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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.
Asset Allocation
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 return. More.

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.

Use Best-in-Class ETFs
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

ShareOwner's Rebalancing Process
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 target allocations.

Target Asset Weighting Maximum Weighting
3.75% 5.0% 6.25%
7.50% 10.0% 12.50%
11.25% 15.0% 18.75%
15.00% 20.0% 25.00%
18.75% 25.0% 31.25%

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.
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 return profile.
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. That 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).

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