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Summer 2016 Market Review

Host:
Welcome, and thank you for standing by. At this time, all participants will be on a listen only mode. This call is begin recorded. If you have any objections, you may disconnect at this point. I'd like to turn over the call to your host, Sally Brandon, vice-president of client services Rebalance. Sally, you may begin now.

Sally:
Thanks so much, John, and good afternoon, everyone. Thank you for joining us for today's Rebalance Summer conference call, focusing on the 2nd quarter of 2016. First, I want to say a special welcome to all Rebalance employees, clients, prospective clients, and friends who are joining us and listening in this afternoon. We'll begin in just a moment with comments from Rebalance Managing Director and Chief Investment Officer, Mitch Tuchman.

After comments from Mitch, we'll respond to client questions that we've received over the last 3 months. Clients are always welcome to submit questions via email to [email protected] for future conference calls. A digital playback of the call will be available on our website at rebalance-ira.com/conference. Please refer to our public filings with the Security and Exchange Commission on the legal link at the bottom of the Rebalance website for more information on the various risks and uncertainties. Mitch, we're ready to get started.

Mitch Tuchman:
Well thank you, Sally, and thanks, John, and thanks, everybody who's joining us today, especially clients and members of our Rebalance family who are sitting in. During this call, I plan to go through two parts. First, I'd just like to review the market and our portfolios from the 2nd quarter, and also go through what we sent out in our Rebalance Summer 2016 Market Review, called Investing, Speculating, and Brexit. If you don't have a copy of the market review, please send and email to [email protected], and we'll makes sure you get a PDF of the important update that we sent out for Q2.

Also, we are going to respond to some questions that Sally received from our members over the last few months. Again, if you have a question that you'd like us to address in the next conference call, please send it over to [email protected] We certainly love getting questions from people.

The market did what the market usually does in the 2nd quarter of 2016. It was choppy, as there was a lot going on in the global economy. People became nervous and those nerves created major market mood swings, at least through the midway point, and 2016 seems to be playing out a lot like 2015. The S&P hit a 2nd quarter low in the middle of May when the Fed started talking about raising interest rates, but wait, all of a sudden, it came to an abrupt halt because there was a bad jobs report in May.

Then everybody thought, well, maybe the US economy isn't as healthy as we thought ... and maybe the Fed won't raise rates, then in June, the likelihood of a rate hike pushed back even further, when the majority of Britain decided on Brexit, which sent the world market into shock. The Brexit vote created a burst of volatility at the end of the month. People sold their portfolios and crowded into safe haven assets like bonds. The 10 years treasury dropped to the lowest level it had been in 4 years, down to 1.5 percent, as everybody ran to get bonds. When Bond yields fall, bond prices rise.

Then gold increased from $100 an ounce to more than $1,350 an ounce. The fear of the future drove the British pound to a 3 year decade low against the dollar. Oil plunged, but the fever passed in a matter of days. The S&P and Britain's large cap stock index both came up into positive territory for the year. Oil came back up, and treasury yields stabilized. Again, the market volatility created by Brexit was a miniaturized version of the early free fall this year. It was a miniaturized version of China last summer in 2015. Our words of caution from last quarter and on every call that we have about the perils of short-term thinking are worth repeating over and over. These periods of market stress can sell out the stampede; people become afraid and overreact to high profile events.

In the case of Brexit, this anti-European Union vote was just the beginning of a process that will take years to play out, if it even happens at all. While the process runs its long course, frankly, Britain will retain all of the rights and privileges of EU membership and trade between Britain and the continental European countries will carry on as usual. From a corporate and economic perspective, in the short-term, nothing has really changed, but the market lost its mind. A lot of investors sold, not our investors of course, but a lot of nervous investors sold on the way down, and locked in portfolio losses. As they sat on their hands and cash, the market rebounded dramatically, and many, many will regret that they got swept up in the frightened herd.

This is why we consistently advise Rebalance members, to stay the course and stick with the investment plan that we have for you, even if there are rough patches. I want to congratulate our members. We have hundreds and hundreds of Rebalance members now, yet received only 3 emails about Brexit, and to me, that is a great accomplishment. In fact, by the end of June, Rebalance portfolios were all up. They were up in the 4 to 8% range. As of now, which is the end of July when we're holding this call, all of the Rebalance portfolios are up in the 8 to 9.5% range for the year.

If you look at the market update that we sent out, you can see what's going on in terms of the asset classes and Rebalance portfolios. The U.S. market, as of the end of June, was up 3.7%, but interestingly, the emerging markets, which hurt our portfolios so much last year, are now driving growth overall. As of the end of June, the emerging markets were up by .6%. What goes down usually comes back up, and the opposite is also true. Of course, foreign developed countries, mostly Europe, also Japan and Australia, were down about 2% through June. U.S. real estate, which was flat last year, is up 13.4% year to date. Bonds have been having a great year, the emerging market bonds are up 10.6%, and on and on. It is important to understand that your portfolios are made up of 10 core asset classes that are all built to do different things in different economic circumstances, and this year, the losers of last year are beginning to drive the performance for this year. That's about it for the market and market performance. Sally, you mentioned you had a few questions. How about we start with those.

Sally Brandon:
Sure. The first question comes from Darla, from Minneapolis. She joined Rebalance about a year ago and she is wondering why her portfolio isn't doing as well as the S&P 500. What can you tell her?

Mitch Tuchman:

Well, first of all, if you compare a Rebalance portfolio to the S&P 500. It's a bit absurd. Soon, we are going to be issuing some benchmarks for each of our portfolios so that you can appropriately benchmark it. Comparing our portfolios to the S&P 500 is like comparing the world's fastest car to the world's slowing airplane. The world's slowest airplane can always beat the fastest car, period, end of story. So comparing a diversified portfolio that's designed to be monitored and risk adjusted, to the S&P 500 literally is like apples to oranges. What you need to do is compare a diversified portfolio to what's in the diversified portfolio. Rebalance portfolios have 10 different assets classes, largely.

We have large U.S. stocks, but we also have large stocks in developing countries like Russia, Brazil, China. We have large stocks in Europe and Japan and Australia, (the developed markets). We have small company stocks and we have real estate stocks. Most of our portfolios, dependent upon which you own, have a variety of bond funds in them. This is not the S&P. The S&P is part of a Rebalance portfolio, but it is not the Rebalance portfolio, because it would not be safe or prudent, to simply own the S&P 500 would mean a lack of diversification. It does not correlate.

The second point, Darla, is that one year is not the time frame for Rebalance. If you were going to look at us on a daily, monthly, even one yearly basis, you are not going to enjoy the benefits of our membership. In our market update, we show that over a long period of time, maybe 5 years plus, there has never been a time when a balanced portfolio is not in positive territory. You really need to own these portfolios for many years to reap the great benefits of diversification and growing your money in, not only the fastest way possible, but the safest way possible. What else, Sally?

Sally Brandon:
Mike, from Boynton Beach, says that he keeps worrying about bonds in his portfolio. He didn't know that ... He doesn't really have a lot, about 30%, but shouldn't he be worried about rising interest rates?

Mitch Tuchman:
We are all worried about rising interest rates. Mike probably owns our Balanced Growth Portfolio which does have 3 bond funds in it; emerging markets, high yield bonds, and high-grade corporate bonds. Yes, we are all worried about rising interest rates, however, we do not know how fast and how high they will rise. We have no idea of the timing and the magnitude. But, because of that, our investment committee has made some very interesting and innovative moves to hedge against extra rising interest rates within our bond portfolios. Mike, you'll notice there are no treasuries, U.S. treasuries, in your portfolio. The emerging market bonds, while they do move up and down with the market, are largely stable and pay over 4%. High yield bonds, while they do have more volatility, are largely stable and yield in the 5% range, and on and on. We have actually added a dividend paying stock fund to our income portfolio.

Rebalance’s Income Portfolio, over the last several years, has dramatically outperformed an all bond portfolio of treasuries, which is typically what has been done in this industry. We are well aware of that. We do realize, you must have bonds in a well-diversified portfolio; as a result, we feel compelled to have them in our asset allocation. But the way we've done it is unique and highly sophisticated and innovative.

The other topic I'd like to go through is Investing, Speculation, and Brexit, and A Random Walk Down Wall Street. One of our investment committee members, Professor Burton Malkiel, wrote a book, called A Random Walk Down Wall Street. If you want to read one book that will give you a complete look at everything one should do in their financial life and why, with a lot of evidence and with a great writing style, you should read A Random Walk Down Wall Street.

