Rebalancing bands (poll)

[6 Iron]

There has been good discussion about this in other threads, but I wanted to get a feel for what the group at large was doing, why they chose the band that they did, was it influenced by retirement status, etc.

[6 Iron]

This is about as I expected. When I started my PP in 10/09, 5% rebalancing bands were more commonly discussed. At present, this issue remains theoretical , as I have yet to reach a rebalancing band, even at 5% for volatile assets.

I chose 5% rather than 10% because I thought that I would have difficulty sitting on 34% gold and 16% stocks, and say let it ride. Also, as I am still accumulating, and adding to the lagging asset, the absolute price change per unit has to change more, than for a portfolio without contributions, to trigger rebalancing.

Now here is the question for the 10%-ers. I recognize that this is HB's method, and I recall seeing a post showing a small backtested advantage. But is your choice influenced by the fact that long term treasuries are the lagging volatile asset? Have any of you changed bands, and if so, how does one avoid market-timing?

[Lone Wolf]

My choice was purely influenced by the fact that the choice of band doesn't seem to make a big difference and the 10% bands lead to less maintenance and fuss.  That's really it for me.  I like my allocation to minimize both fiddling and fear as much as possible.

The one "wrinkle" that I add to this is that I have a deal with myself.  If at some point in the future I feel fear starting to creep back in, I reserve the right to rebalance to 4x25.  If I "feel" turmoil coming in the markets or in my own mind, I am allowed to decide that I am "too out of balance".  Getting everything perfectly 4x25 again seems like a good way to assuage my fears without going too far outside of protocol.  I've not had to use this escape hatch but I leave it open as a shelter into which the most primitive, reptilian part of my brain can run and hide if necessary.

I permit myself no other market timing exercises of any kind whatsoever.  This is my one and only "safety valve".  I'm comfortable with it because I know that the 20%\30% bands also work great.

To reverse your example, if I got down to 16% gold and up to 34% stocks in a time of market turmoil I bet that I'd pull the trigger.  PP is supposed to be a "worry-free" allocation so if I got to the point where I did feel worry, I would push that big red "Rebalance" button.

[MediumTex]

If at some point in the future I feel fear starting to creep back in, I reserve the right to rebalance to 4x25.  If I "feel" turmoil coming in the markets or in my own mind, I am allowed to decide that I am "too out of balance".  Getting everything perfectly 4x25 again seems like a good way to assuage my fears without going too far outside of protocol.

This is such an important point.

One of the psychological shifts that the PP investor needs to make is to change the fear response of going to 100% cash to rebalancing to 25% x 4 instead.

Sooner or later most of us will get rattled by the market.  It's important to know in advance what we will do in such a case. 

The best approach, of course, is to just stick with the PP and rebalance as needed, but fear can have a way of overwhelming that sort of rationality, and I think it's important to have a plan in such a case that will prevent you from abandoning the PP altogether in times of stress. 

[Lone Wolf]

Sooner or later most of us will get rattled by the market.  It's important to know in advance what we will do in such a case. 

That's exactly it.  2008 taught me that.  While I didn't act on any of the many very stupid half-impulses I had during the financial crisis, it was educational to see just what kind of idiotic lunacy the "less rational" parts of my mind would entertain.

While indulging myself with unnecessary rebalances isn't a "fantastic" idea per se, at least that particular security blanket is highly fire-retardant.

[6 Iron]

These are all excellent responses, and I think that the concept of using rebalancing as a safety valve, as opposed to running and hiding is far preferable for an investor. Costs always matter, although with Vanguard, this is significantly less of an issue now for some investors. Still, I think 5 % bands may be at the limit of my comfort zone; when I was a daily portfolio peeker, I started to itch when balances were at 22 or 28%, which is a good reason to check one's portfolio less often.

[Lone Wolf]

I completely agree.  The real story of the backtesting that showed the 10-bands working "better" than the 5-bands was that both bands worked very well in practice.  The edge of the 15/35 bands was quite small and easily could have been down to luck.  Personal preference and comfort seems like the best deciding factor.

[6 Iron]

I thought I would bump this for a couple of reasons. We have grown, and others may wish to respond,but it is weighing on my mind. As I approach two years, I have been able to keep in balance with new contributions, but now gold is near my 30% (+/-5%) band, and I need to commit. For me, it seems easier to buy what is on sale than to sell a winner.

[steve]

My Gold is about 32%. Ideally I want to rebalace at 35% however other things I am considering are the premium on GTU which is what I will sell to rebalance. The premium has been going up and as of now it is 8.99% which is a good time for me to sell some. It could go up more which would be even better but it could also drop to zero in a heartbeat if there is an offering from Central Gold Trust. My stock allocation is 18.75 and I would also prefer to buy when that drops to 15% that would be ideal. If I can be sure there won't be an offering I would wait for my gold to reach 35% otherwise I just may just rebalance at 33% and sit back and relax. The overall difference between 33% or 35% is probably insignificant.

[MediumTex]

My Gold is about 32%. Ideally I want to rebalace at 35% however other things I am considering are the premium on GTU which is what I will sell to rebalance. The premium has been going up and as of now it is 8.99% which is a good time for me to sell some. It could go up more which would be even better but it could also drop to zero in a heartbeat if there is an offering from Central Gold Trust. My stock allocation is 18.75 and I would also prefer to buy when that drops to 15% that would be ideal. If I can be sure there won't be an offering I would wait for my gold to reach 35% otherwise I just may just rebalance at 33% and sit back and relax. The overall difference between 33% or 35% is probably insignificant.

If you are near a rebalancing band and have GTU with a 9% premium I would definitely rebalance.

[steve]

If you are near a rebalancing band and have GTU with a 9% premium I would definitely rebalance.

Thank you Medium Tex.  I think that is good advise.

[melveyr]

One more notch in the 15% and 35% column is greater tax efficiency 

[craigr]

My Gold is about 32%. Ideally I want to rebalace at 35% however other things I am considering are the premium on GTU which is what I will sell to rebalance. The premium has been going up and as of now it is 8.99% which is a good time for me to sell some. It could go up more which would be even better but it could also drop to zero in a heartbeat if there is an offering from Central Gold Trust. My stock allocation is 18.75 and I would also prefer to buy when that drops to 15% that would be ideal. If I can be sure there won't be an offering I would wait for my gold to reach 35% otherwise I just may just rebalance at 33% and sit back and relax. The overall difference between 33% or 35% is probably insignificant.

If you are near a rebalancing band and have GTU with a 9% premium I would definitely rebalance.

I would concur with this as well. Waiting a little longer is probably not going to help you much.

Frankly, anything in the 30-35% range is ripe for rebalancing if you are getting edgy. I don't think it impacts things too much if you are aware of the costs. But if you sleep better taking money off the table it may be OK to do.

[craigr]

One more notch in the 15% and 35% column is greater tax efficiency 

Absolutely. You need to factor in tax costs every time you touch your portfolio. Uncle Sam is an unwanted partner, but a partner none the less.

[buddtholomew]

I hold PP in taxable and tax considerations dictate when to rebalance. I maintain 10% additional in Cash (outside of PP) for rebalancing purposes and intend to contribute to the lagging asset/s to restore the allocation when 15% is breached. Taking a 28% short-term gain with 30+ years of investing before retirement seems counterintuitive. Although I have considered taking a capital loss to offset the gain should the opportunity present.