Golden Butterfly rebalancing bands

[pmward]

I see... the CAPE is wrong AND the Ph.D's that backtested the CAPE at Vanguard are ALWAYS wrong... oh wait, but wouldn't your argument than make the CAPE right (since their argument was that the CAPE was not a predictor in the short term)?

I kid, but seriously...

TLDR, "You have no real evidence to support your claim of 0% predictability of CAPE, and dislike people with PhDs."

No judgement... I have no PhD, so I am not offended.

Haha, yeah I'm just a skeptic. While I do tactical investing, I use multiple indicators so I don't put all my eggs in one basket, and I do not use valuation metrics at all. I mean, who even knows what valuations really are? S&P 500 aggregate corporate profits peaked all the way back in 2012, but earnings per share kept going up. How does this happen? Financial engineering. It's companies levering up to do buybacks. I would say the market is more "overvalued" than it appears for this reason.

[CJ043332]

I see... the CAPE is wrong AND the Ph.D's that backtested the CAPE at Vanguard are ALWAYS wrong... oh wait, but wouldn't your argument than make the CAPE right (since their argument was that the CAPE was not a predictor in the short term)?

I kid, but seriously...

TLDR, "You have no real evidence to support your claim of 0% predictability of CAPE, and dislike people with PhDs."

No judgement... I have no PhD, so I am not offended.

Haha, yeah I'm just a skeptic. While I do tactical investing, I use multiple indicators so I don't put all my eggs in one basket, and I do not use valuation metrics at all. I mean, who even knows what valuations really are? S&P 500 aggregate corporate profits peaked all the way back in 2012, but earnings per share kept going up. How does this happen? Financial engineering. It's companies levering up to do buybacks. I would say the market is more "overvalued" than it appears for this reason.

I hear ya. I definitely think that we have really drifted from fundamentals. Fundamentals can really be distorted by psychology and manipulation.

The only metric that is always guaranteed is that almost everyone is chasing a quick buck, making short-term movements impossible to predict.

That Vanguard study showed every single indicator had basically no predictability over 1 year and over 85% of them had practically no correlation over 10 years. The remaining were still not "very strong". So you definitely don't seem wrong in your views.

I view the CAPE as a drunk weatherman that is pretty good at saying it will snow in winter and rain in the spring. He has no clue what the weather will be tomorrow or the next day. In fact, it might not even snow at all during the winter. So although I am not going to migrate to Florida, it doesn't really hurt me to put a snow brush in my car just in case. Just balancing that little extra risk with a little extra preparedness.

If you think about it, it is really logical. As long as some people pay attention to P/E (which any Graham/Buffett follower would do), P/E will continue to at least be a whisper of reason in equity prices. After-all, lot's of people in the world still see a stock with negative P/E as bad luck Their choosing not to buy that stock still affects the price, even if others don't care about it. It isn't that fundamentals have NO SAY, it is that they are drowned out by all the other factors. However, those fundamentals are always there acting as a drag to some extent (even if it is a small drag when faced with massive fed intervention and speculation). That's also what the data seems to reflect.

I think it would also explain how both you and those PhD's can both be right in your views

[Matthew19]

Just chiming in here because there's no clear guidance on Golden Butterfly rebalancing.

Here's how I landed on 12% and 28% bands (40% swings)

Previous post summary:
1. Tyler originally suggested 10% and 30% bands for simplicity
2. Sophie suggested 14% and 26%
3. Harry Browne allows for 40% swings in the PP (15% and 35% bands)

So according to HB, if bonds increase by 40%, it should trigger a rebalancing event. I believe the same should happen in the GB, so sticking with the 40% swings in the GB (12% and 28% bands) allows for this. It also happens to split the difference between Tyler and Sophie, so I'm happy with that as well.

[stpeter]

3. Harry Browne allows for 40% swings in the PP (15% and 35% bands)

It's true that Harry Browne set the rebalancing bands at 15% and 35%, but I don't know if he crunched the numbers. FWIW, Gobind Daryanani's paper "Opportunistic Rebalancing: A New Paradigm for Wealth Managers" indicates that 20% and 30% bands are more profitable. Having recently switched from HBPP to GB, I'm planning to use 15% and 25%. We'll see how it goes...

[stpeter]

3. Harry Browne allows for 40% swings in the PP (15% and 35% bands)

It's true that Harry Browne set the rebalancing bands at 15% and 35%, but I don't know if he crunched the numbers. FWIW, Gobind Daryanani's paper "Opportunistic Rebalancing: A New Paradigm for Wealth Managers" indicates that 20% and 30% bands are more profitable. Having recently switched from HBPP to GB, I'm planning to use 15% and 25%. We'll see how it goes...

A few further thoughts...

On a 4x25 HBPP, the traditional 15/35 rebalancing band means that you're allowing a swing of up to +/-40% on any given asset class. Daryanani's 20/30 rebalancing band allows only a +/-20% swing, which is a big difference (and would trigger more frequent rebalancing - although note that analysts often define a bear market as a drop of 20% from a recent high, a definition which might be somewhat vague and arbitrary).

On a 5x20 GB, a 15/25 band is a +/-25% swing, a 14/26 band is a +/-30% swing, and a 12/28 band is a +/-40% swing. The smaller your default asset classes (20 with GB vs. 25 with HBPP), the more quickly the band sizes have an impact on your allowable swings - as I'm discovering right now because after switching from HBPP to GB at the beginning of the year gold has already hit the upper edge of my 15/25 band and thus has experienced a 25% swing.

Also, I realized that a swing has meaning only within the context of the portfolio (allowing a 40% swing doesn't mean the leading or trailing asset is up or down 40% all on its own, but relative to the other assets). These gyroscopes are dynamic systems!

(P.S. I've decided that I like to use the term "band" to refer to the lower/upper bounds and "swing" to refer to the percentage changes. It gets confusing if one describes the bounds as percentages of the portfolio even though we know that's what they are. YMMV.)