One of the most interesting parts of A Random Walk Down Wall Street is the title itself, a random walk. What does that mean? It's a metaphor for the stock market. It means that, future steps or things that are going to occur in the market, in the next month, year, or 5 years, cannot be predicted. They're random. Random means random. Whatever is going to happen, is going to happen. Therefore, in the short-term, no one is able to accurately predict and continuously predict the movement of stock or bond prices because they are random. In the book, Professor Malkiel goes through many of the methods that are used by investors to make short-term predictions in a random market, and he lays out the fallacy of all of these methods. One of the things that is intriguing is that after 4 decades of absolute rock solid evidence and science that predictions don't work, predictions continue.

Investment newsletter authors, radio talk show hosts, are all predicting without shame. You have to look at their incentives for doing so. Their incentives are that they are able to make money one way or another by throwing out predictions. Professor Malkiel’s work is irrefutable. If you are trying to make predictions in a random world, these aren't even educated guesses. At best, these are fortune tellers dressed up in Brooks Brothers suits.

Brexit was a great example of a random walk; it was a random event. It came out of nowhere, the referendum vote was a complete surprise. In fact, the stock market predicted that the UK would not leave the union, so it was a random event, as were slowing growth rates in China last summer.

What distinguishes investing over speculation is your time horizon. While thinking long-term, investing for the long-run may sound a little cliché and overused, it really is the different between speculating and investing. In our market review, we have a great chart. It shows the 5 year rolling average of 50% stock 50% bond portfolio since 1950. Over 65 years, it shows that there has never been a 5 year period where a portfolio like this has been down.

Think about that, from 1950 to 2015, if you owned a portfolio, half stock and half bond, over any rolling 5-year period,you've never been down. The worst was up 1%, the best was up 21%, so you should want to get out of the world of randomness, which is very unnerving for an investor, and move into a world of prediction where you can accurately understand what will happen. The great lesson of A Random Walk Down Wall Street is to think long term. Once you read the book, you will stop listening to the predictions, you'll tune out what's going on in the stock market, and focus your mind and emotional energy on something more productive. Sally, I think you've got a couple more questions that might be relevant here.

Sally Brandon:
Yeah, I do, and actually, the next one is from Yaucer, from San Jose, and he actually read the book, ‘A Random Walk Down Wall Street’.

Mitch Tuchman:
Oh, great.

Sally Brandon:
He said it was actually one reason that he joined Rebalance. One thing that he said that the book mentions is that every investment approach that works eventually stops working because the market's efficient, and he wanted to know why would indexing be any different? At some point, if everyone's buying index funds, won't they stop working?

Mitch Tuchman:
That's a great question. People have brought that up. It sounds logical, but if you dig deeper into this idea, it actually does not make sense. The concept of A Random Walk Down Wall Street, and also efficient markets, is that there are always going to be those out there (who are highly paid) trying to beat the market. Because they're trying to beat the market, they are making the market very efficient for the rest of us. When you buy an index fund, you're buying basically everything there is to buy in the market. If you buy an index fund on the U.S. market, the fund holds every U.S. stock. As long as hedge funds and money managers are very highly paid and willing to try and beat those indexes, the prices will be efficient.

It's sort of akin to the idea of a casino. Can someone walk into the casino and beat the odds and make money? Sure. Can they do it consistently over the long-term? Yes, perhaps, if they have a system, but eventually that system will not work. What By using index funds and following the wisdom of A Random Walk, Rebalance is effectively taking house odds. The casinos are open, but they're in business to make money and they have the odds in their favor to always make money, as long as they stick to those odds and run operations efficiently.

The guests have a wild ride and generally lose money. Because of the dynamic, index investing will always yield a great result and it's not just another investment scheme. Go ahead, Sally. Anything else?

Sally Brandon:
I have one last question from Anthony from New Jersey. He says he's in his mid-60s and he's going to be retiring soon and needing to start taking some distributions. He just wanted to know how that process worked?

Mitch Tuchman:
Oh, that's a great question. It is kind of a mystery. We do this for many of our members and we do this routinely, but some people do not understand. Let me give you the basic concept behind and IRA or a 401(k). The government is basically saying to you, a worker, "Hey, you know what, Mr. Worker? We want to make sure that when you are of retirement age, you have enough to live on, so we are going to make this great deal with you. While you're working, you can take part of your taxable income, and you can put it into this account called a 401(k) or 403b or an IRA. You can put it in this special account and if you do, we won't tax you on it, so if you're making 80 grand a year, and you put $5,000 in the account, we'll tax you on 75 grand a year.”

The 5,000 kind of vanishes and you don't pay taxes on it. It gets better. When the 5,000 is in this account, it will grow, and if it is making you money, you won't pay anything on the growth, the dividends or the returns on that investment for your whole working career. But, when you turn 70, and you have taken all this money off your paychecks without taxes, when it has grown without taxes, the government wants to start getting paid. So at 70, the government forces you to begin taking money out of this account and paying taxes on it. How they do this is via these actuarial tables, which say when you are 70, you will probably live another 26 years.

Basically, the next year is 3.7% of the rest of your life, so the government wants you to take 3.7% out of the account and pay taxes on it, and distribute it to yourself. As you become older, 71, 72, 73, obviously the number of years left on your life will decline. If you're 90, maybe you have 15 years left on your life. Well, then the government wants 7%, 1/15 of what's left. As you age, if you're lucky enough to keep walking the planet Earth, you will be forced to take more and more as a percentage of your money out of this retirement account and pay taxes on it.

It's important to understand that, if you contact us, we can run some math for you and show you how that might work for you, but it also begins to inform thinking on other ways to reduce the taxes over time through devices like Roth IRA. One reason we are called Rebalance is there's a lot of very interesting deep thinking approaches that can be taken with IRA's to optimize your after tax income, but that's the basic theory behind these things that are called RMD's or required minimum distributions. That's it, Sally.

Sally Brandon:
Well, that's all we have in terms of questions, but do you have any other closing remarks, Mitch?

Mitch Tuchman:
Oh, sure. I have to tell everyone that our firm, Rebalance, is doing amazing. We just hit over 400 million dollars of assets under management in a very short period of time. Most financial services firms spend a lot of money on commissioned sales people who are very good at creating trust, but it's expensive and riddled with conflicts. Who wants to talk to a person about how to handle their life savings when you know that person's getting paid a commission? You cannot rely on the advice you're getting, as it is going to be conflicted. We're doing this massively innovative thing here at Rebalance where we've found a way to run our business at a much lower cost and not have commissions, nor any conflicts of interest with our clients. What's great about what we're doing is we're part of a whole revolution going on within financial services. The U.S. Department of Labor has jumped on board and is helping by outlawing commissioned selling in IRAs. There's just a lot of innovative ways to lower costs. One of the ways we lower costs is via member referrals. For instance, one of our clients, Rick, told me the other day that he loves talking about Rebalance, and when he first started doing so, people would feel awkward talking about money, and so he would back off, and then he approached it a bit differently. He just told his story, which is he had $450,000 with Edward Jones and he was paying 2.25%, all in, however, with the advisor fee, Rick ended up paying about 10 grand a year, every year, and we showed him that we could bring that down to $3,000 and not only that, give him a much better investment management allocation because we're not conflicted. Rebalance is not paid to push clients to any specific stock fund, we just do what’s best for the client, which is, by the way, what we do with our own money. We also provide great advise with more expertise, which means a higher quality retirement plan that provides you with more in your nest egg. Rick told me that when he tells people his story, he says, " I was paying 10 grand a year in fees. Now I’m only paying 3 grand. And I'm getting 3 times more value from these guys." When it's in hard dollars, he found, and we found, that his friends were more responsive and engaged. He signed up 5 clients with Rebalance, and is so excited to be sharing this secret that he found at Rebalance. I would urge everyone to think of somebody that you know that might be using a broker and is paying 3 times more money than you are and let them know about Rebalance. I think you'll end up doing them a favor, and we'd love to hear from anybody that you have to recommend. I also want to thank everybody for being on this call. Rebalance members, prospective members and our staff. It has been a really great few months. July is turning out to be a barn burner of a quarter. We'll be doing a call like this in early October, so we'd love to have any questions that you have. Congratulations on surviving Brexit. Congratulations on staying the course and we'll talk to you next quarter.

Sally Brandon:
Thanks, Mitch. Just a reminder to everybody that a playback of this call will be available on the Rebalance website at Rebalance-IRA.com/conferencecall, and we'll be also sending out an email to all of our clients as a reminder.

Spring 2016

Moderator:
Welcome and thank you for standing by. At this time, all participants will be on a listen only mode. This call is being recorded. If you have any objections, you may disconnect at this point. I would like to turn over the call to your host, Sally Brandon, Vice President of Client Services at Rebalance. Sally, you may now begin.

