Thoughts on my recent rebalancing history

[Fredmong]

Hi fellow PPers,

I just rebalanced my Canadian Permanent Portfolio, it's the 3rd time I rebalanced in less than one year. I use 20/30 bands but I ended up pulling the trigger before hitting the exact allocation. I have been burned in the past where an asset stalled at 29% only to go back to 25%. My new approach is getting close enough. Anybody else has experienced this ? Anybody else is using a close enough method ?

1) In March 2020, I trimmed bonds (27.5%) and gold (27.5%) and bought stocks (18.9%). Felt horrible buying stocks on the slide, ended up being glad I did.

2) In June 2020, I trimmed gold again (29.4%) and kept the proceed in cash (21.9%). Gold reversed almost immediately after I trimmed it.

3) In February 2021 (today), I trimmed stocks (28.9%) and bought bonds (20.1%). Buying bonds right now is so hard. At least Canadian long bonds yield over 2.7%. Let's hope bond convexity does its magic.

[flyingpylon]

Hi fellow PPers,

I just rebalanced my Canadian Permanent Portfolio, it's the 3rd time I rebalanced in less than one year. I use 20/30 bands but I ended up pulling the trigger before hitting the exact allocation. I have been burned in the past where an asset stalled at 29% only to go back to 25%. My new approach is getting close enough. Anybody else has experienced this ? Anybody else is using a close enough method ?

1) In March 2020, I trimmed bonds (27.5%) and gold (27.5%) and bought stocks (18.9%). Felt horrible buying stocks on the slide, ended up being glad I did.

2) In June 2020, I trimmed gold again (29.4%) and kept the proceed in cash (21.9%). Gold reversed almost immediately after I trimmed it.

3) In February 2021 (today), I trimmed stocks (28.9%) and bought bonds (20.1%). Buying bonds right now is so hard. At least Canadian long bonds yield over 2.7%. Let's hope bond convexity does its magic.

Once your account gets bigger you will rebalance less often. Over the years I have missed some opportunities to rebalance because I was too strict about hitting the threshold. So now I will do it if I'm within 1-2% and feel like I should. Sometimes I will do a partial rebalance or add to a lagging asset just enough to get things evened up a little more. That's not very scientific but it works for me.

I am having to buy bonds now too but I can't count the number of times I thought I was throwing money away on a particular asset only to have it save the day within a year or two later. Good luck!

[Fredmong]

Hi fellow PPers,

I just rebalanced my Canadian Permanent Portfolio, it's the 3rd time I rebalanced in less than one year. I use 20/30 bands but I ended up pulling the trigger before hitting the exact allocation. I have been burned in the past where an asset stalled at 29% only to go back to 25%. My new approach is getting close enough. Anybody else has experienced this ? Anybody else is using a close enough method ?

1) In March 2020, I trimmed bonds (27.5%) and gold (27.5%) and bought stocks (18.9%). Felt horrible buying stocks on the slide, ended up being glad I did.

2) In June 2020, I trimmed gold again (29.4%) and kept the proceed in cash (21.9%). Gold reversed almost immediately after I trimmed it.

3) In February 2021 (today), I trimmed stocks (28.9%) and bought bonds (20.1%). Buying bonds right now is so hard. At least Canadian long bonds yield over 2.7%. Let's hope bond convexity does its magic.

Once your account gets bigger you will rebalance less often. Over the years I have missed some opportunities to rebalance because I was too strict about hitting the threshold. So now I will do it if I'm within 1-2% and feel like I should. Sometimes I will do a partial rebalance or add to a lagging asset just enough to get things evened up a little more. That's not very scientific but it works for me.

I am having to buy bonds now too but I can't count the number of times I thought I was throwing money away on a particular asset only to have it save the day within a year or two later. Good luck!

Thanks, that's great insight ! In the past, I have added lump sum contribution to the lagging asset too, topping it off and it almost always paid off. Regarding missed opportunities, if one had 15/35 bands, in theory, an asset could grow to 34% of the portfolio only to go back to 25%, without ever realizing it. That could be almost a 40% upside that could have been redistributed to other assets. Evidently reality is never that simple. The asset could go up 39% and stall while the other assets catch up, never losing any value.

There is a lot of talk and theory about rebalancing but practice is a little different. The fact is that unless you are rebalancing at fixed date or interval (quarterly), in some weird way, it is market timing. I think that since the PP is all about harvesting volatility, if one was somewhat aware of the current state of the market, there are opportunities where a quick rebalancing will be the difference between say a 15% annual return and a 20% annual return.

[buddtholomew]

Anytime you rebalance out of stocks you lower your long term expected returns. I probably over-re-balance to maintain risk profile.

[flyingpylon]

Hi fellow PPers,

I just rebalanced my Canadian Permanent Portfolio, it's the 3rd time I rebalanced in less than one year. I use 20/30 bands but I ended up pulling the trigger before hitting the exact allocation. I have been burned in the past where an asset stalled at 29% only to go back to 25%. My new approach is getting close enough. Anybody else has experienced this ? Anybody else is using a close enough method ?

