I've been thinking about rebalancing bands and the topic of PP rebalancing, and it seems like we have learned the following:
1. 15%/35% rebalancing bands provide slightly better returns than 20%/30% bands (not to mention better tax treatment and more convenience).
2. It is rare for a rebalancing event to be triggered by an asset falling in value. In other words, it is rare for a rebalancing even to be triggered by an asset reaching 15%, other than cash reaching 15% in the drawdown stage. With that said, I suppose it also matters where you are putting your new PP contributions.
3. Historically, rebalancing events are normally triggered by moves in gold or stocks. I don't know if a rebalancing band has ever been hit because LT treasuries hit 15% or 35% (though I may be wrong). If this is true, it might be a good argument for using zeroes in the LT treasury portion of the PP for their greater volatility.
Anyone else have any rebalancing observations?
What We Have Learned About Rebalancing
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What We Have Learned About Rebalancing
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Re: What We Have Learned About Rebalancing
I would say that we have also learned that an investor's psychology begins to work against him the farther away from 25% x 4 that he gets.
At 25% x 4, the PP feels safe and secure...indifferent toward the future, but when a person who doesn't really like gold very much finds himself with gold at 33% of all of his investments, it can become stressful to wait until the asset actually touches 35%.
OTOH, for a person who loves stocks, it can probably be stressful to sell at 35% when he is sure that stocks are going to continue rising.
At 25% x 4, the PP feels safe and secure...indifferent toward the future, but when a person who doesn't really like gold very much finds himself with gold at 33% of all of his investments, it can become stressful to wait until the asset actually touches 35%.
OTOH, for a person who loves stocks, it can probably be stressful to sell at 35% when he is sure that stocks are going to continue rising.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: What We Have Learned About Rebalancing
MT,
I would say that 35/15 worked better in the past 40 years because trends had a tendency to persist for decades at a time, which I try not to assume for the future with too much certainty.
For instance, gold has had two long bull markets since 1972 and one very long bear market, stocks have had two long bear markets and one very long bull market, and LT treasuries have had one long bear market and one very long bull market.
That is definitely going to make wider bands work better for obvious reasons. I just wonder whether markets are going to sustain trends as long as they have in the past.
What we haven't seen in the last 40 years is a sustained period (10 years or so) where things have bounced back and forth year after year, making tighter bands more appropriate to 1) capture the volatility to buy stragglers that will perform next year, and 2) mitigate the risk of having 16% of an asset at any given time when you need it to perform because the others are going to crap.
I agree with the idea of maybe considering zeros along with 30/20's, even though it would appear (to some) that now is not the time to increase volatility in their bond holdings. I definitely think that recessions being naturally bad for stocks and naturally deflationary leaves plenty to love about notching up our resistance to them.
Regarding investor psychology as you get further away from 4x25, this is the most surprising and true aspect of the pp I've noticed. It's easier said than done to go beyond the 30/20 bands, especially, as you say, with an asset you "don't like."
I would say that 35/15 worked better in the past 40 years because trends had a tendency to persist for decades at a time, which I try not to assume for the future with too much certainty.
For instance, gold has had two long bull markets since 1972 and one very long bear market, stocks have had two long bear markets and one very long bull market, and LT treasuries have had one long bear market and one very long bull market.
That is definitely going to make wider bands work better for obvious reasons. I just wonder whether markets are going to sustain trends as long as they have in the past.
What we haven't seen in the last 40 years is a sustained period (10 years or so) where things have bounced back and forth year after year, making tighter bands more appropriate to 1) capture the volatility to buy stragglers that will perform next year, and 2) mitigate the risk of having 16% of an asset at any given time when you need it to perform because the others are going to crap.
I agree with the idea of maybe considering zeros along with 30/20's, even though it would appear (to some) that now is not the time to increase volatility in their bond holdings. I definitely think that recessions being naturally bad for stocks and naturally deflationary leaves plenty to love about notching up our resistance to them.
Regarding investor psychology as you get further away from 4x25, this is the most surprising and true aspect of the pp I've noticed. It's easier said than done to go beyond the 30/20 bands, especially, as you say, with an asset you "don't like."
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: What We Have Learned About Rebalancing
It drives me nuts that the PP doesn't use zeroes. The spirit of the strategy is that it captures asset volatility, so it seems like zeroes would be the natural choice for the LT treasury portion, at least in a tax sheltered account.MediumTex wrote: If this is true, it might be a good argument for using zeroes in the LT treasury portion of the PP for their greater volatility.
