Rebalancing - General Advice

[postscript]

This is the only area of the Permanent Portfolio that leaves me a little confused, so I thought I'd run it past you all to hopefully get my head straight about it...

1. Am I right in saying, that the general advice is to check our portfolios, once a year (at the same time), say, Jan 1st could be our anniversary date; and see if any asset has creeped outside the 15/35% boundaries. If they have, we rebalance the whole portfolio. Rinse and repeat, every year at the same time.

2. If there's a lot of volatility in the market, or there's widely reported a big market move, we might want to check our portfolios sooner than the annual anniversary, if we spot an asset outside the 15/35% boundaries then we immediately rebalance. We then continue checking at our previous annual anniversary date. If we forget to check, or don't read the news; then we'll spot it at the anniversary date anyway.

3. I would imagine most of us who take an active interest in the Permanent Portfolio, ie. those using this forum, are probably checking their portfolio more frequently, perhaps monthly, weekly, daily or even several times a day (shame on you!).. is it generally agreed that the sooner we rebalance when an asset moves outside the 15/35% mark the better. I'm just wondering, because at the anniversary date, we might be just within it, and within a month or two it creeps outside it; but potentially that's almost a whole year before we rebalance it.

4. If we decide to stick with the anniversary date, and not try to actively monitor for 15/35, and say, we use Jan 1st; then if we start our portfolio mid-year, do you think it makes sense to calculate the %s of each asset, not as 25%, but what they would be now if we'd have started the portfolio on Jan 1st - for example one asset could have appreciated or depreciated strongly in the first 6 months of the year. My intuition, says it really makes no difference, better just to stick with 25%.

5. What do people use for the anniversary date, is there any evidence, that a certain month of the year is preferably to another; and what do members of this forum generally use - I would guess the beginning of the year, or perhaps the tax year.

6. Final question, not really about rebalancing (although it could be!).. if we're adding to our portfolio during the year, is it better to add in equal quantities for each asset, or use this as an opportunity to do a mini rebalance, ie. weight the asset purchases in favour of the underweight assets.

Thanks for your consideration!

[buddtholomew]

Welcome!
There is a lot of information on this site about re-balancing ranging from never to more frequently than annually.
It is not an exact science and depending on asset location (tax deferred, taxable), re-balancing may not be the ideal approach.

[postscript]

Thanks buddtholomew, no doubt it's a topic that's been discussed to death! I'll definitely take the time to search through the forums.

[Xan]

Rebalancing is a part of the portfolio that Harry Browne (to my understanding) acknowledged was largely arbitrary.

I see your worry about being "out of whack" if you're close to a band on your anniversary, and then could end up spending most of the year past your bands. I would say it wouldn't be wrong for that to happen. In fact, backtesting has shown that the wider your bands, the better your performance. Of course there's no guarantee of that. But, since 15/35 is largely arbitrary anyway, you're not going to be too far out in left field for that year.

Some do 20/30 bands, some rebalance annually no matter what, without bands at all. Some rebalance whenever they feel like it.

My opinion is that as long as you put things into your chosen bands, you should rebalance as frequently as you like. Whatever helps you sleep at night.

[Cortopassi]

If you have any interest historically, look at peak to trough:

http://www.peaktotrough.com/hbpp.cgi

It allows you to adjust the rebalancing triggers and you can get a sense of what levels might work best for you and which worked best in the past.

The more you can tolerate it, the returns seem a little better if you can hold off to the 10/40 or 15/35 bands, for longer periods at least. But nothing major.

[eufo]

I agree with the above posts that rebalancing is more about what works for you instead of something being the "best". What bands worked in the past may or may not be optimum for future moves.

I, personally, like to be pretty close to my asset allocation at all times. I won't go crazy with my buying and selling, but I'm sure I do it more frequently than most on this forum. That said, I rarely sell anything because I'm still employed and adding new funds with every paycheck.

Regarding new funds... I always buy the laggards to bring them up to my desired allocation.

[Kriegsspiel]

I buy the lagging asset, because I wanted to avoid paying taxes and keep everything around 25%.

At the end of the year if I can rebalance and tax loss/gain harvest I do that.

[Kbg]

Not directly related to PP, but do a Google search on: Vanguard rebalancing study. It does a nice job of hitting the most important aspects of the rebalancing decision.

As I’ve noted in several posts on this topic...rebalancing should first and foremost be thought of as a risk control measure. The most “effective” way to rebalance if defined as “best” performance is unknowable in advance.

The exception to the above is if a rebalance creates a taxable event...then a general rule is try to do the least amount possible consistent with your tax situation and risk profile.

[boglerdude]

What are the most volatile vanguard funds

If i wanted to rebalance after big moves, like the election

[Cortopassi]

I just rebalanced because cash hit 140% of target. Good to be working.

Had to hold my nose buying a lot of TLT, some gold, a little VTI, and sold some Emerging Market.

[ochotona]

Rebalancing is a part of the portfolio that Harry Browne (to my understanding) acknowledged was largely arbitrary.

I see your worry about being "out of whack" if you're close to a band on your anniversary, and then could end up spending most of the year past your bands. I would say it wouldn't be wrong for that to happen. In fact, backtesting has shown that the wider your bands, the better your performance. Of course there's no guarantee of that. But, since 15/35 is largely arbitrary anyway, you're not going to be too far out in left field for that year.

Some do 20/30 bands, some rebalance annually no matter what, without bands at all. Some rebalance whenever they feel like it.

My opinion is that as long as you put things into your chosen bands, you should rebalance as frequently as you like. Whatever helps you sleep at night.

If rebalancing is semi-arbitary, why not put a trend-following spin on it? If any of the volatile assets breaks trend (1 year price momentum or 10 month moving average) then pull the trigger and either buy or sell. Let's say stocks break trend and there is a trendfollowing sell signal, then sell back to the target allocation, or if they break the other way, buy back to target.

[sophie]

I'd run some backtested simulations on this a while back. There's a thread somewhere reporting results.

I found that rebalancing according to 15/35 bands provided higher returns than rebalancing annually or using 20/30 bands. Annual rebalancing had the lowest returns. I believe the spread was on the order of almost 1% CAGR. Note btw that most portfolio simulations of the 25x4 PP use annual rebalancing.

Harry Browne's recommendation was to throw new contributions into cash, check the portfolio annually or when something unusual happens, and rebalance when one of the assets crosses a 15/35% band. MediumTex suggested 20/30 bands for people too nervous to let the portfolio ride all the way to 15/35 bands. You also shouldn't need to rebalance more often than once every 3 years on average. Less, if you add new contributions by buying the lagging asset.

[stuper1]

To me, this is one of the best things about the HBPP. I know that I have gone years of my life without looking at my portfolio, because I've gotten busy with other things. It's really good to know that with the HBPP I can come back 2 or 3 years later with good assurance that my financial life won't be in ruins.

[ochotona]

My gold rebalancing plan is to let it grow from 10% to 35% over the years / decades, if it indeed ever does that, then at 35% knock it back to 25% and magically arrive at a PP gold allocation. Therefore, my allocation plan is the keep 10/35 = 29% of the gold in ETF form in my IRA, and rebalance from there, and the rest physical, and not have to sell physical. If the allocation sinks from 10% to 7%, I'll buy there and refill it back up to 10%.