Sally Brandon:
Thanks so much. Good Afternoon everyone. Thank you for joining us for today's Rebalance Spring 2016 Conference Call, focusing on the first quarter of 2016. I first want to say a special welcome to all Rebalance employees, clients, perspective clients, and friends who are joining us and listening in this afternoon. We will begin in just a moment with comments from Rebalance Managing Director and Chief Investment Officer, Mitch Tuchman. After comments from Mitch, we'll respond to client questions that we've received over the last 3 months. Clients are always welcome to submit questions via email to [email protected] for future conference calls. Also, a digital playback of the call will be available on our website at rebalance-ira.com/conferencecall. Please refer to our public filing with the Security Exchange Commission (SEC) on the legal link at the bottom of the Rebalance website for more information on the various risks and uncertainties. Mitch, we are ready to get started.

Mitch Tuchman:
Thanks a lot Sally. Thanks everybody for joining us today, especially clients, Rebalance employees, and our extended family who are sitting in. During this call, I plan to review the market and performance of our portfolios, and also discuss this quarter’s topic, Predicting vs. Positioning. Per usual, we also have a few questions from clients, so throughout the call we will provide answers to those queries. Again, if you would like to ask a question that we can respond to during our conference calls, just send them to [email protected].

Let me go over the stock market first. This year started horribly for the markets. In the middle of February, we had the S&P Index down 10%. Anyone suggesting at that time that the first quarter would end in positive territory would have been laughed out of the room. Yet, that is exactly what happened. In barely a month, the S&P recouped its whole decline, and finished up the quarter at 1.3%, including dividends. That roughly matched the S&P for all of last year, 2015. There is really no way to make sense of these markets, and absolutely no way to predict them. They plunge and rebound, as we witnessed the first 3 months of 2016. Stock weren't even the most extreme example. Oil, crude oil, had a 22% drop, a 19% climb, a 16% slide, and a 35% rally. Treasury yields were in the same path.

These wild mood swings reflect a very uncertain macro environment. A sense that there are too many loose ends: economic growth, interest rates, oil prices, political tensions, an election. All of these factors have left asset markets somewhat untethered. It makes it hard to have much conviction about any kind of an enduring trend. At least that is if you are a short term trader. As a long term investor, a lot of us just shrug our shoulders, but those watching the news have a much harder time just shrugging their shoulders. Really, the free falling equities subsided when the Fed begin to back away from its plans to impose four interest rate hikes in 2016. Basically, the Fed was saying that the U.S. economy may not be sturdy enough to handle that pace of monetary tightening as they had thought last year. It is now predicted that there will be two rate increases this coming year, which is more in line with the market's belief that the economy remains vulnerable to a China-led global slowdown. Likely the initial quarter of a percent hike in December probably occurred because the Fed had boxed itself into a corner. They had to do something. Now, the market seems to be satisfied with where the Fed is going.

Fixed income asset classes thrived during the quarter. Treasury’s investment created corporate bonds. Demand increased for these types of assets because they are safe havens. When there is a volatile period, people run for safe havens. There was an influx of yield seeking investors from places where rates are now turning negative like abroad and in Europe. Even the high yield sector ended up doing very well this last quarter because people were looking for some sort of a yield.

The first six weeks of 2016 really exemplified the danger of what we always talk about, which is short-term thinking. Investors overreacting to these transient events influenced markets. There were big spikes in day to day stock market volatility, and everybody got swept up with the fear. When the dust cleared, it was plain to see that the conditions were just not as bad as the markets had thought. They quickly recovered, and now they are up, fairly dramatically, as we do this conference call in April. Anybody who has sold on the way down, or even worse at the bottom in mid-February, may now wish they had not panicked. This is why we can systematically advise our clients that we are investing for the long term, for financial goals, to develop an appropriate investment plan, and to resist the urge to abandon it when the road gets a little bumpy.

We run a software that accurately simulates what our portfolios did the first three months of the year (see here for more details: www.rebalance-ira.com/backtesting). The portfolios ranged from being up 4% for our all-income portfolio, to being up 3.4% for our growth portfolio. Many of our clients were in balanced growth and diversified growth portfolios. Those were up 3.4% to 3.6%. Our portfolios are in very good shape to the surprise of many people who were questioning our inclusion of international stocks/emerging markets. Emerging markets are in the tanks, why would we ever want our money in those? Well, last quarter emerging markets were up 8.8%, almost 4 times the amount of the U.S. market. Foreign developed markets were bit negative, about 1%, but what goes down, will generally always come back up. We remain convinced that the models that we have, and the allocations that we have, are right on target. With that I would like to conclude the markets and performance segment of the call, Sally, you had a few questions from some clients. Why don't we take the first one?

Sally Brandon:
All right, perfect. Thanks Mitch. Your comments lead into a question that we had from Steve from Indianapolis who asked: With all the bad news I hear and read, why do you actually think my portfolio will go up?

Mitch Tuchman:
That is a good one, Steve. A lot of times people wonder with all this bad news, why would my portfolio ever go up, and more importantly, what factors cause my portfolio to go up? I find that a lot of our clients have been subject to what we would call portfolio abuse. They have had mutual fund managers that put their money in stocks and bonds that fall and never recover. We call that some sort of an abuse. It leaves those clients to dread a market decline, as they have been burned by a lack of recovery in the past, due to portfolio mismanagement. Rebalance, I try to remind clients, is in the business of buying the entire market. We are betting on something called global capitalism. We are betting on the idea that markets always recover and go up. If you ride that wave over time, you will be very happy with the results achieved by your portfolio. Sometimes people say well, why do you think the stock market is going to go up? Why will it go up in the future? It seems that everything is so bleak.

I was recently reading the Berkshire Hathaway Report by Warren Buffett that was issued for 2015. I think one of the things that he says in this annual report is a very good answer to that question. Buffett says, "Too few Americans fully grasp the linkage between productivity and prosperity." In other words, as we as a nation or a world become more productive, we also become more prosperous. In that prosperity is where company earnings are driven. He gave a few examples in this part of the annual report. Buffett said that in 1900 there were 20 million working Americans, 11 million of which were farmers. 40% of all working Americans worked on a farm; the largest crop was corn. The U.S. had 90 million acres devoted to corn. We yielded 30 bushels per acre, $2.7 billion in bushels of corn a year with 40% of our workforce. Today, there is 158 million people working in America, 3 million in farming, which is only 2% of our workforce. We have about the same number of acres devoted to corn, but we yield 5 times more per acre. We yield, instead of $2.7 billion worth of bushels of corn, 14 billion bushels of corn. That is productivity.

If you look into the world, you see that information technology has extended productivity in all areas of our economy. As companies develop, take each other out, and do more and more things that generate profits, that prosperity generates earnings, which goes to us as investors.

The reason that, Steve, the market will go up, and your portfolio will go up over time is because that is how the economic system works. It has worked that way for over 200 years. If your portfolio does not go up, there will be something much more systemic at the root of the problem. If history repeats itself, as we expect it to, you can anticipate the same pattern of global economic growth in the future. Sally, how about another question?

Sally Brandon:
This question came to us actually from somebody here at Rebalance on the service team. She said: Clients have been asking a lot about China, our outlook on 2016 (given the upcoming elections), oil interest rates, and essentially our forecast. Someone had asked us actually if we would create a Hillary or a Trump portfolio pre or post-election? They hear that active money managers who tout the wisdom of positioning of portfolios for this electoral outcome is something to consider. Maybe you could address the idea of not worrying about short term forecasts.

Mitch Tuchman:
Yes, this is a great question. We do hear this from clients quite a bit; Tell us what your forecast is. The reason they are asking is because many money managers have forecasts. Now, let's just take a step back. Are money managers who have ever held accountable whether their forecasts are right or wrong over some period of time? The answer is no. There is no accountability for forecasts. Why would financial advisors offer an economic forecast? The only motive would be to project this idea that they know what is going to happen in the future.

That is really the fundamental siren song of Wall Street in the financial services industry. We call it a siren song because it sounds wonderful, and it is very seductive. It is very tempting to engage with people who have those forecasts. Alas, at Rebalance we do not have short-term forecasts. At best, we have long-term forecasts that say the global economy will continue to grow at past rates, plus or minus. We are not in the forecasting business. We believe that those who provide an economic forecast are not being honest with clients or themselves, because no one has been accurately able to predict markets in the future. If we were going to create a Hillary or Trump portfolio, or if we were going to give you an outlook on China, oil prices, or anything, which even the world's greatest experts are not able to do, we would be lying, number one. Number two, if we did that, you should look at us crosswise.

