Reallocation Bands

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rnmike10

Reallocation Bands

Post by rnmike10 » Thu Jul 04, 2013 10:05 am

Do we reallocate in the 15/35 bands @ the current portfolio value or the value when the portfolio was started? IE: my pp is down  5.7% since I started 9/11/12.  Gold is now @ %19 (down %28.5 since purchase) of the total asset value of my pp.
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Re: Reallocation Bands

Post by rickb » Thu Jul 04, 2013 10:46 am

rnmike10 wrote: Do we reallocate in the 15/35 bands @ the current portfolio value or the value when the portfolio was started? IE: my pp is down  5.7% since I started 9/11/12.  Gold is now @ %19 (down %28.5 since purchase) of the total asset value of my pp.
Current value.
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Re: Reallocation Bands

Post by MarySB » Fri Jul 05, 2013 11:23 am

I have the same question and, with all due respect to Rick, don't quite understand the answer. Is one to look at the total of each asset or the amount gained or lost in each asset?

For example, my gold asset gained to the point that the gains were more than 35% of the portfolio, but the total dollars were not. So, I've watched my gains in gold evaporate with no rebalancing bands met, if I looked at the total amount.
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Re: Reallocation Bands

Post by Khisanth » Fri Jul 05, 2013 11:57 am

A recent discussion laid out some actual math: http://gyroscopicinvesting.com/forum/pe ... ing-bands/

Basically, all other assets remaining the same, it would take a 62% increase in a single asset for it to become 35% of a portfolio:

Starting Portfolio: 100 : 100 : 100 : 100 = 400    100 / 400 = 25.00%

62% increase in one asset: 162 : 100 : 100 : 100 = 462    162 / 462 = 35.06%

Of course we'd expect some volatility from the other two non-cash assets, so it's unlikely we'd have to wait for a single asset to gain 62%.

A more likely scenario: 40% increase in A, 20% decrease in B, 10% increase in C.
140 : 80 : 110 : 100 = 430
This still doesn't reach a hard rebalancing band.
32.55% : 18.6% : 25.58% : 23.25%

For the 4x25 Permanent Portfolio I prefer 20/30 rebalancing bands. Because I like to do something.
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Re: Reallocation Bands

Post by dualstow » Fri Jul 05, 2013 12:00 pm

MarySB wrote: Is one to look at the total of each asset or the amount gained or lost in each asset?
Mary, for rebalancing purposes, you're supposed to look at the total, the value of your current holdings.
Not the cost, not the gain or loss.
If the value of your gold today represents 15% or less of the value of your four assets combined, you need to rebalance (buy more gold).
If it hits 35% of your total, you need to rebalance (sell gold).
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Re: Reallocation Bands

Post by Xan » Fri Jul 05, 2013 12:06 pm

Right.  The goal is to maintain a portfolio with the right exposure to all four assets.  That's path-independent: it doesn't matter how you got to the allocation that you have; it just matters that you keep 25% of your wealth (give or take your chosen bands) in each asset.
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Re: Reallocation Bands

Post by MarySB » Fri Jul 05, 2013 12:11 pm

Thanks to all for your answers to my question. I will look at the link provided. It sounds like it is an interesting discussion.
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Re: Reallocation Bands

Post by rickb » Fri Jul 05, 2013 2:19 pm

MarySB wrote: I have the same question and, with all due respect to Rick, don't quite understand the answer. Is one to look at the total of each asset or the amount gained or lost in each asset?

For example, my gold asset gained to the point that the gains were more than 35% of the portfolio, but the total dollars were not. So, I've watched my gains in gold evaporate with no rebalancing bands met, if I looked at the total amount.
Sorry to be too terse.  As others have elaborated, the bands refer to the percent of each of the four assets relative to the total portfolio amount - so gold/total, stock/total, LTbonds/total, and cash/total.  If any of these is less than 15% (i.e. 0.15) or greater than 35% (0.35) it's time to rebalance.
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Re: Reallocation Bands

Post by MarySB » Fri Jul 05, 2013 3:34 pm

No problem, Rick. I could just have easily been too obtuse :)
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Re: Reallocation Bands

Post by frugal » Fri Jul 05, 2013 3:49 pm

But if we do it yearly at the same day each year, the end result after several years, will be the same.

Correct?
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Re: Reallocation Bands

Post by Ad Orientem » Fri Jul 05, 2013 4:33 pm

frugal wrote: But if we do it yearly at the same day each year, the end result after several years, will be the same.

Correct?
Probably not. The 15/35% rebalancing bands serve a couple of purposes. First they give room for the asset that is hot (currently that's stocks) to run. And secondly it keeps you from rebalancing too frequently and generating unnecessary tax bills.

That's not to say you can't rebalance annually. Some people do. It is a more conservative approach that will reduce your volatility, but also your potential gains. And you will likely pay more in taxes over the long run.
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Re: Reallocation Bands

Post by frugal » Sat Jul 06, 2013 1:48 am

Ad Orientem wrote:
frugal wrote: But if we do it yearly at the same day each year, the end result after several years, will be the same.

Correct?
Probably not. The 15/35% rebalancing bands serve a couple of purposes. First they give room for the asset that is hot (currently that's stocks) to run. And secondly it keeps you from rebalancing too frequently and generating unnecessary tax bills.

That's not to say you can't rebalance annually. Some people do. It is a more conservative approach that will reduce your volatility, but also your potential gains. And you will likely pay more in taxes over the long run.
I'm still in the middle of the book...

So, the day after 15 or 35% bands have been reached we immediatly make the REBALANCEMENT of the assets?


thanks
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