Another re-balancing question

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glennds
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Another re-balancing question

Post by glennds » Tue Aug 13, 2013 3:13 pm

Is it better to sell the performing asset class while it is at a comparative premium, or to buy the lagging asset class at a comparative discount while it is out of favor?

This may sound like a rhetorical question, but there is a subtlety that I'd like to better understand. For example, right now stocks have had a great run while gold and (to a lesser degree) LTT are out of favor. I have the option of re-balancing in the classical way which is to sell my stocks down to 25% and distribute the proceeds to the other classes. Alternatively I could add money to the portfolio such that I buy the lagging classes up to the re-balance point but not sell any stock in the process.

In the classical approach, I am both buying low and selling high. In the contribution re-balancing approach I am buying low but not selling high because I didn't sell any stock.

Is this distinction meaningful or are we talking six of one, half-dozen of another?

I could see where the latter would be more tax efficient since I am not realizing the gains on the stock if I'm not selling it. But from a return standpoint, wouldn't I ride my stock gains back down when stocks cycle out of favor? Maybe it doesn't matter so long as the portfolio is balanced?

Thanks for any insight on this
Libertarian666
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Re: Another re-balancing question

Post by Libertarian666 » Tue Aug 13, 2013 4:34 pm

You would end up with the same portfolio either way, other than having more transaction fees by selling and re-buying, so why would you do that?

Or am I not understanding your question?
Khisanth
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Re: Another re-balancing question

Post by Khisanth » Tue Aug 13, 2013 4:40 pm

My preference is not to sell at all, so buy the lowest asset at the time if you are cash-heavy.

This reduces taxes, transaction costs, and whatever else. Each of our situations will be unique in how we prioritize taxes, cash, or other assets of the Permanent Portfolio. We even have different sleep-at-night thresholds.
stuper1
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Re: Another re-balancing question

Post by stuper1 » Tue Aug 13, 2013 4:53 pm

Backtesting shows higher gains with re-balance bands much wider than 15/35 (even up to 50% or more), likely due to momentum.  This would indicate that holding on to your excess stocks longer should be good on average, but probably not if there is a huge stock downturn coming up (wouldn't be surprising, would it?).

Of course, the future will be different from the past.

Do whatever feels more comfortable to you.  In the long run, the difference between the two options will probably be very small.
Xtal
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Re: Another re-balancing question

Post by Xtal » Wed Aug 14, 2013 12:59 pm

I just want to say that I understand your question and I had the same question.  I was overweight on stocks recently and not sure whether I should sell off some of my stock holdings, or just buy more of the lagging assets to catch up.  I ended up doing the latter.
whatchamacallit
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Re: Another re-balancing question

Post by whatchamacallit » Wed Aug 14, 2013 10:31 pm

It sounds like you have a variable portfolio consisting of cash that you want to add to your permanent portfolio.

Cash was my favorite asset before finding the permanent portfolio so I am doing that myself until I am ready for full permanent portfolio.

When I add this to my permanent portfolio, I will just balance everything back to 25%. At this rate, I may need to sell stocks as well as buy bonds and gold to do this.
glennds
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Re: Another re-balancing question

Post by glennds » Thu Aug 15, 2013 12:58 pm

Thanks for the replies. Yes, I have some cash sitting on the sidelines and from the responses, I think it makes sense for me to add the cash to the portfolio, buy up the lagging classes to the re-balance point and not sell anything.

It seems that on an ongoing basis, re-balancing this way takes a tax efficient strategy and makes it even more tax efficient. Plus, history would indicate that an unfavorable year for the Permanent Portfolio is the perfect time to be adding to it if you can.

I guess we'll see.
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AgAuMoney
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Re: Another re-balancing question

Post by AgAuMoney » Fri Aug 16, 2013 8:54 am

Libertarian666 wrote: You would end up with the same portfolio either way, other than having more transaction fees by selling and re-buying, so why would you do that?
This.

For the extreme example of "sell first" approach, consider you could always sell everything (going to 100% cash) and then rebuy everything to end up with the 4x25% proportions.

For the extreme example of the "buy first" approach, you never sell anything, you just buy lagging assets to bring everything to the 4x25% proportions.

Other than possibly not having enough cash to always do the "buy first", in both cases you end up with exactly the same portfolio.

The way to mix the two is to "sell minimal first then buy".  If that "minimal" is "nothing" you have done "buy first" as both approaches end up with the same portfolio as "buy first."  And that portfolio is also the same as "sell first" except you never had to sell.

If "sell minimal" results in selling something, and then you buy in the correct 4x25% proportions with the excess cash, you will also have the exact same portfolio as the "sell first."


Conclusion:

"sell then buy" and "sell minimal then buy" is always the same except transaction costs and possible tax effects.  When minimal is $0 then they are also the same as "buy".

In the real world I minimize my transaction costs so I'm never exactly 4x25%.  So I am never quite identical to a "sell first."  But I consider it close enough.
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