Having said that, I love getting cash from my Treasury Bonds twice a year, which, in a sense, is a kind of rebalancing.
"All men's miseries derive from not being able to sit in a quiet room alone."
Pascal
Pascal
Re: What We Have Learned About Rebalancing
Would it make sense to have tighter rebalancing bands for the LTT such they tiggered a rebalance at about the same frequency as the stocks and gold? So perhaps have 20-30% bands for LTT and 15%-35% for gold and stocks? I suppose though the LTT are not there for our situation, they are there for the Japanese PP and for us if our economy ever turns Japanese. I guess the Japanese PP would have benefited from wide rebalancing bands with LTT so as to avoid rebalancing out of LTT.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: What We Have Learned About Rebalancing
I have deep respect for all of our psychological frailties as human beings, and one of the things I like about the PP is that it also respects the fact that people have a hard time thinking clearly when they are either making or losing a lot of money.
If I were to give advice to a new PP investor, I would tell him/her that in the beginning it will be easy, but as the assets begin to move in different directions it may become more difficult because as each PP asset moves away from 25%, what will begin to happen is that each individual's ratio of rationality to emotion with respect to that asset will also begin to move around. A person who is perfectly rational about LT treasuries at 25% may find himself nervous and fearful with LT treasuries at 32%.
The dynamic above is one of the many reasons not to look in on the portfolio too often, but it is also a concept that is best absorbed when one is in a rational state of mind. That way if/when you do find yourself feeling rattled about that PP asset that is lingering around 32%, you can remind yourself that someone once said you might feel this way, and to just stick with the basic formula and don't let emotions dictate an early rebalance just because it feels like a good thing to do at the time.
If I were to give advice to a new PP investor, I would tell him/her that in the beginning it will be easy, but as the assets begin to move in different directions it may become more difficult because as each PP asset moves away from 25%, what will begin to happen is that each individual's ratio of rationality to emotion with respect to that asset will also begin to move around. A person who is perfectly rational about LT treasuries at 25% may find himself nervous and fearful with LT treasuries at 32%.
The dynamic above is one of the many reasons not to look in on the portfolio too often, but it is also a concept that is best absorbed when one is in a rational state of mind. That way if/when you do find yourself feeling rattled about that PP asset that is lingering around 32%, you can remind yourself that someone once said you might feel this way, and to just stick with the basic formula and don't let emotions dictate an early rebalance just because it feels like a good thing to do at the time.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: What We Have Learned About Rebalancing
What is the argument *against* using zero coupon bonds?
Re: What We Have Learned About Rebalancing
I wonder about this too. There is a part of me, however, that says if it aint broke, don't fix it.stone wrote: Would it make sense to have tighter rebalancing bands for the LTT such they tiggered a rebalance at about the same frequency as the stocks and gold? So perhaps have 20-30% bands for LTT and 15%-35% for gold and stocks? I suppose though the LTT are not there for our situation, they are there for the Japanese PP and for us if our economy ever turns Japanese. I guess the Japanese PP would have benefited from wide rebalancing bands with LTT so as to avoid rebalancing out of LTT.
LT bonds, like cash, provide value by merely offsetting dramatic moves in other assets and paying regular dividends, even if these assets do not trigger rebalancing bands themselves.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: What We Have Learned About Rebalancing
Low levels of liquidity and high bid/ask spreads in zero coupon funds and bad tax treatment outside of tax deferred accounts are a few objections.christina wrote: What is the argument *against* using zero coupon bonds?
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: What We Have Learned About Rebalancing
Thanks!MediumTex wrote:Low levels of liquidity and high bid/ask spreads in zero coupon funds and bad tax treatment outside of tax deferred accounts are a few objections.christina wrote: What is the argument *against* using zero coupon bonds?
Re: What We Have Learned About Rebalancing
Isn't it fair to say that premature rebalancing back to 25% is relatively benign. It probably will typically slightly reduce performance but only by a small amount. You'll make a 9.5% gain only a 9.2% or something like that. Hardly a catastrophe??
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: What We Have Learned About Rebalancing
stone,
I think that's fair to say.
I would say one should try to imagine the PP under conditions of having two important assets be at 16% each.
If you went into a great-depression scenario with 16% cash and 16% bonds you could be pretty screwed as 68% of your portfolio tanks.
That said, I'm definitely getting pretty picky about the facts here.
I think that's fair to say.
I would say one should try to imagine the PP under conditions of having two important assets be at 16% each.
If you went into a great-depression scenario with 16% cash and 16% bonds you could be pretty screwed as 68% of your portfolio tanks.
