Variable Portfolio Rebalancing Rules?

[Jake]

I'd be really interested to hear about any strategies that people with a Variable Portfolio have for rebalancing between the VP and the Permanent Portfolio. I'm currently almost 100% PP but am considering some speculative investments which would mean creating a VP.  I imagine that one approach would be to set a wall between the two and say that any gains or losses in either portfolio are always treated as independent. Indeed Harry warned against taking money out of the PP to restock the VP after losses, but what about the other way? If you make money in the VP, do you rebalance gain into your PP? Have you set any kind of rebalance band for VP vs PP? Also, do you have rebalancing rules within your VP for any particular speculations that you make? Thanks in advance for any thoughts on this.

[clacy]

I only use the PP for 50% of my investable assets, but my rule on that is that there is only a one way street in terms of rebalancing between the VP and PP.  Money from my VP can go into my PP, but never the other way around. 

[craigr]

As clacy says, treat it as a one way street. Money goes from VP to PP, but never the other way. If you make a good profit in the VP, consider taking some of it and storing it in the PP instead of re-gambling it. IMO.

[Jake]

If you make a good profit in the VP, consider taking some of it and storing it in the PP instead of re-gambling it.

I agree and I think it is worth having a rule about when to do this. I was thinking of a one way (max only) rebalancing rule from VP to PP. I wondered if those who already have a VP have done this and what threshold or bands they set for the VP before rebalancing gain into the PP?

[PP67]

I suspect the general consensus would be to do whatever feels appropriate for your risk tolerance.  If say a 80% PP/20% VP seems tolerable (ie you could live with yourself if you lost the 20%) then you could give your VP strategy say a year to play out and rebalance back to 80%PP/20% VP but only if that would add money to the PP...

[alvinroast]

I agree with keeping it a one way street between the two portfolios. Personally I'm about 20% VP and comfortable with that for now. I'm giving it a year and if I'm not comfortable with the VP or I just don't want to bother either for a while or permanently I'll drop the VP. If I do better gambling than in the PP I'll move half of the difference into PP.

Of course I'm leaving myself open at any given time to take up fishing and put it all in the PP.

[dualstow]

Hello Jake. How are things in the ducts?

My vp exists mainly as a "pre-existing condition" that will one day hopefully go away. When stocks rise, I sometimes take a profit in individual stock holdings and put that money in the pp, but I don't have specific bands. I guess that's part of the fun of the pp.

Something more dangerous: I'm thinking about putting a bunch of physical gold in my VP. This could turn out to be a very slippery slope: it's one thing to try to time or tinker with a pp. It is perhaps even worse to buy pp-component assets in a vp, because I may want to recharacterize them as true pp components. (I never owned gold before discovering the pp, with the exception of the odd coin received as a gift.)
My vp mainly consists of non-pp assets at present, like corporate bonds and munis. Last year I had some FXF (Swissie etf) in there. I think that makes more sense.

[l82start]

my vp is made up of gold and silver (bullion coin) i have contemplated re-characterizing the gold portion as pp if i had a windfall contribution.. ( it seems unlikely to happen..) what do you see as being dangerous about it?

[Jake]

Hi Dualstow! Hehe, nice that you know the avatar

Something more dangerous: I'm thinking about putting a bunch of physical gold in my VP. This could turn out to be a very slippery slope: it's one thing to try to time or tinker with a pp. It is perhaps even worse to buy pp-component assets in a vp, because I may want to recharacterize them as true pp components.

Funnily enough, the reason that I want to set up a VP is to speculate in gold and silver too! I don't see what you view as dangerous about that though. If gold rises in value so much that you want to harvest some of your gains from your VP into your PP, you won't be moving gold in, because the gold inside the pp will have pushed up in value too. So to harvest you would sell gold (in the VP) and probably buy other assets. I suppose if gold fell in value, you might be tempted to move your VP gold back into the pp to rebalance pp gold up. But what would be wrong with that? It would just mean that you were retreating out of speculation and back into the PP only. Surely more safe than dangerous?

As long as one sticks to the rule of one way movement only (VP to PP only, with no movement out of the PP to cover VP losses) I can't see the problem. What do you think?

[Alanw]

Hi Dualstow! Hehe, nice that you know the avatar

Something more dangerous: I'm thinking about putting a bunch of physical gold in my VP. This could turn out to be a very slippery slope: it's one thing to try to time or tinker with a pp. It is perhaps even worse to buy pp-component assets in a vp, because I may want to recharacterize them as true pp components.

