Speculative Rebalancing

General Discussion on the Permanent Portfolio Strategy

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Desert
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Re: Speculative Rebalancing

Post by Desert » Sat Aug 15, 2015 7:39 am

Stewardship wrote:
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?
I have been looking at the CAPE 10 charts recently as well.  Historically, the PE10 has averaged around 17 in the U.S.  With recent accounting rules changes, some believe 19 is a more accurate average.  So at 26, we're in a range where we'd expect lower returns going forward.  That doesn't mean we have to have a 2008-style crash, even though valuations are at about the same level as pre-2008 crash levels.  But reduced returns over the next decade are more likely.  CAPE10 has been shown to have only about 40% correlation with future returns though, so it's a very, very blunt instrument, at best. 

My view is this:  I wouldn't use CAPE 10 to rotate in and out of stock allocations, but I think it's worth a glance if/when one is thinking of changing one's equity allocation. 
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technovelist
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Re: Speculative Rebalancing

Post by technovelist » Sat Aug 15, 2015 8:19 pm

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 have no idea what "2x CPI" means. And exactly how long has the CPI been around? Not as long as gold, I suspect.
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ochotona
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Re: Speculative Rebalancing

Post by ochotona » Sat Aug 15, 2015 8:52 pm

technovelist wrote: I have no idea what "2x CPI" means. And exactly how long has the CPI been around? Not as long as gold, I suspect.
CPI is Consumer Price Index. The span of the study was 1975 - Present. The exhibit I referred to plots how much the 10 year ahead real return actually was based on how much the investor paid for gold as a multiple of the CPI. It shows pretty clearly that it is very easy to pay too much for gold. Gold is great if you get it on sale, and very terrible if you get at high prices, and right now it's still too high priced.
Last edited by ochotona on Sun Aug 16, 2015 7:37 am, edited 1 time in total.
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sophie
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Re: Speculative Rebalancing

Post by sophie » Mon Aug 17, 2015 12:39 pm

Before you go and muck with your portfolios, you might want to read this book:

http://www.amazon.com/Best-Laid-Investm ... uckgo-d-20

It contains the most intelligent debunking of various market timing strategies you'll find anywhere - including the ones brought up in this thread.

To respond to the OP's original question - if you are getting antsy about the stock market and want to rebalance now, then go right ahead if it will make you more comfortable.  I've been debating the same since I'm close to a rebalance band in stocks anyway.  But any strategy that involves deliberately modifying the allocation as an attempt to time the market is essentially a PP plus some speculation.  Nothing wrong with that, but do recognize it for what it is.

It's also kind of nice that the PP has a built-in panic button (i.e. rebalancing) that lets you feel like you're doing something to protect yourself while not actually letting you dig yourself into a pile of trouble.
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technovelist
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Re: Speculative Rebalancing

Post by technovelist » Wed Aug 19, 2015 6:22 am

ochotona wrote:
technovelist wrote: I have no idea what "2x CPI" means. And exactly how long has the CPI been around? Not as long as gold, I suspect.
CPI is Consumer Price Index. The span of the study was 1975 - Present. The exhibit I referred to plots how much the 10 year ahead real return actually was based on how much the investor paid for gold as a multiple of the CPI. It shows pretty clearly that it is very easy to pay too much for gold. Gold is great if you get it on sale, and very terrible if you get at high prices, and right now it's still too high priced.
So the time span it covers is insignificant compared to the amount of time that gold has been a valuable asset class, and includes only the US, which is far from representative.

In other words, it is worthless. The study, that is, not gold.
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jsnikeris
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Re: Speculative Rebalancing

Post by jsnikeris » Mon Aug 24, 2015 10:37 am

Anybody else feeling good about being light on stocks?  :)

Now, I just need to figure out how to not let this luck go to my head...
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Re: Speculative Rebalancing

Post by technovelist » Mon Aug 24, 2015 11:20 am

jsnikeris wrote: Anybody else feeling good about being light on stocks?  :)

Now, I just need to figure out how to not let this luck go to my head...
Me, me, me!
However, it is unlikely to go to my head, because I almost never change my allocations, and have no intention of doing that now...
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frugal
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Re: Speculative Rebalancing

Post by frugal » Mon Aug 24, 2015 4:32 pm

Hi,

rebalancing once a year is still probably the best option?


Regards!
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Re: Speculative Rebalancing

Post by blackomen » Tue Aug 25, 2015 9:59 am

I'll admit I sometimes engage in speculative rebalancing if the asset over 30% is overbought or under 20% is oversold..  but I'll still respect the rebalancing bands and manually rebalance at 15/35.
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Re: Speculative Rebalancing

Post by Xan » Tue Aug 25, 2015 10:55 am

I think as long as you're within the rebalancing bands, you have a PP, and there's nothing particularly wrong with rebalancing any time you feel like it.  I might even go so far as to say it's "okay" to aim for a different allocation for a while, as long as you're within the bands.  You need to be willing to admit that doing so may be just as likely to cost you money as make you money.  But you're still well within the PP framework, and still have the protection that affords.

I don't do it myself, because I have zero trust in my ability to predict what's going to happen next.  Even if I do get it right, I'll get it right until I don't, and my gains would go poof.  But I bet there are some folks who would sleep better if they played these games, and I'd be hesitant to say they were wrong to do it.
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Re: Speculative Rebalancing

Post by Jack Jones » Tue Aug 25, 2015 3:07 pm

Xan wrote: I think as long as you're within the rebalancing bands, you have a PP, and there's nothing particularly wrong with rebalancing any time you feel like it.  I might even go so far as to say it's "okay" to aim for a different allocation for a while, as long as you're within the bands.  You need to be willing to admit that doing so may be just as likely to cost you money as make you money.  But you're still well within the PP framework, and still have the protection that affords.
Yeah this is how I feel as well. The only caveat being that "rebalancing any time you feel like it" can be costly in terms of transaction costs.
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