1) In March 2020, I trimmed bonds (27.5%) and gold (27.5%) and bought stocks (18.9%). Felt horrible buying stocks on the slide, ended up being glad I did.

2) In June 2020, I trimmed gold again (29.4%) and kept the proceed in cash (21.9%). Gold reversed almost immediately after I trimmed it.

3) In February 2021 (today), I trimmed stocks (28.9%) and bought bonds (20.1%). Buying bonds right now is so hard. At least Canadian long bonds yield over 2.7%. Let's hope bond convexity does its magic.

Once your account gets bigger you will rebalance less often. Over the years I have missed some opportunities to rebalance because I was too strict about hitting the threshold. So now I will do it if I'm within 1-2% and feel like I should. Sometimes I will do a partial rebalance or add to a lagging asset just enough to get things evened up a little more. That's not very scientific but it works for me.

I am having to buy bonds now too but I can't count the number of times I thought I was throwing money away on a particular asset only to have it save the day within a year or two later. Good luck!

Thanks, that's great insight ! In the past, I have added lump sum contribution to the lagging asset too, topping it off and it almost always paid off. Regarding missed opportunities, if one had 15/35 bands, in theory, an asset could grow to 34% of the portfolio only to go back to 25%, without ever realizing it. That could be almost a 40% upside that could have been redistributed to other assets. Evidently reality is never that simple. The asset could go up 39% and stall while the other assets catch up, never losing any value.

There is a lot of talk and theory about rebalancing but practice is a little different. The fact is that unless you are rebalancing at fixed date or interval (quarterly), in some weird way, it is market timing. I think that since the PP is all about harvesting volatility, if one was somewhat aware of the current state of the market, there are opportunities where a quick rebalancing will be the difference between say a 15% annual return and a 20% annual return.

Yes, in my first reply I forgot to mention that some of this requires looking at your portfolio more than you're "supposed to". I'm in the accumulation phase so about quarterly I will distribute new cash but other than that I only make trades about once a year.

I run a GB and I was able to plow some funds into stocks in March when SCV got "close enough" to my rebalancing band. That turned out great but the opportunity was relatively quick so if I had not been paying attention or had been more strict about rebalancing bands I would have missed it.

[Fredmong]

Anytime you rebalance out of stocks you lower your long term expected returns. I probably over-re-balance to maintain risk profile.

Interesting. So in your case as soon as stocks get 2-3% let's say below 25% you end up bringing them back to 25%, essentially buying the dip ? You must have made a killing in the past year, almost every 5-10% short dip rally back up for a new leg up. What was fueling those buys ? New money or trimming gold and bonds spikes in the past year ?

[Fredmong]

Yes, in my first reply I forgot to mention that some of this requires looking at your portfolio more than you're "supposed to". I'm in the accumulation phase so about quarterly I will distribute new cash but other than that I only make trades about once a year.

I run a GB and I was able to plow some funds into stocks in March when SCV got "close enough" to my rebalancing band. That turned out great but the opportunity was relatively quick so if I had not been paying attention or had been more strict about rebalancing bands I would have missed it.

Yes, good point. PP strategy is mainly sold as a passive strategy and that's true and that's fine, but on the other end I think timing the market gets a bad rep because people end up selling all at once or buying all at once. PP philosophy teaches to scale in and out of position which is simply good portfolio management but also makes you always be invested never selling it all. So if one ends up trimming profits and buying lagging assets too often that may shave a couple percent off returns but if the timing is right, one might end up adding a couple percent more. You'll probably never get poor taking profits.

Regarding small caps, that's amazing your buy at March lows loosely disregarding the bands must have brought you amazing returns compared to somebody who had not rebalanced. You must have ended up with 20%+ returns for 2020, right ?

[mathjak107]

Anytime you rebalance out of stocks you lower your long term expected returns. I probably over-re-balance to maintain risk profile.

That is only true when rebalancing in to less capable assets like equities to a total bond fund ...it does not apply when rebalancing in to assets with equivalent gain potential .

Gold and long term bonds have the equal ability to match equities gains when it is there day in the sun ...I have not looked in a while but last time i did gold was beating equities the last 15 and 20 years

[buddtholomew]

Anytime you rebalance out of stocks you lower your long term expected returns. I probably over-re-balance to maintain risk profile.

That is only true when rebalancing in to less capable assets like equities to a total bond fund ...it does not apply when rebalancing in to assets with equivalent gain potential .

Gold and long term bonds have the equal ability to match equities gains when it is there day in the sun ...I have not looked in a while but last time i did gold was beating equities the last 15 and 20 years

I chose my words cautiously and used “expected” return to convey the point.

[mathjak107]

I expect 2021 to maybe have gold as top dog ...... I think stocks have a lot of catching up to do to meet their already expectations....