Funnily enough, the reason that I want to set up a VP is to speculate in gold and silver too! I don't see what you view as dangerous about that though. If gold rises in value so much that you want to harvest some of your gains from your VP into your PP, you won't be moving gold in, because the gold inside the pp will have pushed up in value too. So to harvest you would sell gold (in the VP) and probably buy other assets. I suppose if gold fell in value, you might be tempted to move your VP gold back into the pp to rebalance pp gold up. But what would be wrong with that? It would just mean that you were retreating out of speculation and back into the PP only. Surely more safe than dangerous?

As long as one sticks to the rule of one way movement only (VP to PP only, with no movement out of the PP to cover VP losses) I can't see the problem. What do you think?

Wouldn't it be wise to speculate in your VP with assets that are not held in your PP?  Personally, I don't want to hold gold, LTT's or cash in my VP.  It would give me the feeling that my total portfolio was not balanced properly.

[dualstow]

I don't disagree with what you wrote, Jake. As long as pp$ does not flow to Vp$, it's ok. It's just that when I caught myself toying with the idea of buying gold in the Vp, it seems like I'm giving myself a license to tinker, and I'm simply *calling* it the vp. I should probably set forth my plan in ink on paper so that I don't deviate from it later.

By the way, I don't necessarily think that gold is going to go up. I'm probably just rationalizing buying a bunch of coins while I'm still young. When I'm older, I might prefer to deal with solely with the ETFs when rebalancing and, like MT and others have suggested, keep the coins as the core gold holding. So, if I buy the 20-coin minimum at Tulving, something I certainly don't have to do -- I can buy elsewhere -- I won't have enough cash left to buy an equal amount of stocks. I think I can swing the bonds because I saved enough money to do my spring 401(k) contribution. Hence the rationalization. The upshot, though, is that my entire holdings (Vp + pp) will end up being more HBPP-like than ever before.

At least your plan is an honest Vp play.

Edit: Exactly, AlanW. See my last line in my last post before this one.

[dualstow]

my vp is made up of gold and silver (bullion coin) i have contemplated re-characterizing the gold portion as pp if i had a windfall contribution.. ( it seems unlikely to happen..) what do you see as being dangerous about it?

Like AlanW wrote, it may make you feel like your pp is off balance, like it's only 4 x 25% in name.
I mean, if you speculate in Apple stock, that's different from the S&P index fund that you may hold for your pp. But, gold bullion is gold bullion.
Perhaps one's Vp should only contain non-pp assets for further diversification, and less confusion.

[Alanw]

my vp is made up of gold and silver (bullion coin) i have contemplated re-characterizing the gold portion as pp if i had a windfall contribution.. ( it seems unlikely to happen..) what do you see as being dangerous about it?

Like AlanW wrote, it may make you feel like your pp is off balance, like it's only 4 x 25% in name.
I mean, if you speculate in Apple stock, that's different from the S&P index fund that you may hold for your pp. But, gold bullion is gold bullion.
Perhaps one's Vp should only contain non-pp assets for further diversification, and less confusion.

I agree.  The VP should contain assets not included in the PP.  Otherwise, just put them in the PP and rebalance.  Just my opinion.

[l82start]

i haven't really had the off balance feeling yet, i suppose it could happen, but so far i have viewed VP and PP as mostly different and separate with mostly different and separate goals, the pp is preservation, the VP is speculative, some part of me thinks gold will (over the long haul) go up and that silver is a good safety/preparation bet for economic collapse, i don't count or watch the VP it just sits... the two do overlap in that i see both as relatively safe, the VP is an investment i made years ago in my 20's, long before i got my first 401k and even longer before i started studying or trying to understand investing, i bought it and forgot it, it may just be some weird attachment that keeps me from combining the two... so far i have only ever thought about combining them in a hypothetical windfall contribution situation where i wouldn't end up selling... i probably should also consider the possibility of combining them in a large gold re-balancing (needing to sell more gold than i have in GTU) situation...       

[dualstow]

Gold has a curious quality in that, short of a future synthetic version, it will never "go out of business".
By putting gold in a Vp, I suppose you free it from all rebalancing rules. It's a license to hoard. And, if you're young enough,and you're willing to never sell and leave it to heirs in case gold drops significantly while you're alive, it's not a terrible idea in my opinion.

The main drawback is that it could be in your pp. I think that when my pp is large enough to live off, I might accumulate more gold to bequeath. Then again, bequeathed stock shares are very tax friendly.