Rebalance is not about trying to predict the future. Rather, our Firm is focused on the investment process, not predicting the markets. That is why we are modeled after the smartest investors in the world, the institutional investors who engage in process not predictions. There is a very different distinction here. Predictions center around performing better than the market, which serves the needs of Wall Street. Wall Street is fueled by activity, trading, and moving money around; that is how Wall Street makes money. If you are predicting, and you change your prediction, you have to trade; you have to maneuver; you have to move. You have to continually change your portfolio’s position to beat the stock market, and perform better than the market, if that is what you are promising.

Positioning is very different. A process oriented firm like ours is organized around performing to meet the needs of the person or the institution. Rebalance, like large institutional investors, is built around a process. If you have lived around the world of prediction, it may be hard to really get your head around this. In order to better demonstrate, what I have done is pulled an investment policy statement and document by a large endowment that I was given access to. I wanted to read you a few excerpts from this investment policy statement. I think it is very different language, thinking, and approach, which is very process oriented. It is not about, well if Trump wins the election, then this means we got to get the portfolio set up for that. If oil prices are lower, we need to own more of this and less of that.

All of that conversation you will not hear in the sophisticated institutional investments that we model Rebalance client portfolios after. For example, what these investors do is they have an investment policy statement explaining the purpose of that institution. In this policy statement I was given access to, the purpose of the institution is to enhance its mission, not to beat the market, and not to outperform benchmarks. To better explain, imagine as a family you have a mission for your money saved. What could that mission be? It could be leave your children lots of money, or on the opposite end of the spectrum, it could be die broke, but have a great time doing it.

Think about this. In their policy statement, the institution has defined some sort of amount they need to pull out of the endowment every year. In order to do anything greater, they have to have a very large majority of people get together and agree upon that. What that does is it takes the emotions out of that kind of decision making. Other parts of this investment policy statement similarly reflect the fact that if the endowment wants to make changes in any kind of allocation of assets, which are very clearly laid out in this policy, it will require a large group of trustees to approve that change. Specific responsibilities of the Board of Managers relating to the management of this endowment include; projecting financial needs, communicating those needs to investment managers, determining risk tolerance and time horizon, establishing reasonable investment objectives, policies, and guidelines to direct the investment of the Endowment.

That is what we do with our clients at Rebalance. We come up with policies, and we reflect the needs of the clients. When you invest in this manner, your whole conversation is about how to engage in a process that positions the client to be successful in their mission, in the most probable way possible, and with the least amount of risk. When you read this kind of investment policy statements, you understand that the process is all important. There is no conversation about predictions. There is no conversation about oil prices or China's growth. It is about what is the philosophy of this endowment, what is the mission, and how does the endowment serve to fulfill the mission of the organization.

Anyway, I just wanted to leave that with you because when our Firm is asked about predictions, and we explain that we have none, sometimes it is disappointing to clients. I assure you, we manage now hundreds of millions of dollars; we have our own money invested; we have the smartest investors in the world investing with us, thinking through our portfolios with our Investment Committee; this works, predicting does not. With that, Sally, I think you had a few other questions, and I would like to answer those as well.

Sally Brandon:
We have a client, Matthew, who is 61. He lives outside of Boston, and he is planning to retire in about a year. He has money in a taxable account, but he'd rather draw it out of his IRA until his social security kicks in. He wanted to know what your thoughts on that would be?

Mitch Tuchman:
Yes. This is an interesting trend worth speaking to, and I think it's probably because our client base is people over 45. We do not attract millennials necessarily. Our clients are mostly people getting into their early 50s, early 60s, about to retire or thinking about how to make sure they can. The situations of our clients tend to be fairly complex, but yet have not been properly addressed by their financial advisors in the past. Matthew, you're 61, and the name on our door is Rebalance. Let me give you an example of where we finding some real added value in thinking this through via an IRA standpoint. Many of our Firm’s clients that are in their early 60s, planning to retire like you, but have a number years before they can access their social security. I do not know how much exactly you have saved, but we are finding a very interesting strategy is instead of drawing cash out of your IRA, you should rather convert a portion of your investments to a Roth IRA, in order to forever liberate it from taxes.

Right now, you are going to have nine more years of being in a very low tax bracket. It is very possible that if you are converting some of your IRA into a Roth over the next nine years, you could do that by paying little if any tax. We have clients that are in very low tax brackets right now looking to get into six figure incomes from their IRA distributions. If you are 61, it might make a lot of sense to talk to us about this sort of slow gradual Roth conversion to liberate your money by the time you turn 70, and you have to start paying taxes on your withdrawals.

Who else, Sally?

Sally Brandon:
Okay. The last question we have is from Martin, and he said that he's received the emails that we sent about U.S. Department of Labor’s “fiduciary” standard. Now he has been reading about it in the Wall Street Journal as well as seeing it in the news. He assumes that Rebalance is a fiduciary, but he wanted you to boil it down for him to better understand it.

Mitch Tuchman:
Sure. Martin, thank you for that question. The fiduciary standard is near and dear to our heart. Managing Director of Rebalance, Scott Puritz, has been front and center in that fight on our behalf, and your’s actually, in Washington, DC. Essentially, the Department of Labor won a great landmark victory this month by promulgating some new regulations that require anyone managing someone's retirement account to abide by a fiduciary standard. The fiduciary standard is very simple. In our business at Rebalance, if we do not put your best interest ahead of our own, then you can sue us for that, literally. If you prove that we put our interests ahead of yours, you can sue us for doing that. What does that mean? That means if I sold you a product that I got a commission from that was not in your best interest, if it was a more expensive fund than another one because I got a commission from it, then you could sue me for that.

Stockbrokers, who do not operate under the fiduciary standard, operate under something called a suitability standard. In other words, if they sold you that same fund, that they made more commission from that was not in your best interest, but it was suitable for you, (which is hard to prove what is or is not suitable) you can not sue them. The stockbroker can say well, it was suitable for you. You should have had that fund in your portfolio. For stockbroker to be sued the situation has to be rather extreme, for example, if they take a widow’s money and invest it in very teeny publicly traded tax stocks, that would not be suitable for a widow, who was in retirement. Aside from such an extreme examples, brokers can take retirement money, and do all kinds of crazy things with it as long as they make commissions, and still be immune to lawsuits under the suitability standard. Under the fiduciary standard, those games are gone.

Rebalance has helped lead a fight, in doing our part with the Department of Labor, to put these regulations into effect. Now, as these regulations get instituted, stockbrokers are already making announcements that they are getting out of the business of managing IRAs because they can not extract the fees and operate under that kind of conflict. It is really exciting to have been part of this. As a matter of fact, our Firm and Scott were mentioned while Secretary Perez was announcing these new regulations as a poster child firm for operating under the fiduciary standard, and being able to make a darn good business doing it. Hopefully, more and more Americans will make the switch like you have, and begin to operate with advisors who have their best interests at heart. Thanks, Martin for that question.

Sally Brandon:
Okay, great. That's all we have in terms of questions. Mitch, do you have any closing remarks?

Mitch Tuchman:
Yes. As I think about this fiduciary standard, and I think about our clients, one of the great things about Rebalance is that we charge a lot less than many other firms. Our advisory fee is a half of percent. One of the reasons we do that is we do not spend a lot of money on marketing, our work speaks for itself. If you ever see our name on a building somewhere in a high rise, you can shoot me. I don't think that is ever going to happen because our clients would know that their money paid for that luxury. However, we do a lot of work with the media to try to get our message out there, which allows us to grow our business and keep our fees down. We also rely on you, our clients, to refer friends and family. If you can think of anybody that you know who is using a financial advisor or stockbroker and is likely paying a lot more than you are for your investment advice, we would love to reach out to them in an informative and educational way. You will end up doing them a favor. Let us know.

If you have anybody that we could help, we would love to. We can call them. We can email them. We will do so in a classy and prudent manner that will make you proud.

That said, I would like to thank everybody for being on this call: our clients, prospective clients, and staff. It has been an interesting quarter to say the least. Again, like I said last call, our clients have survived another correction. They have saved a lot of money on fees, and have brought friends and family to Rebalance, and for that, we would like to say thank you. I look forward to our call next quarter, and please make sure to send some questions in to [email protected] Thank you.

Sally Brandon:
Okay. Thanks, Mitch. Just a reminder to everybody that a playback of this call will be available on our website at www.rebalance-ira.com/conferencecall. We will also be sending out an email to all of our clients as a reminder, and would like to again say thank you to everyone for joining us today.

