Speculative Rebalancing

General Discussion on the Permanent Portfolio Strategy

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jsnikeris
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Speculative Rebalancing

Post by jsnikeris » Fri Aug 14, 2015 3:30 pm

After reviewing some of the literature on market valuation, it seems to me that the stock market is currently overpriced. I'm aware that an orthodox PP implementation eschews speculation of any kind, but how bad of an idea would it be to tactically underweight an asset class while still remaining within the traditional 15-35 bands? Let's take taxes and transaction costs out of the equation for the purposes of this discussion.
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Re: Speculative Rebalancing

Post by stuper1 » Fri Aug 14, 2015 3:59 pm

What does the literature suggest on the current valuation of gold and long-term bonds?
jsnikeris
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Re: Speculative Rebalancing

Post by jsnikeris » Fri Aug 14, 2015 5:59 pm

stuper1 wrote: What does the literature suggest on the current valuation of gold and long-term bonds?
I take your point to be that in order to underweight stocks, the money needs to be allocated elsewhere. If one doesn't know how to value the alternatives to stocks, who's to say that they aren't even more overpriced than stocks are? If so, touch�.

I'm curious to know why you didn't also mention the value of cash. Is it because it doesn't really make sense to say that cash is overpriced or underpriced?

For what it's worth, I'm thinking about holding a slightly higher cash allocation (30%) and a slightly lower stock allocation (20%).
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Re: Speculative Rebalancing

Post by stuper1 » Fri Aug 14, 2015 6:05 pm

My point is just that nobody really knows which components are overvalued or undervalued at this time, or almost at any time.  From what little I've read recently, I wouldn't say that there is a consensus that the stock market is overvalued.  Holding more cash is almost always a less risky proposition, but comes at the sake of forgoing possible gains.
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Re: Speculative Rebalancing

Post by Stewardship » Fri Aug 14, 2015 6:11 pm

jsnikeris wrote: After reviewing some of the literature on market valuation, it seems to me that the stock market is currently overpriced. I'm aware that an orthodox PP implementation eschews speculation of any kind, but how bad of an idea would it be to tactically underweight an asset class while still remaining within the traditional 15-35 bands? Let's take taxes and transaction costs out of the equation for the purposes of this discussion.
Some may be confident that they don't need their portfolio to protect them in times of prosperity.  Afterall, making ends meet or earning a higher income is often easier during times of prosperity.

Others could have trouble coping with a losing portfolio during times when everyone else is making lots of money.

So I guess the question is do you want an all-weather portfolio or more of a rainy-weather portfolio?
In a world of ever-increasing financial intangibility and government imposition, I tend to expect otherwise.
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Re: Speculative Rebalancing

Post by jsnikeris » Fri Aug 14, 2015 6:32 pm

Stewardship wrote: So I guess the question is do you want an all-weather portfolio or more of a rainy-weather portfolio?
Well, when it Looks Like Rain, I want a rainy-weather portfolio.

Image
Last edited by jsnikeris on Fri Aug 14, 2015 6:39 pm, edited 1 time in total.
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Re: Speculative Rebalancing

Post by ochotona » Fri Aug 14, 2015 6:46 pm

Exhibit 3 of "The Golden Constant" by Claude B. Erb, Los Angeles, CA 90272 and Campbell R. Harvey, Duke University, Durham, NC 27708 and National Bureau of Economic Research, Cambridge, MA pretty much tells me that you don't want to pay more than 2x the Consumer Price Index for gold. You can find this paper posted on the Internet. I found a link on this forum in a recent gold thread. If you pay much more than 2x CPI, you risk having 0% real return over the next decade. 2x CPI is about $430. Therefore, I am way underweight gold now. I have some, but really a token amount. If I can't get it for the price I want it for, I'll pass this lifetime.Maybe I missed my chance in 2001. Maybe not.

Should you underweight stocks? Well, the PP is perpetually underweight stocks, from the point of view of conventional investing, a 25% stock allocation is OK for a very risk averse or elderly person. So I would not do that.

Treasuries? It certainly is a puzzle what interest rates may do. We've ended a 35 year bull market in bonds, but maybe we just stay in a trading range for a while and bang around. I shortened my maturities because I can't stand the noise, and the extra coupon does not make it worth my while.

So my opinion is shorten maturities, underweight gold. I like the PP, but not sure if it's the right time to get in. Maybe in a few years. It's a good retirement allocation at the right gold price, that's 10 years off for me yet.
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Re: Speculative Rebalancing

Post by craigr » Fri Aug 14, 2015 7:00 pm

jsnikeris wrote: After reviewing some of the literature on market valuation, it seems to me that the stock market is currently overpriced. I'm aware that an orthodox PP implementation eschews speculation of any kind, but how bad of an idea would it be to tactically underweight an asset class while still remaining within the traditional 15-35 bands? Let's take taxes and transaction costs out of the equation for the purposes of this discussion.
I've never seen market timing work consistently for anyone. They get some lucky streaks, but eventually the luck ends.

For those that are nervous about letting things alone, I generally recommend just using lower rebalancing bands of 20/30 instead of 15/35 for the asset slices. You could also "over-rebalance" by selling an asset down to say 20% instead of 25% as you are implying if you really feel like it. But taking it below 20% I don't know about just based on my experience.