The rebalancing hurting performance usually refers to moving from a higher capable asset to a lessor capable asset like the typical equities to total bond fund .... but when you have just as capable asset things can be very different since each asset except cash can typically outperform the other when it has its day in the sun

https://www.kitces.com/blog/how-rebalan ... nt-anyway/

[flyingpylon]

Yes, in my first reply I forgot to mention that some of this requires looking at your portfolio more than you're "supposed to". I'm in the accumulation phase so about quarterly I will distribute new cash but other than that I only make trades about once a year.

I run a GB and I was able to plow some funds into stocks in March when SCV got "close enough" to my rebalancing band. That turned out great but the opportunity was relatively quick so if I had not been paying attention or had been more strict about rebalancing bands I would have missed it.

Yes, good point. PP strategy is mainly sold as a passive strategy and that's true and that's fine, but on the other end I think timing the market gets a bad rep because people end up selling all at once or buying all at once. PP philosophy teaches to scale in and out of position which is simply good portfolio management but also makes you always be invested never selling it all. So if one ends up trimming profits and buying lagging assets too often that may shave a couple percent off returns but if the timing is right, one might end up adding a couple percent more. You'll probably never get poor taking profits.

Regarding small caps, that's amazing your buy at March lows loosely disregarding the bands must have brought you amazing returns compared to somebody who had not rebalanced. You must have ended up with 20%+ returns for 2020, right ?

I don't mean to imply that my "method" is in any way intended to beat the performance of a standard GB. A big part of the reason I started with a PP+VP and then moved to a GB was to remove some of the emotional issues related to investing. Initially I was pretty strict about rebalancing bands but was disappointed and frustrated about missing out on occasional trading opportunities. So now I give myself a little more leeway and I am happier with that. But again it's more about dealing with FOMO than goosing performance.

I ended 2020 +16.73% vs +12.89% for the GB according to PortfolioCharts.com. In March I sold part of an LTT position that was due to be replaced in 2021 anyway and put it into SCV and TSM. It was not large enough %-wise to have a huge impact on overall performance but it was a nice little "win" for a change.

[Hal]

And here are BelangP's thoughts on rebalancing -> https://www.youtube.com/watch?v=gtykd_RFKDI

[LazyInvestor]

And here are BelangP's thoughts on rebalancing -> https://www.youtube.com/watch?v=gtykd_RFKDI

Does anyone know how this would work with more than 2 asset classes?

If one decides to follow this rebalancing strategy, how should they go about adding new money? Add to the better performing asset that year?

[ppnewbie]

I listened to Harry Browne discuss rebalance bands on his radio show. He said something to the effect of there being little science behind it. It was just a general guideline. With the main point being that if that - could you endure a loss of 50 percent to a particular asset class.

I’ll see if I can dig up that old episode and share it.

[mathjak107]

While belangp is likely correct since up trends especially in stocks tend to run multiple years I think most would find it way to complicated to rebalance in increments ....

[I Shrugged]

Back when I started out by reading John Bogle, I thought the studies showed that rebalancing actually has very little impact versus just letting things run. Maybe it was some other author who studied this.

[mathjak107]

Back when I started out by reading John Bogle, I thought the studies showed that rebalancing actually has very little impact versus just letting things run. Maybe it was some other author who studied this.

in most conventional portfolios rebalancing hurts long term returns since anything pulling money from equities and ptting it in to an asset like a total bond fund will hurtreturns since it lacks the bang equities does.

the pp is different .the assets in the pp except for cash can equally run with the ball . however that still does not mean the odds say they will

[ppnewbie]

I listened to Harry Browne discuss rebalance bands on his radio show. He said something to the effect of there being little science behind it. It was just a general guideline. With the main point being that if that - could you endure a loss of 50 percent to a particular asset class.

I’ll see if I can dig up that old episode and share it.

https://m.youtube.com/watch?v=MaHRI9KdqOc

At minute 1:40 in the video - Harry Browne answers the rebalancing question.

[Kbg]

There have been a lot of studies on rebalancing and if one is dishonest, pick a certain date and you can come up with the conclusions you want in advance. If one wants to dive into the topic a good line of study is looking at rebalancing schemes and when they do well and when they don't do well.

A discussion on rebalancing and performance is misguided, the facts are you don't know in advance if it will help some or hurt some.

Rebalancing discussions, properly framed, should be about taxes and risk control...risk control is the main purpose of rebalancing, taxes are about whether or not it is worth it. Rebalancing does an excellent job of risk control and particularly so when paired with negative or non-correlated assets which is pretty much the PP.

There are some cases where rebalancing more frequently makes sense but they are generally associated with leverage and volatility control/smoothing out compounding.

In an unleveraged account I wouldn't sweat some rebalancing fudging here and there unless it is a taxable event or you find yourself rebalancing a lot because you "want some action." If kept basically within some type of framework the odds of harming yourself are quite small.

[pp4me]

I'm leaning in the direction of not rebalancing at all unless/until it gets really cheap to do it.