Rick Ferri doesn't try to time markets. Instead, he relies on taking a buy-and-hold approach.

But that doesn't mean the Troy, Mich.-based advisor sticks to a completely static portfolio. He's a big believer in taking advantage of the impact a disciplined and consistent rebalancing strategy can bring to a diversified portfolio over time.

By refraining from buying high and selling low, Ferri says his clients can better control risks and maximize their long-term investment prospects.

"We assign bands, or parameters, around our asset classes for rebalancing purposes," Ferri said. "People call it opportunistic rebalancing, which is really a bad name that infers we're making market predictions—which we definitely aren't."

Going back to 1950, Ferri sorted through monthly data pertaining to different asset classes. Then, he tried hundreds of unique scenarios comparing different levels to rebalance around. "There's no optimum way to do this, but the percentages we came up with work well in all of the five decades we compared," Ferri said.

Along with his staff at Portfolio Solutions LLC, he has developed a sliding scale for setting bandwidths around asset classes based on risk levels. If a client has less risk, the rebalancing bands are tightened. If a client has a 50% equity target for their overall portfolio, for example, and the stock portion grows to more than 54%, Portfolio Solutions will take a hard look at rebalancing, according to Ferri.

For someone with an 80% equities allocation, he says the portfolio would need to go up to close to 87% equities to consider rebalancing.

"But you've got to look at the reasons behind those changes," Ferri said. "We review what's going on—you can't just automatically rebalance portfolios based on some set number."

Look Behind The Curtain

Ferri has written five books on index funds and exchange-traded funds. His research has been published by IndexUniverse.com. And he has written articles on various topics for the site as well. Ferri's work has also been featured in the Journal of Indexes and other leading industry magazines in the past nine years.

"Our theme is low-cost investing," he said. "All of the books I've written are generally about how different asset classes and types of indexes can work together in a portfolio."

In his book, "All About Asset Allocation," he advises do-it-yourself investors to rebalance once a year. "It's not wise to look at your portfolio all of the time and try to figure out when to rebalance. The methodology we use for rebalancing is overseen by a professional staff and reviewed on a weekly basis. It's very difficult for individuals who don't do this full time to keep up with that sort of an involved process and stay on track," Ferri said.

His studies show that rebalancing annually can gain 80% of the benefits advanced by modern portfolio theory. Ferri believes that using his firm's research into setting allocation bands can help clients to pick up most of the rest. "Our methodology for rebalancing should cover our management fees, which average 0.25% per year," he added.

Ferri prides himself on doing his own number crunching and research. "I've got access to the same data everyone else uses," Ferri said. "But I want to run it myself. I can see how other people are coming to certain conclusions. But I want to make those calls for our clients ourselves."

After serving as a fighter pilot in the U.S. Marines Corp. in 1988 at age 30, Ferri left active duty and decided to use his business degree from college to work for a large brokerage house. He landed a job as a broker at Kidder, Peabody & Co., which eventually became part of UBS AG. He advanced to managing bond portfolios and investment management consulting. That work included interviewing money managers and analyzing strategies and styles used at the firm.

Ferri jumped to Smith Barney in 1994 doing much the same. "I also started to analyze commodities managers and began looking at different types of managers dealing in futures contracts," Ferri said. "I became a big user of commodities and all types of products."

As he learned more about active management, Ferri says it became clear to him that most of their claims were lacking in substantive benefits for investors. "After interviewing and reviewing active managers for awhile, it became clear they were dealing with smoke and mirrors," Ferri said. "It was pure marketing."

At the same time, he started becoming aware of the work of John Bogle, the founder of Vanguard. "I started converting our clients to indexing as much as possible," Ferri said. "But we had very limited access to outside funds."

Then the exchange-traded fund SPDRs (AMEX: SPY) came out in 1993. "When ETFs started hitting the market, it was like a godsend to me working at a brokerage," Ferri said. "It really gave me the freedom to use just that fund to start to convert my clients out of large-cap U.S. stock funds. That was a good start."

He approached a Smith Barney executive about starting a program that would provide access to index mutual funds in a way that would benefit both the brokerage and its clients. "But they wouldn't let that happen because Vanguard refused to compensate brokers. It had nothing to do with what's best for investors," Ferri said.

Under contract to Smith Barney, Ferri started planning ahead. In the summer of 1999, his deal with the brokerage house ended and Ferri left to start Portfolio Solutions LLC. The firm, which now manages more than $800 million in assets and has a staff of six, has links to Ferri's research and other topics at http://www.portfoliosolutions.com/.

"We try to get broad asset class exposure at the lowest costs possible," Ferri said. "That means we use a lot of Vanguard funds and ETFs."

He also uses selected Dimensional Funds Advisors products for his clients. "DFA has closed several funds over the last few years," Ferri said. "We've had to select different funds for new clients."

The Bedrock 

Around 60% of his portfolios are now using ETFs. His cornerstone for the firm's U.S. stock portfolios is the Vanguard Total Stock Market ETF (AMEX: VTI). Ferri will add the Vanguard REIT ETF (AMEX: VNQ) for real estate exposure. He also likes the Bridgeway Ultra-Small Company Market (BRSIX) index fund for micro-cap exposure.

Ferri also uses the iShares S&P SmallCap 600 Value Index (NYSEArca: IJS). "The Vanguard small cap value ETF has larger stocks and it has high exposure to real estate, which IJS doesn't," he said. "So we like the structure of IJS a little better than the Vanguard ETF at this point."

With foreign stocks, Ferri divides the world by region. He assigns fixed allocations to: Europe, the Pacific Rim, emerging markets and international small-cap value funds.

About 5% of Portfolio Solutions' total equity positions go into DFA Emerging Markets Core Equity Fund (DFCEX), which holds large- and small-caps from emerging markets and takes a value tilt. "There's not much benefit into slicing and dicing into other funds with such a small percentage of the overall portfolio going into emerging markets," Ferri said.

For international small-caps, he prefers the DFA International Small Cap Value (DISVX). That also averages roughly 5% of the firm's overall equity portfolios.

Another 10% goes into the Vanguard Pacific Stock ETF (AMEX: VPL); an equal amount is put into the Vanguard European Stock ETF (AMEX: VGK).

All told, Ferri will give a typical client about a 30% allocation to international stocks as a percentage of their total stock portfolios, which includes U.S. stocks.

"Nobody is going to know exactly what the best allocation to international stocks will prove to be in the future," Ferri said. "But looking back at past decades, a 30% allocation would position a portfolio the most efficiently. You may not make the most, but you won't do the worst, either."

He doesn't use commodities. "The price of commodities eventually is reflected in stocks, and commodities funds are expensive," Ferri said. "People don't need commodities funds to reach their financial objectives."