test of my PP resolve: need to rebalance by selling bond & buying stock

[cabronjames]

I use a non-cash, "3X33%" stock, bond, gold allocation.

Furthermore, being a Vanguard custodian customer, I use EDV instead of TLT, & use MediumTex's idea of holding 2/3 EDV in relation to the other assets, since EDV has 3/2 the volatility of TLT.  (BTW I did some spreadsheet analysis, which confirmed MT's 3/2 volatility notion).

So my target allocation is 25% EDV, 37.5% stock, 37.5% gold

Well EDV has gone a bullish tear, & now my bond allocation hit 35% of the portfolio, 40% above the target of 25%.  Time to rebalance.

My trailing asset is stock.

I feel stocks are overvalued, based on Dr. Robert Shiller's PE10 idea, using the last 10 years of CPI inflation-adjusted earnings.  Lower PE10s were correlated with higher real stock 10 & 20 yr stock returns. As of Aug-01, the PE10 of the S&P500 is 22.7 vs. the historical average of 16.4.  Only at 13% of the monthly snapshots in history (historical data set 1870-now), were stocks more highly valued than they are currently.
http://advisorperspectives.com/dshort/u ... uation.php

Beyond the high overvalued current PE10, it also FEELS that stocks are overvalued given the bad US economic conditions.  Consumers & businesses have cut back their purchases in this 2007-now recession/depression.  Now, Barack Hoover Obama & the other D & R plutocrat politrickians are pulling a Hoover (or 2010-11 UK Governent "austerity" move) in also cutting Fed government spending.  I read some think tank (Economy Policy Institute IIRC) estimates that these Fed gov cuts will reduce 1.8 million additional jobs in the FY2012.

Despite this, I feel I should do the mechanical robotic decision that the PP philosophy requires

Sell a portion of my EDV, use that $ to Buy more Stock

I need to
"just do it" (c) Nike
"do it live" (c) Bill O'Reilly
"get er done" (c) The Cable Guy

[MediumTex]

I would just do it.

Stocks have been falling/drifting for months.  They may fall more, but if they do it's almost certain that gold and/or bonds will continue to do well.

It's not necessary to buy stocks at their absolute low.  You're buying stocks on a nice pullback here and you are banking gains from a very strong upward move in bonds.

If rebalancing felt good everyone would be doing it.  It's supposed to hurt a little.

The alternative is to hang on and hope that your intuition and judgment under stress are accurate. 

With all that said, if you waited a few days it probably wouldn't hurt anything.

[Storm]

I would follow your gut instincts as of 3 months ago, when you setup the portfolio.  Who knows, we might be at the top of a crazy bear market for stocks, or we might be at the bottom of a temporary correction in the market.

I am more convinced that QE3 would prevent the meltdown that is happening the last couple days than the Fed will just let it happen and Dow goes to <5000.

[craigr]

Just do it.

I've not been burned by rebalancing in the long term. But I've been burned by waiting too long and not rebalancing when I had the chance.

[AdamA]

I need to
"just do it" (c) Nike
"do it live" (c) Bill O'Reilly
"get er done" (c) The Cable Guy

The correct answer is "do it live." 
http://www.youtube.com/watch?v=2tJjNVVwRCY

[stone]

If you want some extra encouragement for reballancing, read the commentary on the Hussman Funds web site. Clearly they put immense effort into rational, evidence based, market timing and seem extremely wise and yet consistently flunk it (we were right and the market was wrong seems to be the general theme).

[cabronjames]

I did it!

Sold some EDV for $98.13 this afternoon.  With the proceeds, bought my trailing asset, stock (which apparently was on sale today).

Big thx to yall for the encouragement.  You were like Jedi Masters with sage wise words, I knew the Permanent Portfolio force was with me (pardon my lame attempt at a MediumTex-ish metaphor).

[MediumTex]

I did it!

Sold some EDV for $98.13 this afternoon.  With the proceeds, bought my trailing asset, stock (which apparently was on sale today).

Big thx to yall for the encouragement.  You were like Jedi Masters with sage wise words, I knew the Permanent Portfolio force was with me (pardon my lame attempt at a MediumTex-ish metaphor).