Winter 2016

Moderator:

Welcome, and thank you for standing by. At this time, all participants will be on a listen-only mode. This call is being recorded. If you have any objections, you may disconnect at this point. I would like to turn over the call to your host, Sally Brandon, Vice President of client services at Rebalance. Sally, you may begin now.

Sally Brandon:

John, thank you. Good afternoon everyone and thank you for joining us for today's Rebalance Winter Conference Call focusing on the fourth quarter. I want to say a special welcome to all Rebalance employees, clients, prospective clients, and friends who are joining us and listening in this afternoon. We will begin in just a moment with comments from Rebalance Managing Director and Chief Investment Officer, Mitch Tuchman. After comments from Mitch, we will respond to client questions that we have received over the last three months. Clients are always welcome to submit questions via email to [email protected] for future conference calls. A digital playback of the call will be available on our website at rebalance-ira.com/conferencecall.

Please refer to our public filing to the U.S. Securities and Exchange Commission (otherwise known as the SEC) on the legal link at the bottom of the Rebalance website for more information on the various risks and uncertainties.

Mitch, we are ready to get started.

Mitch Tuchman:

Great, Sally. Thank you and first of all, I would just like to say welcome to everybody on the call, especially our clients and employees at Rebalance who are sitting in. During this call, I first plan to review the market and Rebalance asset class performance. Then I am going to talk about this quarter's topic, which is particularly germane to everyone who is watching the market the first part of 2016, and speak to why the portfolios that we build are very safe via the diversification that we use at Rebalance. Throughout the call, we are going to take a few questions from Sally that we have received from our clients over the last several months. Again, we like questions so if any of you have them for the next conference call, which will be in about three months from now, please send them to [email protected]

Anyway, let's get started. The markets were very jittery throughout the latter half of 2015 and the beginning of this year; they have gone from slightly nervous to absolutely jumpy. When portfolios rise for six years, everybody is wondering when the music is going to stop. Finally it did, in the beginning of this year. In January alone, in the middle of the month, global markets were down 9%. That makes us all spooked about the dark days of 2008, but this time it is a lot different.

It is really all about energy and falling oil prices, they have become today's catalyst. They are driving everything; fear in every asset class from technology stocks to banks to, of course, oil and gas stocks. While cheaper oil is very good for the American economy because Americans have more money in their pockets via gas savings and cheaper airline tickets, there are some players that suffer. Those employed in the oil patch, while a small number in the U.S. market, will see some unemployment, but what is also worrying everyone is a higher risk of default on bonds. A lot of bonds were issued, particularly high-yield bonds, to borrowers who are oil producers, so the banks and financial institutions that have issued those loans are getting worried. What happens in this type of panic is traders sell first and then try to figure it out later.

Then there is China. China, the second-largest economy in the world, is slowing. For the last twenty-five years, China has been building its infrastructure. The economy has been sucking up cement, oil, gas, steel, and commodities to build cities, bridges, and highways. Now, the Chinese are moving from an economy-building infrastructure to one that is going to be similar to the American economy in terms of services to consumers, which means considerably less demand for oil and, of course, that is spooking investors.

Add to the mix the fact that Iran has had its sanctions lifted and is beginning to ship oil. You have, perhaps, too much supply and not enough demand, and that is a big shift from ten years ago.

Additionally, the Fed finally decided, after almost a decade, to start raising the interest rate in America. That is akin to taking the drugs away from an addict. It is painful, and there are withdrawal pains, which many market watchers are saying was part of the decline this year.

Against this backdrop, our Rebalance Investment Committee convened a meeting in New York City January 15, 2016, where we spent the better part of a day reviewing the portfolios, the market, and the company in general. You might say, "Well, aren't you going to do something about all of this?" Really, the unequivocal answer is that the Investment Committee decided that the portfolios are in great shape. They are exactly as we have designed them. The portfolios are operating in exactly the way the Investment Committee intended them to during markets like this. There is really nothing that we have changed, nor anything that concerns us. Again, market upsets, market volatility, black swan events (an event that comes out of the blue), these are the kinds of things that the Investment Committee has anticipated in building the retirement portfolios. There is really no change, and in fact decades of research support the position that we have taken and our experience shows that we are prepared to ride these types of markets out.

The positive news about these market conditions is that our client portfolios are spewing forth dividends every month. As these dividends are coming in at this kind of pricing level we are able to buy back more stock for our clients at even lower prices. Those of you in retirement, or those of you saving for retirement, can rest at ease that these downdrafts are a great opportunity. We are not particularly concerned.

Moving on to asset classes, we work with two broad asset classes to build our client portfolios, which we will discuss later in the call. Generally speaking, in 2015 all of the asset classes were up or down, give or take about a percent, except for two. Whether it was the U.S. stock market, which held steady for most of 2015 despite a little bit of a disruption that self-corrected in September, U.S. stocks were up a little less than a percent. U.S. small cap stocks were down a little more than a percent. The emerging markets asset class was the big loser in all of our portfolios last year, at close to 15% down, while the high-yield convertible bonds (which were affected by oil) were down 5%. This includes the interest paid, which is roughly the same.

Now on to Rebalance client portfolios. First, let me state an SEC compliance disclaimer: these are not actual client portfolios but rather portfolios that were back-tested using sophisticated software that accurately estimates portfolio returns. The bulk of our client portfolios this year, in 2015, were down between 1.5 and 2.5%, which is not bad. The Investment Committee was very happy with that. At any rate, that is what happened this year in our view of the market and really, the fact is that we are very happy with how these portfolios are constructed because they have been designed for exactly these kinds of turbulent markets.

With that, Sally, I would like to hand it over to you. I know we had a couple of questions from clients over the last several months that are relevant to what I have been discussing. What do you have for us?

Sally Brandon:

Sure, the first question I have is from Rita, who asks, "Since the market seems to be getting worse, shouldn't we sell everything and get back in when it's all over?"

Mitch Tuchman:

Well, that is a great question and one that is on many peoples' minds when you have a market behaving as it currently is. Rita, your question, “Shouldn’t we sell everything and get back in when this is all over?" presupposes that someone, me or the Investment Committee or someone outside of Rebalance, knows when this will be over. The assumption of knowing when the market improves is fundamentally the big lie. That is what we call “market timing.” Wall Street and the financial services industry are very much about convincing investors that they have predictive powers about when the markets are going to go up and when they are going to go down. In fact, I turned on CNBC just this morning and there were market forecasters declaring where the S&P 500 would end up this year, when the rout would be over, et cetera. I really feel, based on decades of research and every scientific study that I have ever been exposed to, and I'm speaking both for myself and our Investment Committee, that the people who say they know where the markets are going to go might as well be wearing wizard hats from a fairy tale.

There is nobody that has accurately predicted the ups and downs of the markets for decades on end. If the Investment Committee or myself knew when this was going to be over or where it was going, absolutely, we would act on that information and knowledge, but the fact is no one knows. If you take that as a given, you have to do something very different in the way that you invest your retirement portfolio. You have to build and construct a portfolio that will ride out these stock market moves and grow as the markets grow, which is exactly what we have done. Rita, the answer is, we would love to sell everything and get back in. It may be painful to watch, so my advice would be, and this is not to be flip, simply do not watch the market, because your Rebalance portfolio is built to recover and there has never been a period of time over five years where the portfolios that we have constructed, and the indexes contained in them, have not recovered from market changes.

At any rate, Sally, would you like to share the next question?

Sally Brandon:

The next question I have is from Anna. She asks, "I've heard about stop-loss order you can put in a portfolio to protect it. Do you use those to keep my portfolio safe?"

Mitch Tuchman:

For those of you who do not know, what Anna is asking about is another financial services Wall Street sales pitch to convince clients that they can limit their losses. What stop loss orders are, are little devices one can put in a portfolio so that if the price of a fund hits a certain point the device automatically sells the fund. Our answer, again, to that question, predictably, is absolutely not. Again, if you look at the evidence, this is another form of market timing. It’s saying that when a stock hits a certain point or a fund hits a certain point, I am going to make sure it is sold. Then I will be in cash. Unfortunately, those who do that tend not to repurchase the fund or the stock once the stop-loss is executed and then they miss the move back up. If you look at all market data about big moves in the stock market, the moves are very swift and very large. Markets decline very quickly over a matter of days, they also go up very quickly over a matter of days. There are numerous studies that show if you miss the top several days of the market over several years you miss a very big part of the return.