That said, I'm definitely getting pretty picky about the facts here.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: What We Have Learned About Rebalancing
I guess tighter rebalancing bands together with a strict prohibition against frequent rebalancing in the same direction will result in forgoing the "momentum" benefit of the classic 15%-35% strategy and will probably also give slightly higher overall portfolio volatility but could provide greater catastrophe "what if" protection??
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: What We Have Learned About Rebalancing
One simple solution would be recommend that the new PP-er start with 20/30% rebalancing bands, and plan on eventually going to 15/35% bands as their comfort level with the strategy increases.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: What We Have Learned About Rebalancing
Here is a quote from Fail-Safe Investing:
When you make your once-a-year check of the portfolio's value, if all four investments are within the 15-35% range, no rebalancing is necessary. During the year, if you happen to notice that there's been a big change in investment prices, you may want to check the values of the investments. Again, if any investment has strayed outside the 15-35% range, go ahead and rebalance the entire portfolio.
Browne, Harry (2010-04-01). Fail-Safe Investing: Lifelong Financial Security in 30 Minutes (p. 47). St. Martin's Press. Kindle Edition.
For me, having read Craig's blog, and this forum, and finally the above book, I did lots of simulations and back tests, and concluded, that the above approach was the one I would use. I set up my PP with 55% of my investments at the end of May this year, with the commitment to give it a year, and see if I wanted to go all in. So far, so good (really good actually).
What my simulations and back tests told me was that the above strategy was close to optimal. Rebalancing with tighter bands, or more frequently reduces volatility, and consequently reduces returns, but not by too much. What I have learned is, for me, it is best to follow HB's recommendation.
FYI I am retired, and in draw-down mode, so I will probably be rebalancing because of low cash as often as not.
Steve
When you make your once-a-year check of the portfolio's value, if all four investments are within the 15-35% range, no rebalancing is necessary. During the year, if you happen to notice that there's been a big change in investment prices, you may want to check the values of the investments. Again, if any investment has strayed outside the 15-35% range, go ahead and rebalance the entire portfolio.
Browne, Harry (2010-04-01). Fail-Safe Investing: Lifelong Financial Security in 30 Minutes (p. 47). St. Martin's Press. Kindle Edition.
For me, having read Craig's blog, and this forum, and finally the above book, I did lots of simulations and back tests, and concluded, that the above approach was the one I would use. I set up my PP with 55% of my investments at the end of May this year, with the commitment to give it a year, and see if I wanted to go all in. So far, so good (really good actually).
What my simulations and back tests told me was that the above strategy was close to optimal. Rebalancing with tighter bands, or more frequently reduces volatility, and consequently reduces returns, but not by too much. What I have learned is, for me, it is best to follow HB's recommendation.
FYI I am retired, and in draw-down mode, so I will probably be rebalancing because of low cash as often as not.
Steve
Last edited by SteveGo on Thu Nov 03, 2011 2:04 pm, edited 1 time in total.
Steve G
Re: What We Have Learned About Rebalancing
SteveGo,
The area I am touching on is figuring out how best to match up the optimal rebalancing approach (which I agree is 15/35%) with the emotional dissonance that people often encounter in trying to implement the optimal approach.
Even though the PP is very simple and safe, I think that our "human-ness" still tempts us in endless ways to try to screw it up through tinkering with the allocation or the rebalancing points.
The area I am touching on is figuring out how best to match up the optimal rebalancing approach (which I agree is 15/35%) with the emotional dissonance that people often encounter in trying to implement the optimal approach.
Even though the PP is very simple and safe, I think that our "human-ness" still tempts us in endless ways to try to screw it up through tinkering with the allocation or the rebalancing points.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: What We Have Learned About Rebalancing
MT,
I understand.
What I was trying to say was that by reading the PP source materials, and doing some of my own testing, I was able to put in enough of a bulwark into the "thinking" part of my brain, to deal with the "emoting" part of my brain, when the urge to twiddle or fear manifested itself.
Others may have different methods for dealing with the emotions of investing, but this seems to work best for me. Much has been written about the fact that the fear part of our brains, operates from a different place than the logical part. The advice I have taken away from that stuff is that you have to know this, and then make a plan and a commitment to deal with it.
I don't think the human urges and fears ever go away, though. They are ever lurking.
S
I understand.
What I was trying to say was that by reading the PP source materials, and doing some of my own testing, I was able to put in enough of a bulwark into the "thinking" part of my brain, to deal with the "emoting" part of my brain, when the urge to twiddle or fear manifested itself.