Lock in gains you did, hmm?  On sale did you buy the trailing asset.  Managing risk well you are.

To Darth Rogers and his ilk you should not listen.  Confused is their thinking.  Crooked is their way.  Against reality they bump their heads.  Hurts, hmm?

[smurff]

I did it!

Sold some EDV for $98.13 this afternoon.  With the proceeds, bought my trailing asset, stock (which apparently was on sale today).

That's a good way to think of a major market decline (crash)--as a major sale, for stocking up.

[Liz L.]

Very impressive discipline, cabronjames.

[craigr]

I am very close to a rebalancing point as well and I will rebalance just as I did in early 2009. In the long run the benefits of the risk management by rebalancing are huge.

[gonetowindsurf]

CabronJames
I am curious as to why you chose a 3 market PP instead of the traditional 4 with a cash/short term Treasury component? Or maybe you have a cash component if another form?

[moda0306]

I find it helpful when it comes to rebalancing from bonds to stocks to look at the dividend yield of VTI at this point compared to the rate of long-term bonds.

If VTI is yielding 2+% dividend return and LTT's are at 3.5%, it can help one say, "wow, do I really want to settle for LTT's at this point for the long run as so much larger a part of my portfolio than stocks?"

Further, treasuries are especially volatile at the low-rate end, and that can help you make the jump, too.

gonetowindsurf,

I'm willing to bet it's because of the low-return nature of cash... the other 3 assets are all volatile but tend to cancel each other out and net to handsome gains... cash just sits there and waits for this process to stop working, which it rarely does (1981... and a few other much smaller instances).

Further, today, the opportunity cost of being out of cash is so small that it can be tempting to just hold an emergency fund and run a 3x33 PP outside of that.

[steve]

I also getting close to rebalancing. My Gold is about 32% Long term bonds about 26.5% Stock 19.4 % and the rest cash. Has anyone done any mid rebalancing instead of a full rebalance?,  if so how did it work out?

[cabronjames]

CabronJames
I am curious as to why you chose a 3 market PP instead of the traditional 4 with a cash/short term Treasury component? Or maybe you have a cash component if another form?

1. in the past, there's been a slightly higher return, for slightly higher risk of the 1981 tight money recession situation.

2. protects against a risk NOT covered in the 4X25, a big currency devaluation relative to other currencies, ala Iceland 2008, Argentina ~2002, etc.  An Iceland 2008 3X33 did less badly than a Iceland 2008 4X25.  I understand that such a massive fast devaluation is unlikely given the #1 reserve currency status of the USD.  However, a slower USD currency devaluation could happen.  Example - some nations for bilateral trade, have dropped the USD & are trading in their own currencies.  Some oil trading has swtiched to Euros.  Etc. Even if the USD remains the #1 RC, it could "lose market share", from the current 60% of foreign exchange reserves.  I would rather hold 33% in  (or in my case 25% due to using EDV) Treasury assets in the 3X33 than the 50% Treasury assets in the 4X25.

3. probably better for using limited tax-advantaged account (IRA, 401k, etc) space.  IIRC craigr recommended the prioritized order for the tax-adv space is bond, cash, stock, gold.  The Treasury assets (bonds & cash) pay more dividends than stock.  In the 3X33, it is easier to shield all of your Treasury assets in your tax-adv space.

4. probably better for "making 401k lemonade".  Many jobs force their employees to pick from a list of wack mutual funds, which have high expense ratios, and cover only the stock asset decently, & perhaps the cash asset in a mediocre way (30 yr Treasury bond fund or gold not a choice available on the list).  The money market or "stable value fund" could be considered cash, but is not 100% Treasury assets as Harry Browne recommends.  There is likely to be garbage in these funds, such as Lehman Bros, Fannie Mae, etc short term bonds.  So instead of calling the mediocre stable value fund as "cash" (don't label an orange as an apple), just avoid cash.  Load up the 401k in whichever stock index they offer, & keep the bond the bond in IRA, & if you run out of IRA space for the gold, hold the gold ETF or closed end fund in a taxable account, or physical gold coins.