No, the biggest advantage our investors have, Anna, is that we are long-term retirement investors. We are not in this to use the market to make short-term money. We are in this to participate in the growth of global capitalism. Because we are not rushed or hurried or forced to take our profits off the table, we have the benefit of being able to allow these dips to be at our advantage, particularly when we are adding money through dividend reinvestment. This is really another version of Rita's question and we would honestly be doing all of our clients a disservice with stop-loss orders.

Anyway, Sally, I know you have a couple more questions, but I think they may be relevant to the next section.

I would like to talk about what we mean by diversification. The word is bandied about quite a bit. It's pounded into investors' heads. You have to be diversified. I do not think people fully appreciate what diversification is, so let me talk about what it is not.

We had a client the other day that came in and had thirty big U.S. stocks, predominantly Dow Jones Industrial Average stocks. He felt that he was very diversified. Diversification is not owning thirty stocks. It is not owning thirty funds. Funds do different things. You could own a fund that focuses on an industry like the software industry, or you could own a fund that focuses on a sector like the technology sector or the energy sector. Owning a bunch of those funds is not diversification.

Diversification is akin to making a fine salad or putting together a great orchestra or jazz band. It is very consciously constructed with various attributes in mind so that the construction of the portfolio leads to an optimal and efficient diversification, which is what Rebalance is paid to do. It is what your Investment Committee knows how to do. It is our expertise. It is where we are highly, highly sophisticated. We know how to diversify a retirement portfolio. That is what we are in the business, largely, to do. Let me take a few minutes and talk about that.

What diversification really means is that you want to take money of a client, of a retirement investor, and spread it into various buckets. These buckets tend to do different things during different economic circumstances. Right now, while we are experiencing panic in the market, where is the money going? It tends to go into bond funds because during markets like this the bond funds profit, thus why we own them. Other types of funds do not do as well in this particular market, in particular funds that have any kind of energy exposure or financial exposure, like our high-yield bonds in emerging markets. Yet, in other markets, real estate might do well, so we own real estate. In markets where people are excited about the prospects of the world economy, they are buying smaller companies. The trick of our trade is really understanding this concept of asset allocation, how to allocate your assets into the right buckets.

In fact, there is a study done by Yale in which they analyzed the portfolio performance of professional investment managers over a long period of time. They tried to extract what the factors were that really drove portfolio performance. In other words, if one portfolio manager was up, why was he up? We should understand the factors that led to out-performance or under-performance. Number one, one thing that had very little to do with it was stock selection. The manager's ability to select stocks had very little impact on investment returns. Also, they tried to understand if there were investors who knew how to get in and get out of the market at the right time. We have talked about this during the call, timing the market. In fact, those who tried to time the market had very little impact on investment returns. The one decision that impacts over 90% of portfolios' performance is, again, this concept of asset allocation. It's how you move money around in a portfolio.

Sally, I think you had a couple questions related to that as well.

Sally Brandon:

I do, I have two more questions. The first question is from Fred. He sent in a question related to international stocks. He asks, "My exposure to international and emerging markets continue to be disastrous investments for me. How can we keep justifying continued reinvestment in this sector when everything I read is so negative on its recovery?"

Mitch Tuchman:

Well, that is a great question. First of all, we do notice that emerging markets have had a very bad year. I think all of our clients have gotten a document from us. They get this document every year, titled "Which Asset Class Does Best?" Every year, there is inevitably an asset class that does poorly. This year that asset class has been emerging markets. What you will notice from the data, is if you take the long view, which is an absolute necessity for Rebalance clients, the asset class that does poorly usually becomes the winning asset class within several years down the road.

The fact is right now, Fred, emerging markets and international stocks are incredibly inexpensive. For example, I am going to pull up some numbers here. There is a useful metric to assess evaluations, called a cyclically adjusted priced-earnings multiple or a CAPE. Forget all the mumbo jumbo, but basically this measurement shows that the U.S. market at the end of last year was at a twenty-six price-to-earnings multiple, well above the long-run average. Japan was at 20. Europe was at 15, and the emerging markets were at 10, which is well below their long-run averages. In fact, right now, your emerging market fund is paying 3.5% dividends with all the growth that is available to those securities.

A 3.5% dividend is well above anything that you can make with Treasury. While these evaluations have been compressed, we have been buying more of those securities and we have been collecting incredible dividends. Also, remember that the funds that represent each of these asset classes, such as emerging markets, are comprised of almost a thousand companies in over twenty countries. It is not like owning one stock that could go down and never come back. It's not even like owning one fund, such as an energy fund or a biotech fund, that could get hammered from some event and never come back for many years, like the QQQ or the NASDAQ. In this fund you own a thousand companies in the largest and fastest-growing emerging market economies in the world. We do not worry about it. I think the word "disastrous" is a bit of overkill. In fact, this is about smart portfolio management.

The last point I would like to add is that if there was not a loser in your portfolio, then we would not be diversified properly. I'm going to say that again. If, in your portfolio, there was not a loser asset class, then we would not have been diversified. It would have implied that we were actually too much exposed to things that look alike. The notion of diversification does imply what may be perceived to be a cost. You buy auto insurance and it costs you money every year, but if you pay your premiums and the year is over and you did not get into an accident, you would not bemoan the fact that you paid the premium. You would say, "That was the price for being safe." That is why we own international stocks and will always plan to own international stocks in our portfolios for that very reason.

Sally, what is the next question?

Sally Brandon:

Our last question is from Howard, who asks, "For someone like me who is drawing money out of my retirement account for required distributions, should I be worried when these corrections hit that we might have to sell my funds at a lower price?"

Mitch Tuchman:

That is a very pertinent question, and for our retirement investors who are living off of their income from their retirement investing this is something that, at times, can get under your skin. One of the things that we pay a lot of attention to with our clients at Rebalance is what percentage in retirement you need in order to take out of your portfolio, in most cases, the percentage of withdrawal from an account. For example, Howard, you are in your mid-seventies if I properly recall. You are required to withdraw 3.8-ish% out of your portfolio. The portfolios that we offer and build for our retired investors generally have enough dividends being paid to provide the required minimum distributions. While stock markets do go down, sometimes dramatically in a particular year, and we do have to trim a little bit, over time we really do not feel that the distribution rate is going to make a material difference in the growth of the portfolio, even when we need to distribute during down years. I can understand the concern. However, if you do the math, there is really nothing to be concerned about.

Sally Brandon:

Okay, great! Well that is all we have in terms in questions today, but Mitch, do you have any closing remarks?

Mitch Tuchman:

Yes, I do. I want to let everybody know about something that has been going on with Rebalance in Washington D.C. that I think is of great interest and should probably be something that every retirement investor should know about. My partner and Co-Managing Director Scott Puritz has been literally front and center stage in a huge fight going on in Washington between the Department of Labor and the financial services industry. It is important to understand this. This fight has been buried in the pages of the newspapers, but essentially the U.S. Department of Labor, which oversees 401(k) plans and retirement plans for investors in American, has been able to successfully win a very big, almost David-and-Goliath-caliber fight, the financial services industry being Goliath and David being the Department of Labor. There are rulings that are to be put in place late March or early April that are going to be historically pro-consumer.

What has been happening is many brokerages in America have been able to hide fees and operate under business practices that are abhorrent and should not be allowable for people with retirement accounts. Brokers have been able to sell clients mutual funds on a commission basis, with the client being none the wiser. We onboard new clients all the time, and there is a category of them we call, "brokerage refugees." They have been at a stock brokerage house. They did not know that they were paying 2% to 2.5% in fees. When they become a Rebalance client we bring those fees down 50 % to 65%, saving them perhaps the difference between a healthy, enjoyable retirement and one where they may need to supplement retirement with work. These fees and these practices have been a horrible thing for retirement investors. Finally, the Department of Labor will be able to get these regulations passed.

Beginning in March and April, upon the ruling, the entire industry of brokers and insurance agents who were selling retirement investments to everyday investors in their IRA accounts are going to have to disclose the fees in a much more transparent way. It is similar to when the bad business practices within the auto industry were brought to light and they had to begin disclosing their fees. It changed everything.

We have been, as a company, very much involved in this. I mentioned that Scott Puritz testified on behalf of the U.S. Senate on Capitol Hill. Secretary Perez of the U.S. Department of Labor asked one investment firm to testify. He chose ours and he chose Scott Puritz to testify in front of the Senate. Scott was grilled by Elizabeth Warren and Al Franken, two very prominent senators in America. Literally, Rebalance was held up as a poster child for how investing should be about the retirement investor, not the broker. If you would like more information about this issue and our involvement, let us know, we are happy to provide you with some materials. This DOL ruling is very important for anybody who is a retirement investor in America to understand because things are going to change, and they are going to change for the better.

