How the Rocks and Sand Technique Works

How does the rocks and sand technique work?

David Marotta: What you’re trying to do is to buy rocks that have very, very low expense ratios but it cost more to break them up and sell some to rebalance your portfolio. And we buy mostly rocks with very low expense ratios, there is one cost to get into them but then expense ratios is low. Then we buy a little bit of sand for that same bucket or asset class. The sand has a higher expense ratio but there is no cost to buy and sell it. Then when we want to rebalance from US stocks to foreign stocks or from small cap value to large cap growth we take a little bit of the sand out of one bucket and we put it in the other bucket. Since sand has no expenses to buy and sell it there is no cost to do that. Because the rocks have very low expense ratios, the expense ratio of our overall portfolios is cut very low. Generally expense ratios from mutual funds and that being 1%, or 1.2% or 1.4% if it is a high fund expenses for exchange traded funds and that being .2% or .4%. So, you can lower your expenses almost by a full percent by buying rocks as opposed to sand. So, when you get a big mount you put a rock in and then you rebalance with your sand. When sand builds up in a bucket, you sell all the sand and you buy a rock in that bucket. When one bucket runs out of sands, you take a rock you break it up and you put some of the sand in the bucket and use sand to rebalance. And so by doing that rocks and sand technique you can end up keeping your expenses as low as possible.


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