Others may have different methods for dealing with the emotions of investing, but this seems to work best for me. Much has been written about the fact that the fear part of our brains, operates from a different place than the logical part. The advice I have taken away from that stuff is that you have to know this, and then make a plan and a commitment to deal with it.
I don't think the human urges and fears ever go away, though. They are ever lurking.
S
Last edited by SteveGo on Thu Nov 03, 2011 4:15 pm, edited 1 time in total.
Steve G
Re: What We Have Learned About Rebalancing
A summation of this idea I've always liked is: "No one is wise on horseback."SteveGo wrote:
Others may have different methods for dealing with the emotions of investing, but this seems to work best for me. Much has been written about the fact that the fear part of our brains, operates from a different place than the logical part. The advice I have taken away from that stuff is that you have to know this, and then make a plan and a commitment to deal with it.
I don't think the human urges and fears ever go away, though. They are ever lurking.
S
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
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jackely
Re: What We Have Learned About Rebalancing
Can you explain? I have not clue what that means.MediumTex wrote: If this is true, it might be a good argument for using zeroes in the LT treasury portion of the PP for their greater volatility.
Haven't been doing the PP long enough to rebalance myself.
Re: What We Have Learned About Rebalancing
Zero coupon bonds are a lot more volatile than coupon bonds.jackh wrote:Can you explain? I have not clue what that means.MediumTex wrote: If this is true, it might be a good argument for using zeroes in the LT treasury portion of the PP for their greater volatility.
Haven't been doing the PP long enough to rebalance myself.
Compare the movements of EDV to TLT and you will see what I mean.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: What We Have Learned About Rebalancing
Actually the above analysis is "it depends." Meaning it depends on when the portfolio was started whether a certain rebalancing point is going to be reached. Someone starting the Permanent Portfolio in late 2007 probably did rebalance from LT bonds into stocks. But if they started it end of 2008 they likely did the opposite a year later.MediumTex wrote: 3. Historically, rebalancing events are normally triggered by moves in gold or stocks. I don't know if a rebalancing band has ever been hit because LT treasuries hit 15% or 35% (though I may be wrong). If this is true, it might be a good argument for using zeroes in the LT treasury portion of the PP for their greater volatility.
Anyone else have any rebalancing observations?
Various portfolio performance results assume that things begin Jan 1st and end Dec 31st but this is usually not the case. Each person's "rebalance timeline" is going to be different depending on when they started, when they made deposits, when they made withdrawals etc.
Last edited by craigr on Fri Nov 04, 2011 11:09 am, edited 1 time in total.
Re: What We Have Learned About Rebalancing
In principle wouldn't it be possible to have a universal (not person specific) PP. You could take as a starting point say the March 2009 low for stocks and then play things forward from that point assuming that at that point things were 4x25%. If someone was entering now then, instead of buying in at 4x25, they would buy in at whatever ratios things had got to (eg 20:30:27:23 or whatever it might be). Drawing down or adding to the portfolio would be done so as to conserve the "economy directed" ratios. In principle if 15%-35% rebalancing bands perform better than tighter bands, then that is because they let the portfolio run with economic trends. That is not something specific to each person's portfolio. I guess the extra phaff isn't worth it though??
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
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dualstow
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Re: What We Have Learned About Rebalancing
It's almost never worth faffing about. What a great word, though.stone wrote: I guess the extra phaff isn't worth it though??
WHY IS PLATINUM UP LIKE 4½% TODAY
Re: What We Have Learned About Rebalancing
To me, the most important thing we've learned is that all of these approaches work quite well. You will do just fine whether you choose 20/30 or 15/35 so long as you do not screw yourself over by attempting to time the market.
Buying lagging assets every so often with cash (if you're in the accumulation phase and your savings-to-earnings ratio isn't too large) is yet another effective method. This has the nice side effect of keeping you close to 4x25.
I personally feel most comfortable hugging 4x25 because:
Buying lagging assets every so often with cash (if you're in the accumulation phase and your savings-to-earnings ratio isn't too large) is yet another effective method. This has the nice side effect of keeping you close to 4x25.
I personally feel most comfortable hugging 4x25 because:
- The behavior of 4x25 is well-understood, stable, and very effective
- It keeps you the furthest from any taxable events brought on by rebalances
Re: What We Have Learned About Rebalancing
Even buy and hold works pretty well, right? It's around a percentage point difference...I think someone ran the numbers once and posted them.Lone Wolf wrote: To me, the most important thing we've learned is that all of these approaches work quite well.
"All men's miseries derive from not being able to sit in a quiet room alone."
Pascal
Pascal