At any rate, this is all I have for everyone today until the next conference call. I would like to thank everyone for being on our call, our clients, prospective clients, and the staff. It has been a really great year, 2015. I think it is very gratifying to watch our clients surviving these sorts of markets, saving a lot in fees and bringing friends to join us at Rebalance.

Sally, I will turn it over to you.

Sally Brandon:

All right, thanks. Just a reminder everybody that a playback of this call will be available on the Rebalance website at rebalance-ira.com/conferencecall. We will also be sending out an email to all of our clients as a reminder. I thank everyone for joining us.

Moderator:

That concludes today's conference. Thank you for your participation. You may now disconnect.

Fall 2015

MODERATOR: Welcome and thank you for standing by. At this time all participants will be on a listen-only mode. This call is being recorded; if you have any objections, you may disconnect at this point.

I’d like to turn over the call to your host, Sally Brandon, Vice President of Client Services at Rebalance. Sally, you may begin now.

SALLY: John, thanks so much. Good afternoon everyone and thank you for joining us for today’s Rebalance Fall Conference Call regarding the 3^rd quarter. I first want to say a special welcome to all Rebalance employees, clients, prospective clients, and friends who are joining us and listening in this afternoon. We will begin in just a moment with comments from Rebalance’s Managing Director and Chief Investment Officer, Mitch Tuchman. After comments from Mitch, we’ll respond to clients’ questions that we have received over the last three months. Clients are always welcome to submit questions via email to [email protected] for future conference calls. A digital playback of the call will be available on our website, www.rebalance-ira.com/conferencecall. Please refer to our public filings for the SEC on the Legal link at the bottom of the Rebalance website for more information on the various investment risks and uncertainties. Mitch, we’re ready to get started.

MITCH: Sally, thank you very much and thanks to everyone for joining us today, especially our clients and employees at Rebalance who are sitting in. During this call, I first plan to talk about the market and the Rebalance asset class performance, then we’ll take a few questions that we’ve received via email from clients, and then I’m going to discuss this quarter’s topic which we’re calling The Life of the Active Manager which was reflected in our quarterly update. Then we’ll take a couple questions that came in related to that. Throughout the call, we will be responding to questions, so if you have questions in the future you can always submit them to [email protected]. Let me first talk about the market and the performance.

As our clients, you have all received a colored mosaic chart. We like to talk about each asset class and how they all work together and grow in different ways and different amounts during the year. As a matter of fact, each asset class has its own characteristics. U.S. stocks operate differently than foreign stocks, which operate differently than bonds, which might operate differently than real estate, and this is the gist of our whole diversification approach. The idea is if you mix enough asset classes together that are all doing different things, and as we say in the business, uncorrelated, you get a better result, more diversification and a way to grow your money in a safer way. So that’s why we own a little bit of everything and if, as we all know, every season, every quarter, ever year, there are certain asset classes that do well and others that don’t do well. If we don’t have asset classes that are performing poorly in a quarter, we’re in fact not really well diversified. Right now, through the end of the 3^rd quarter in September, the income portion of our portfolio was down 1.6%, but by the end of October it had recovered and was down 1.1%.

Let me take you through the income asset classes. We have high yield dividend equities – this is unique to Rebalance – that we use a proxy for a bond fund because interest rates are artificially manipulated by the government and kept artificially lower than they normally would have been if the market had set those rates by its own market forces.

Equity stocks were down 6.7% through the end of the 3^rd quarter; however in October, they largely recovered.

U.S. corporate bonds, which are what we use instead of treasuries for Rebalance clients, were up 1% for the quarter and they are up even further now at the end of October.

We also use high yield corporate bonds and that’s generally been a very strong performer but it did slip within the 3^rd quarter and, for the year to date, high yield corporate bonds are down 3.7%.

With the slowing U.S. economy, some are worried that some of these borrows could be pushed into default. We love high yield corporate bonds; they pay a lot more interest than treasuries and also because these are not the greatest borrowers – I’m not talking little companies; think CitiBank and other very big companies that don’t have a pristine credit rating – they cannot lend money out very long so the maturities of our high yield bond fund is closer in. We believe that this greatly offsets interest rate risk by having a fund of bonds that have a short maturity in general, relative to something like government bonds.

Emerging market bonds were also held back over the quarter, but year to date, emerging market bonds are up 2%.

In the growth asset classes, where we expect to make more of our money, through the end of the 3^rd quarter, we were down 6%. However, by the end of October, the growth part of our portfolio were largely flat, so we recovered a lot in the month of October.

We have U.S. stocks in that group and a lot of the down side of U.S. stocks over the quarter was because of China – people were worrying about China – so it pulled back. Our U.S. stock market fund was down 5.5% by the end of the 3^rd quarter, however that was largely recovered in October.

Same with small cap stocks. Small cap refers to companies that have a market value of a median of a billion dollars versus the much larger companies which could have market values of hundreds of billions of dollars.

Emerging market stocks, again largely due to China, are down 14% for the year.

Developed countries – countries like Japan, the United Kingdom, and Europe – have been doing better than the U.S. They are down 3.4% as of the end of the quarter.

Real estate, which was up almost 33% last year, has taken a deep breath and is down 5.7% through the end of the 3^rd quarter.

At any rate, the growth asset classes are doing fine. They have largely recovered and if you roll them all together, you have phenomenal portfolios that we believe mix risk and return in a great way, depending on the client’s risk tolerance.

I also want to mention that these portfolios have been constructed by our Investment Committee – Dr. Charley Ellis, Professor Burton Malkiel, and Jay Vivian who collectively have over 150 years of managing money for very large retirement pools and endowments. This approach is extremely scientific and it’s one that we have our own money in as principals of Rebalance, one we are very proud of. During corrections like this, don’t sweat it too much given the nature of how these portfolios are constructed

That’s about it on the asset classes. Sally, you mentioned that you had some questions from our clients that came in via email.

SALLY: I do, and I have one relevant, great question. It’s from a client on Long Island who asks, “If China is having so many problems, wouldn’t it be wise not to have it in the portfolio?” Mitch, what are your thoughts on that?

MITCH: Every asset class has problems at some point, and this quarter the big rap is against China. People were calling us wondering why we have China in the portfolio. We all know China’s having problems. Well, you know that and we know that, but also everyone else in the world knows that. As a result, the stocks in China have been hammered and actually stocks in China are at historically cheap levels. We like to rebalance our portfolios, which most of you are aware of, and we are adding to the emerging market fund that holds Chinese stocks. The other issue is how much do we really own of China? If you look at your own portfolio, and it depends on which one you own, Rebalance portfolios that do hold emerging market stocks hold anywhere from a little over 5% to about 17% of an emerging market fund. Within that, China is maybe a quarter. For most of our clients, we only own 4% of China. So my question would be, “Do you really think it’s a bad idea to not have at least a few percentage points in the 2^nd largest world economy, particularly at historically low prices?” We’re happy with our Chinese exposure; we find its size particularly well suited and we’re not that worried about it.

SALLY: I have another question here from Fred from Santa Monica. He says that he noticed he had a dividend stock fund, but it’s on the income side of his portfolio and he wasn’t sure why that was, knowing that they’re not bonds.

MITCH: That’s a good question. At Rebalance, given the sophistication of our Investment Committee, we have studied how bond prices move when you have the government repressing interest rates, which is what they’re doing today. Interest rates are now, for a 10-year treasury, around 2%. Basically the government is saying, “Hey, give me your money and I’ll give you 2% back per year, for 10 years.” 2% back per year, for 10 years may just beat inflation and if you’re in a taxable account, you’re actually making a deal with the government where you might lose money. We don’t think that’s a great idea and in fact, that’s why we’ve put high dividend paying stocks in our portfolio that we now label “income” as opposed to “fixed income”. These are very, very successful companies, a subset of the S&P 500 that have been raising dividends consistently for 20 years. In fact, many of the bonds that we own from companies like AT&T pay less in interest than their stocks do in dividends. It’s a great way to diversify a bond, or fixed income portfolio, with some of these dividend paying stocks and we’ve found, over the last three years, having that element in the portfolio for income, has actually outperformed a traditional bond portfolio. We are really happy that it’s in there and I’m glad Fred asked that question. In addition, the last thing I want to mention is that in our income portfolio we also have emerging market bonds which are, in a way, a very safe bet as well because they’re all dollar denominated. When you hear all the horror stories about emerging markets and the strong dollar, we’re not as affected by that because those bonds are dollar denominated.

