40/15 rebalancing bands?
Posted: Tue May 28, 2013 5:02 pm
Hi, I'm a new member and this is my first post. I have lurked for a few months and have learned a lot. Thank you all.
I have a question about rebalancing bands. I'm curious whether 40/15 bands might be attractive for rebalancing events (rather than 35/15) and whether anyone has modeled them? I'm considering 40/15 bands for two reasons: (i) they more accurately reflect a component halving or doubling in value and (ii) they might better balance volatility on the upside and downside. Let me explain both.
(i) Consider a balanced PP with stocks, gold, cash, and bonds of $100 each:
100/100/100/100 = $400
If one component doubles in value (say stocks), with no change to the others (sure, unlikely in the real world), we would get:
200/100/100/100 = $500
In percentage terms,
40/20/20/20 = 100%
This situation would trigger a rebalance (40% band).
From the original balanced portfolio, if one of the components halved in value we would get:
50/100/100/100 = $350
In percentages,
14.3/28.6/28.6/28.6 = 100%
This situation would trigger the 15% rebalancing band. I understand the logic of the PP having a 15% band: it corresponds to one of the components halving in value relative to all of the other components. That makes sense to me. But I would also expect -- for symmetry alone! -- to rebalance on the upside at 40%, not 35%.
(ii) Using Peak2Trough's data at http://www.peaktotrough.com/hbpp.cgi and looking at all of the historical rebalancing events for the 35/15 bands over the last 40+ years, it seems that there have been more rebalances triggered by a component reaching 35% than there have been by one reaching 15% (by about 2:1). To my mind, you would want both events to be roughly equally distributed to catch volatility in both directions. One way to even it out might be to increase the 35% band to 40% (so that rebalancing on the upside becomes less frequent) while keeping the 15% band where it is. Unfortunately, Peak2Trough's algorithm doesn't allow 40/15 as an option for rebalancing bands.
I'm not trying to reinvent the wheel, but I am curious whether these bands have been tested before and what the numbers look like. If only to convince myself that there is no advantage! Has there been a discussion like this before? Does what I propose sound logical?
I have a question about rebalancing bands. I'm curious whether 40/15 bands might be attractive for rebalancing events (rather than 35/15) and whether anyone has modeled them? I'm considering 40/15 bands for two reasons: (i) they more accurately reflect a component halving or doubling in value and (ii) they might better balance volatility on the upside and downside. Let me explain both.
(i) Consider a balanced PP with stocks, gold, cash, and bonds of $100 each:
100/100/100/100 = $400
If one component doubles in value (say stocks), with no change to the others (sure, unlikely in the real world), we would get:
200/100/100/100 = $500
In percentage terms,
40/20/20/20 = 100%
This situation would trigger a rebalance (40% band).
From the original balanced portfolio, if one of the components halved in value we would get:
50/100/100/100 = $350
In percentages,
14.3/28.6/28.6/28.6 = 100%
This situation would trigger the 15% rebalancing band. I understand the logic of the PP having a 15% band: it corresponds to one of the components halving in value relative to all of the other components. That makes sense to me. But I would also expect -- for symmetry alone! -- to rebalance on the upside at 40%, not 35%.
(ii) Using Peak2Trough's data at http://www.peaktotrough.com/hbpp.cgi and looking at all of the historical rebalancing events for the 35/15 bands over the last 40+ years, it seems that there have been more rebalances triggered by a component reaching 35% than there have been by one reaching 15% (by about 2:1). To my mind, you would want both events to be roughly equally distributed to catch volatility in both directions. One way to even it out might be to increase the 35% band to 40% (so that rebalancing on the upside becomes less frequent) while keeping the 15% band where it is. Unfortunately, Peak2Trough's algorithm doesn't allow 40/15 as an option for rebalancing bands.
I'm not trying to reinvent the wheel, but I am curious whether these bands have been tested before and what the numbers look like. If only to convince myself that there is no advantage! Has there been a discussion like this before? Does what I propose sound logical?