Just remember that at any point in time you can find research that will support your own biases. I have seen this over and over and over and over and over again. One year bonds are doing great and the news media finds pundits talking about the coming depression as to why they will do well going forward. Then another year gold is doing great and the guys come out of the woodwork with their $10,000 an ounce predictions. Stocks doing well always brings out the guys talking about leveraging, etc. to make more dough.

Really I've seen it all and it should just be ignored. I've made far more money ignoring market predictions than I have by following them. A mechanical rebalancing strategy just works better. It protects you from taxes, transaction fees, worrying about the latest news, and waking up in the morning and seeing something in the news overnight that causes big drama because you bet wrong.

So no, I don't think speculative rebalancing is a good idea for your core portfolio. It is perfectly fine though if you want to take some money you can afford to lose and wager it that way.
Last edited by craigr on Fri Aug 14, 2015 7:02 pm, edited 1 time in total.
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Re: Speculative Rebalancing

Post by LC475 » Fri Aug 14, 2015 8:15 pm

jsnikeris wrote: I'm thinking about holding a slightly higher cash allocation (30%) and a slightly lower stock allocation (20%).
Well, cash is a conservative investment.  One of Harry Browne's rules was that it's best to err on the side of safety.  That is, better to be safe then sorry.

So, might you miss out on some returns from stocks if you only have 20% stocks?  Yes.  But, are those extra percentage points worth the sleepless nights and mental agony?  If you are really convinced that a crash is probably coming soon, wouldn't it be better to lower the allocation and be able to relax?

I think that it would be.

What's more, the performance of 25/25/20/30 is going to be very close to that of a 25/25/25/25 portfolio.  You get the benefit of the Permanent Portfolio, but with less heartburn for you, personally.

If that is going to be what you're most comfortable with, I would recommend that you go for it.  Then, in a year, re-examine the situation.  If the crash has happened, consider buying back in at the lower price.  If it hasn't, decide if the factors leading you to believe a crash is coming are still true, or whether you have changed your mind and it's time to re-balance up to 25%.
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Re: Speculative Rebalancing

Post by ochotona » Fri Aug 14, 2015 10:56 pm

You won't regret being 5% cash heavy until you and the world economy can decide what to do... you can always spend it later. Other things may go on sale.

LC475 wrote:
jsnikeris wrote: I'm thinking about holding a slightly higher cash allocation (30%) and a slightly lower stock allocation (20%).
Well, cash is a conservative investment.  One of Harry Browne's rules was that it's best to err on the side of safety.  That is, better to be safe then sorry.

So, might you miss out on some returns from stocks if you only have 20% stocks?  Yes.  But, are those extra percentage points worth the sleepless nights and mental agony?  If you are really convinced that a crash is probably coming soon, wouldn't it be better to lower the allocation and be able to relax?

I think that it would be.

What's more, the performance of 25/25/20/30 is going to be very close to that of a 25/25/25/25 portfolio.  You get the benefit of the Permanent Portfolio, but with less heartburn for you, personally.

If that is going to be what you're most comfortable with, I would recommend that you go for it.  Then, in a year, re-examine the situation.  If the crash has happened, consider buying back in at the lower price.  If it hasn't, decide if the factors leading you to believe a crash is coming are still true, or whether you have changed your mind and it's time to re-balance up to 25%.
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Re: Speculative Rebalancing

Post by Stewardship » Sat Aug 15, 2015 4:06 am

jsnikeris wrote:
Well, when it Looks Like Rain, I want a rainy-weather portfolio.

Image
Understood.  So that chart makes it look like rain to you?
In a world of ever-increasing financial intangibility and government imposition, I tend to expect otherwise.
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Re: Speculative Rebalancing

Post by Desert » Sat Aug 15, 2015 7:31 am

ochotona wrote: Exhibit 3 of "The Golden Constant" by Claude B. Erb, Los Angeles, CA 90272 and Campbell R. Harvey, Duke University, Durham, NC 27708 and National Bureau of Economic Research, Cambridge, MA pretty much tells me that you don't want to pay more than 2x the Consumer Price Index for gold. You can find this paper posted on the Internet. I found a link on this forum in a recent gold thread. If you pay much more than 2x CPI, you risk having 0% real return over the next decade. 2x CPI is about $430. Therefore, I am way underweight gold now. I have some, but really a token amount. If I can't get it for the price I want it for, I'll pass this lifetime.Maybe I missed my chance in 2001. Maybe not.

Should you underweight stocks? Well, the PP is perpetually underweight stocks, from the point of view of conventional investing, a 25% stock allocation is OK for a very risk averse or elderly person. So I would not do that.

Treasuries? It certainly is a puzzle what interest rates may do. We've ended a 35 year bull market in bonds, but maybe we just stay in a trading range for a while and bang around. I shortened my maturities because I can't stand the noise, and the extra coupon does not make it worth my while.

So my opinion is shorten maturities, underweight gold. I like the PP, but not sure if it's the right time to get in. Maybe in a few years. It's a good retirement allocation at the right gold price, that's 10 years off for me yet.
I like that summary.  I think we're converging at a similar destination. 
Our greatest fear should not be of failure, but of succeeding at something that doesn't really matter. 
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Diversification means always having to say you're sorry.
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