1099 Update and LifeGuide’s Dynamic Rebalancing Process

Posted at 23rd February 2018

Sunny and highs pushing 70 degrees in Central PA, what a difference a few days make!   TD Ameritrade tax document update   All TD Ameritrade 1099s have been posted to TD’s AdvisorClient portal.  They were also mailed out via USPS last week.  You should receive a 1099-DIV for each individual or joint account.  You should also receive a 1099-R for any Traditional IRA from which you withdrew money in 2017 (including IRAs that were converted all or in part to a Roth).   TD Ameritrade doesn’t post 1099s until they are reasonably sure that they are final.   But as always, there could be revisions; 1099 revisions are unfortunately becoming the norm throughout the investment industry.   There is no way for us to know for sure if you will receive a revision.  We have been advised that if needed, revisions will be released in waves through April 10th.   We recommend that you provide your tax preparer the current 1099s along the with the rest of your tax documentation and remind them about the possibility of 1099 revisions.  Each tax preparer has their own preferences and process for handling 1099 revisions.   No K1s are generated by your TD Ameritrade accounts.  If you have any direct investments and have questions about K1s please contact us.   LifeGuide Investment Update Series:  Part 1 of 4   Previously we mentioned that we are planning to share a four-part series about LifeGuide’s investment techniques and recent portfolio enhancements.  Today, we will discuss the concept of rebalancing and LifeGuide’s dynamic rebalancing process.   Our rebalancing process supports LifeGuide’s investing Principle #2 (Creating and maintaining meaningful diversity) and Principle #3 (Be contrarian).  For a complete explanation of all of our investing principals, you may click here:  LifeGuide’s InSight Investing Principals.  Let’s get to it!   Rebalancing takes winnings off the table.   Rebalancing is a systematic way to manage the run-up of a particular segment (asset class) in a portfolio.   Over the past several years, stocks have been bid up.  Rebalancing has allowed us to take some profits off the table by selling them and reinvesting them into other asset classes that haven’t been bid up as much. We often get questions about selling out of stocks when they are up.  Through a defined rebalancing process, we are selling stocks (and other overweight asset classes) on a systematic basis without having to speculate where “the top of the market” is.   Rebalancing helps to keep risk in check.   Rebalancing keeps your risk in line with your plan by preventing the percentage of your portfolio in any one asset class from getting too large.  Maintaining proper portfolio allocations is important so that you are not overexposed to any one type of investment, such as stocks.  The value of maintaining proper weightings was felt recently during the decline or “correction” that we had earlier this month.   Rebalancing helps you benefit from market ups and downs.   Rebalancing is a way to take advantage of the market’s ups and downs. The bigger the swings, the more rebalancing can benefit your portfolio over the long term.  Systematic rebalancing buys what has dropped.  Buying more shares at a lower price point decreases your average share price which accelerates your recovery and growth during the next upswing.   Rebalancing is not a guarantee against losses or a sure-fire silver bullet for growth.   It is important to keep in mind that while rebalancing has many positive effects on a portfolio, it, just like any other individual investing technique, cannot guarantee results.   LifeGuide’s rebalancing process   Unlike traditional rebalancing methods that rebalance after a defined period of time (i.e. quarterly or annually), we rebalance dynamically. Instead of rebalancing on a predetermined time period, we set a “drift collar” around each holding.  A drift collar is a percentage range within which each holding should remain. If the holding moves outside of that range, then we sell (or buy) it back to its target percentage at that time, instead of waiting for an arbitrary date. For example, a 30% position that has a 10% collar will be traded back to its target of 30% if it drifts below 27% or above 33%.  Dynamic rebalancing can maximize the benefits of selling high and buying low by trading whenever opportunities present themselves. While rebalancing dynamically takes more monitoring and effort on our part, we feel that the benefits to your portfolio are worth it.   There is math behind establishing the sizes of the drift collars.   We do not want to set the percentages too tightly because we want to allow a holding to run a little. Nor do we want to set the collar too loosely and miss trading opportunities.   Think about stretching a rubber band.  A rubber band will stretch to a certain length before it needs to snap back. Ideally, we set the collars right before they need to snap back.  It is impossible to always predict when a position will snap back, so we establish our collars based on an analysis of history.  At LifeGuide, we do not do things just because they are easy or “that’s the way everyone else does it.”  Our dynamic approach to rebalancing, which we continue to research and fine tune, is certainly not as common as the traditional calendar based technique.  It was exciting for us to hear industry thought leader Michael Kitces, Director of Research for Pinnacle Advisory Group, validate this exact rebalancing methodology as best practice at last year’s Certified Financial PlanningTM conference.   We feel that we continue to be ahead of the curve on this and are taking it to the next level by leveraging TD Ameritrade’s enhanced trading platform.  We are now able to globally rebalance your allocation across your accounts with us, when appropriate.  This enables us to place holdings in specific accounts to minimize your taxes and keep your overall portfolio in balance.  We will have to save the details about “tax-sensitive asset location” for another time.  It is important that you have a coordinated rebalancing and asset location strategy among all of your accounts, even the ones you do not have with us (i.e. 401k, 403b).   You can rest assured knowing that we are continually monitoring your accounts and innovating our investment management processes.   Stay tuned, as next time we will discuss some of the specific portfolio enhancements that we have made to our Impact portfolios.