One of the things we talked about in our Market Review letter came from a very important question that one of our clients asked us, which I’ll paraphrase. This question was so relevant that we felt the need to highlight it and I’ll talk quite a bit about it

Over the summer, this client said to us, “If the Fed is going to raise interest rates in October, shouldn’t we sell all our bonds and buy them back at a later date?” Makes sense, right? Everybody knows the Fed is going to raise interest rates in October and when they do that, interest rates will go up so why would one want to own bonds? “Interest rates will go up and my bond values will go down.” This sounds like an astute, normal question but if you’re a market observer and an investment professional, the answer if because everybody already knows that, it’s already priced into the market. I’ve found that clients have a hard time understanding what this means – priced into the market. I’d like to take a little time to explain what priced into the market means. We as investors at Rebalance own index funds, meaning we’re not investing in funds run by individuals trying to beat the market. We’re just trying to mimic the market through the funds that we own. But most of the market is not investing the way that we do. Most of the market is investing in funds run by active managers. I was an active manager for a number of years so I have an intimate understanding of the life and what that means to be an active manager. Given my understanding of that – what I’d like to explain to you – really helps illustrate why prices are set by the market and information that we get as consumers are already in the prices of the stocks or bonds. The net net being that bonds did not actually jump at all in October because the Fed didn’t change the interest rates. Of course, everybody thought they would. Now, everybody thinks they’re going to change interest rates in December, but they may not. Whatever the collective expectation is out there of managers is, it’s already in the stocks or bonds. This is what I mean by that.

If I’m an active manager, the only way that I can beat the market – beat the stocks that I’m trying to work on – is if I find some information that nobody else has about a stock or a bond that will allow me to buy a lot of it and get an edge so that when that information comes out, I’m right and the stock goes up. In order to do that, as a manager, I have to go talk to management teams. For example if I’m analyzing retail stocks, I have to understand what their strategy is, I have to talk to suppliers, to consumers…I’ve got to see if the other investors are missing something and I have to find something that others don’t know about. If I find that out, and I know something they don’t, then I have to go buy that stock and hope that when they figure it out, that I’ll make more than the market. That I’ll beat the market because I will make an oversized return from knowing something that no one else know. So I, as a fund manager might have a boss who says, “You’ve been buying this stock and buying this stock and it keeps going down. What do you think you know that other people don’t know?” I could be getting pressure to sell the stock. If I made a bunch of bad bets, maybe I’m even going to lose my job. So I can only do this with a handful of companies because it’s a lot of work and a lot of research and it’s never-ending. I’m competing with thousands of other people in the market who are doing the same thing. This goes on day in and day out and if 500 people are doing what I’m doing, and they’ve figured out what they think the price is, what makes me think that the price should be even higher, or lower in the case of people shorting stocks, than it is right now. So if you think about all these people out there in every country in the world, highly paid, highly degreed, rocket science degrees, using computer algorithms, meeting management teams, hiring consultants to go check things out in the market. They’re figuring out what the prices ought to be – one guy’s buying and one guy’s selling. They’re competing and setting the prices in the market.

When they do that, the prices are actually fairly perfect, based on all of the information that’s out there. And as a result, when we hear on CNBC some information, it’s yesterday’s news. And it’s yesterday’s news that we get as the public. So when people say to us, “Well, bond prices are going to rise in October, why should I own bonds?” Because all of the information about their being raised, when they’re going to be raised, even how long it’s going to take for them to get to higher normal levels, how many years…all that is in the price and therefore there’s no money to be made by getting out because when it’s all priced in, when the event finally occurs, there’s not going to be a change. Because everyone already knew it and they figured it out. These guys and gals out there doing this are very smart, very aggressive, very highly paid and anything that we think we know, and that we’re hearing at this point, it’s already there. So that’s one reason why at Rebalance we own index funds. It’s because there’s no advantage to doing anything else. Sally, I’d like to turn it back to you for a few other questions relevant to this topic.

SALLY: I have one question from Jessica who is calling in from Houston. She wanted to know, after the market dropped in 3^rd quarter, she started to read a lot of bad things about ETFs and wanted to hear your take on this.

MITCH: It’s a great question. Talking about ETFs is a little like talking about real estate. When someone says, well I hear it’s a bad time to be in real estate, I kind of roll my eyes. Because real estate can be anything form a deserted farmhouse in Birmingham, Alabama to a high rise in the middle of Manhattan. It depends…first of all, when the markets dropped there were some ETFs and, again, there’s about 1,500 ETFs, but most of the ETFs out there have relatively few investors. They are really gambling vehicles for traders. Some of those do not accurately reflect the price of the underlying assets, but that’s because there just isn’t a lot of money invested in that fund and there are a lot of issues when markets move around for some of those ETFs. The ETFs that our clients own, that we personally own, none of that really happens. Secondly, it doesn’t really matter to us because we’re not trading them. We’re buying ETFs, holding them, and rebalancing them several times a year. So the big answer here is “nothing to worry about”; the second answer is that some of those articles were written by active managers so you need to consider the source. We’re about long-term success. We’re good and we’re going to continuing owning our ETFs and we’re very happy that we do. Another question, Sally

SALLY: Lastly, we have Scott from Tucson, Arizona who wanted to help a friend understand the fees that he was paying for his accounts and he tried to explain it to him. His friend didn’t really believe him, nor did he understand the big deal. Scott wants to know how he should explain this to his friend.

MITCH: That’s a tough one, and actually managing director at Rebalance, my partner Scott Puritz, has been on television quite a bit recently testifying on behalf of the Department of Labor about this very topic. It’s very difficult to figure out what fees are because the industry has set out to obfuscate them and hide them. The best thing you could tell your friend who has an advisor who is building and managing his portfolio, that there should be an advisory charge that he can find on his statement and second, that the hidden fees come from the fees themselves so it’s very important to open up the funds – go to Yahoo Finance or other websites – and look up the symbols and find the management fee. You can also have your friend call us, of course. We routinely do this for friends of our clients. Hopefully they’ll become a client, but if not, just the goodwill and the information is something we take great pleasure in providing to the general public. Third is trading commissions – sometimes on mutual funds those can be very expensive. Our Rebalance clients are paying very amounts in trading commissions, maybe $60 for the whole portfolio when we rebalance it, .15% to .2% in fund fees, and of course our .5%. We believe if you can’t get it down way below 1%, generally below .8% or .7% for everything, your nest egg can be damaged by the advice you’re getting. We would be happy to help the friend and uncover any of those fees and help them better understand them.

SALLY: That’s great. Well, that’s all we have in terms of questions. Mitch, do you have any closing remarks?

MITCH: I do. I wanted to tell everyone a story that was great to hear as a business owner. We had a client who referred a friend over to us and the friend required almost no convincing. This friend had been with a big broker who wouldn’t tell him what he was paying, but he knew it was a lot and he and our client were comparing war stories and the client told his friend we were like Uber for investing. And the friend said, “Well, what do you mean?” And our client told him this. And again, this was very, very gratifying and I thought it was just a great story. The client said to this friend, “You know, before Uber when I had to get around town and needed a taxi, I’d get a car – sometimes it was a nice vehicle, sometimes it was beat up, usually driven by some surly guy that I didn’t feel that comfortable with, but look, I had to get around. And I’d be driving around town, getting to where I needed to go, and this person is driving this car. I’m putting my life in his hands and the whole time my money is just clicking away on the meter, 25 cents at a time. And then I get out of the car and I pay the fare and I’m glad it all worked out, but it wasn’t a great experience. Then, I find this new service called Uber. I get in the car, the person driving is nice, professional…the car is clean, usually brand new. I’m given a bottle of water when I get in, driven to where I’m going. I feel like a millionaire! There’s no meter clicking my money away. I get out, I get an email on my iPhone with a receipt. And it’s a shockingly small amount of money – about half of what I’d pay a cab.” And because of that, he called us the Uber of investment management. And I think that’s actually true because at Rebalance, like at Uber, we retooled the whole way investment management is delivered, and we can deliver it for a lot less than anybody else.

I want to thank everybody for being on this call – our clients, prospective clients, and our staff. It’s really a landmark quarter. The correction came and went without a hitch. Our clients have survived brilliantly and what is so gratifying is that everyone involved in Rebalance is getting a great result, saving money in fees, and bringing friends on to join us. And with that, Sally, I’ll turn it over to you.

SALLY: This is just a reminder to all that a playback of this call will be available on our website at www.rebalance-ira.com/conferencecall. We’ll also be sending out an email to all our clients as a reminder. Thanks everybody for joining us today.

MODERATOR: And that concludes today’s conference call. Thank you for your participation and you may now disconnect.