Rebalancing to capture volatility

[gnome]

With gold (in sterling) at a 5 year low, after spiking in 2011, I got wondering how well the PP captured that kind of volatility. A quick calculation of what would happen in any year where gold went up 35%, and stocks and bonds dropped 20% gives the result (33.75/98.75=34.2%) that no rebalancing would be required, if using 15/35 bands, with the result that all of those gains in gold would not have been captured. Have any of the statistics and spreadsheets whizzes who generously share their thinking in this forum with us mere mortals done any analysis on optimal levels for rebalancing bands or timing?

My position is that of an enthusiast for simple, low fee investment, and a convert to general PP theory after reading Roland & Lawson, looking to invest the proceeds of an imminent house sale, but concerned about going all in, with stocks at current multiples and bonds at 300 year lows.

[mathjak107]

i found historically whenever i don't want to committ a large amount for some reason which of course there are many at any given time  that i ended up shooting myself in the foot.

no matter what the time frame i get money to invest i found it best to commit.  long term i can't even remember the fact i did it that way as higher highs and higher lows are usually the path investments take over time.

when it comes to equity's which have always been the bulk of my growth engine markets typically are up 2/3's of the time and down only 1/3 with only a few exceptions.

in effect trying to time when to add money would be betting against the house .  odds would be not very good of you winning.

[barrett]

gnome,

You can play around with different rebalancing bands on peaktotrough.com and probably get your question answered. You didn't give a start date but I just used 1/1/2000 and got two rebalances due to gold going up to 35%. Looks like they were 5/2/06 and 5/2/11. I know that looks like a typo because they were both on May 2nd five years apart.

A lot of folks like the 15/35 bands because a hot asset can keep going up for years (gold in the 2000s and stocks now would be two examples), and it can be favorable to not sell too soon. I much prefer tighter bands or just an annual rebalance. I think the tighter bands help in this low-rate environment because bonds can deliver some nice gains but it's unlikely (in my opinion) that they would shoot up to 35% of the total portfolio.

As always, consider tax consequences (if any) when rebalancing. Sometimes selling down a winner over two calendar years (could be late December & early January) can be a good choice for tax purposes. Hope that helps.

Ah, I see you are looking at gold prices in Sterling. Peaktotrough is in dollars but should still be a pretty good tool for you. Good luck.

[lordmetroid]

I rebalance each time I make a decision to purchase. When I do a purchase I buy all assets more or less for each asset class to become about 25% of the portfolio.

[barrett]

I rebalance each time I make a decision to purchase. When I do a purchase I buy all assets more or less for each asset class to become about 25% of the portfolio.

Which can work fine if you are still accumulating. For those in retirement that's not possible unless they have quite a lot of pension money rolling in (or really successful kids who are sending them money!).

Lord M, in your position, is the recent volatility in bonds actually a good thing? I mean do you feel that you have a lower buy-in point than you did six months ago? Well, obviously it is lower. So my question really is, does the recent drop in bonds bother you? Thanks.

[mathjak107]

rebalancing from gains is a good thing , rebalancing from losses is never a good thing ,.

especially on interest rate bets.  unlike equity's which have a fairly fast cycle most of the time , rate cycles or commodity cycles  can span decades .

the thing about rebalancing is it is a double edge sword . cutting winners and buying losers can leave you with less . buying gold the last 5 years and cutting equty's would not have panned out well at all.

if you rebalance do it for volatility reasons and not because you think it will put you a head. you may be very well killing off the goose laying those golden eggs prematurely only to buy something that is only at the beginning of a long term fall.

my own portfolio's have never ever been rebalanced . when a type of fund no longer has the same reason for owning it is swapped for one with better chances in the investment climate.

the exact allocation is never fixed but moves in an over all range of volatility . some years equity allocations may be a bit higher and some lower .

there were years the income and capital preservation was 35% equity's and years  it was 25% . we even had a 25% cash position for a while before it was deployed.

the growth model may range from 80% equities to 95% equities . it all depends on how the volatility of the portfolio shifts and what the trend looks like it will ultimately be .

as an example with the fed doing everything but dropping leaflets from helicopters saying rates will be be low the portfolio made a bigger shift to bonds since that was the trend .


with the last 6 months having rising yields on bonds less of an allocation is in intermediate term bonds and more in shorter maturities .

over all  the volatility range and the big picture is what sets my allocations not some fixed number written in stone.

[sophie]

It's a little difficult to answer gnome's question as posed.  If you had been holding a chunk of money in the PP in real life and are not adding to it, then sometime in the past few years you most certainly would have rebalanced at least once.  Historically, the PP has claimed about a 1% boost in CAGR from rebalances.

In practice, things might work out differently if you are actively contributing to the PP and would like to avoid the tax consequences of rebalancing.  You can do that by buying the lagging assets instead of selling the winners.  Also, as barrett says, you always have the option to push the rebalance button even if you haven't hit a band.  For tax purposes, timing when you take your gains may be important enough not to wait.  And if rebalancing now rather than waiting lets you sleep better at night, that's plenty good reason also.