing less frequently, then important rebalancing
opportunities could be missed in the interim. Waiting until June to rebalance won't
be effective when markets are volatile in March.
A better way to rebalance is on a contingent basis. Under this approach, portfolios
are only rebalanced when asset weightings fall outside of pre-determined thresholds,
ensuring that the cost of the transactions are outweighed by their benefit. For
example, if the target weighting for a specific asset class is 20% of the
portfolio's value, the threshold for rebalancing could be set to occur if the weight
falls below 15% or moves above 25%. More
Every month ShareOwner's automated rebalancing process will calculate and execute
any transactions necessary to keep your portfolio aligned with your target asset
allocation. This monthly process ensures that your portfolio is updated in a timely
manner and our all-inclusive fee structure ensures that you are able to benefit from
more frequent rebalancing without incurring additional transaction costs.
ShareOwner's rebalancing process includes reinvesting any dividends that have been
received in the portfolio and investing any new deposits that you may have
contributed. This ensures that any excess cash in your account is put to work
quickly rather than sitting idle over several months. When reinvesting excess cash,
ShareOwner will only buy assets in the Model Portfolio that are currently below
their target weight. Using cash in this way brings the portfolio closer to balance
and it decreases the likelihood of the need to sell assets in the account, which
helps to minimize the realization of capital gains (which is important for taxable
accounts). However, if your portfolio has assets that are outside of their "rebalancing
threshold" following the allocation of cash, then further rebalancing
transactions will be triggered such that all asset classes are returned to their
Although there is no one "right" threshold value to use, research suggests
that optimal rebalancing thresholds are quite wide from the target.10
In ShareOwner's Model Portfolio's the thresholds are set at 25% of an asset's target
weight. If the target weighting for a specific asset class or ETF is supposed to
represent 10% of the portfolio's value, it will be a candidate for rebalancing if
its weight falls below 7.5% or moves above 12.5%. Such a threshold is wide enough to
ensure that rebalancing isn't happening all the time, but narrow enough to prevent
portfolios from deviating from their targets so significantly that they fail to
adequately represent their intended risk and return profile.
|Target Asset Weighting
In practice, it is impossible to know for sure whether a portfolio is efficient or not. However, the best way to
get close is to invest in a variety of different asset classes that align with a portfolio's return objectives.
For example, a portfolio constructed for aggressive growth can benefit from diversifying among high return, but
risky, assets like stocks. A portfolio constructed for relative safety benefits from diversifying among various
bond asset classes. Balanced portfolios typical own a mix of stocks and bonds. In general, the more asset
classes there are to choose from, the better the portfolio outcomes can be. For example, various studies have
shown that including international assets in addition to domestic assets can help improve a portfolio's risk and
Multiple studies confirm that rebalancing is an effective strategy for controlling risk and can even be a way to
generate higher returns by taking advantage of the tendency for "mean reversion" in asset prices - particularly
in volatile markets.8
Academic studies suggest that these thresholds should be far enough from the target that the value of
rebalancing transactions outweighs their cost. Research shows that contingent rebalancing can reduce a
portfolio's transaction costs and turnover by up to 50%9
leaves more money with investors while also maintaining risk within prescribed parameters. How often rebalancing
happens is a function of a variety of variables including the size of the thresholds, market volatility, and the
available cash in an account (whether from deposits or dividends).