time of year to rebalance

[christina]

Hello there,
Canadian PP still hanging in at 2% gains since October 2010 when I started. But that's not why I posted :-)

I'm wondering if it's OK to do a rebalance this October.
Somebody here said that rebalancing in the fall is not a good idea. Should I wait till a better time?
THanks!

[AdamA]

Hello there,
Canadian PP still hanging in at 2% gains since October 2010 when I started. But that's not why I posted :-)

I'm wondering if it's OK to do a rebalance this October.
Somebody here said that rebalancing in the fall is not a good idea. Should I wait till a better time?
THanks!

If you're going to rebalance every year you should pick a specific day of the year and just stick to it.  I don't think the time of year matters.

Have you considered just using 15/35% bands?  It makes the decision a little easier, and you won't have to do it as frequently.

[CA PP]

Hi Christina,

If I had to pick a date I would choose 01 JUN. 
This is when a rung of a 1-3 year ladder for CASH component would mature.  My preferred approach for CASH.
It is also the date you receive dividend payment from your short term bonds and long term bonds.

I am however a follower of the 15/35 band approach.

[iwealth]

What if you are adding to your PP on a monthly or some semi-regular basis?

Should you add evenly 25/25/25/25 or put it into the lagging assets? I'm guessing the latter but better to ask.

[christina]

Because I don't have very much money, by bi-weekly contributions into cash cause my cash pot to become overweighted. If I were to rebalance out of cash to maintain my bands, I'd have to do it twice a year, maybe more. That would cost me a lot of money in transaction fees.

So I was thinking that a once-a-year rebalance would be better. I would just need to pick an arbitrary day, and CA PP is telling me that June 1 is good (hey, that's today!). Should I wait a little longer since I only started in October? I am 40% cash right now.

[craigr]

Rebalance when you hit your rebalancing bands. There is no set date. If it happens every in 20 months, that's fine. If it happens in three months that's fine.

[MediumTex]

For annual rebalancing you might do it on your birthday.

[craigr]

Clive I agree each investor is different. Sometimes there are tax considerations as well. Someone may find it advantageous to wait a bit and rebalance across or into the new tax year, etc.

Thing for me really is to touch the portfolio as little as possible. I find the less I touch it, the better it performs. I only rebalance when I am at a rebalancing band or tax considerations make it something to do.

[jackely]

In Fail Safe, Harry suggested that for smaller amounts, simply add to the cash pot. For larger amounts he said that you might like to distribute those funds equally between the four assets.

Interesting. I don't recall reading that but then I was on a long flight back from Hong Kong and half awake at the time.

Are you saying he didn't recommend buying "lagging assets"? I hear people talk about doing that and it makes me wonder if that is the best strategy. I can see it if you think the lagging asset is approaching the bottom but if it's still on the way down it doesn't strike me as a particularly good idea. Distributing equally does seem to make more sense.

[Tortoise]

Are you saying he didn't recommend buying "lagging assets"? I hear people talk about doing that and it makes me wonder if that is the best strategy. I can see it if you think the lagging asset is approaching the bottom but if it's still on the way down it doesn't strike me as a particularly good idea. Distributing equally does seem to make more sense.

The key phrase in your statement above is "if it's still on the way down." Nobody knows whether the lagging asset is still on the way down or is approaching the bottom. So you're making some implicit market-timing assumptions when you say always buying the lagging asset doesn't seem like a particularly good idea. You're assuming the lagging asset is more likely to continue falling than to reverse direction.

Personally, the main reason I choose to add to the lagging asset is because it delays the next rebalance event as long as possible. (I'm still in the accumulation phase.) Plus, as some other folks here like to point out, it makes me feel smart for buying the lagging asset "on sale."

[MachineGhost]

Personally, the main reason I choose to add to the lagging asset is because it delays the next rebalance event as long as possible. (I'm still in the accumulation phase.) Plus, as some other folks here like to point out, it makes me feel smart for buying the lagging asset "on sale."

You could probably use a simple trend filter to improve the odds of avoiding a falling knife.

[Tortoise]

You could probably use a simple trend filter to improve the odds of avoiding a falling knife.

Using a trend filter would be an example of market timing, and as I mentioned in my previous post, I prefer to avoid market timing. The PP isn't the appropriate investment strategy for people who like to time the market.

[MachineGhost]

Using a trend filter would be an example of market timing, and as I mentioned in my previous post, I prefer to avoid market timing. The PP isn't the appropriate investment strategy for people who like to time the market.

I use the PP and "time the market".  There's nothing magical about the PP per se, it is just composed of non-correlated assets that hedges the risk of each other.  It is no different than any other investment strategy that hedges risk in some way, such as pair trading.  So I would debate the point that a trend filter is "timing the market".  You would never get in at the exact top or bottom of any move by using a trend filter.  It just increases the odds of identifying an existing trend that will stay in motion.  As I've mentioned in another thread, trend filters improve the risk/reward ratio just as the PP does collaboratively.  Isn't that the whole point of using investment strategies?  What weakness humans bring to an investment strategy is not the fault of the investment strategy.

True market timing is identifying forward-looking windows where tops or bottoms will occur.  I haven't got a foggiest clue how looking in a rear-view mirror became conflated with market timing.  Perhaps it is a legacy of Wall Street's demonization of technical analysis.

[murphy_p_t]

MachineGhost...what are your filters indicating now?

[jackely]

I use the PP and "time the market".  There's nothing magical about the PP per se, it is just composed of non-correlated assets that hedges the risk of each other.  

Back to my original question/observation about HB's strategy....

If he did, indeed, suggest that it would be preferable to spread new investments across all four sectors as opposed to buying lagging assets then that sounds to me like he was recommending sticking with the momentum currently in play. I don't see that as "timing the market" either and I thought it made a lot of sense. I think you could also look at the concept of buying lagging assets as a sort of "timing the market" approach - I mean you are assuming that since those assets are on the way down they are bound to come back. You don't know that either, do you?

[Tortoise]

It sounds like HB's recommended method of adding new funds to the PP had more to do with simplicity than momentum. Here's the relevant passage from Fail-Safe Investing:

After you set up the Permanent Portfolio, you probably will want to add to it over time.

Whenever you have additional funds to invest, you don’t need to divide the additions evenly among the four investments. Just put the new money into the cash portion. If you do this somewhat frequently, the portfolio will eventually become unbalanced (one of the investments being worth at least 35% or as little as 15% of the total value of the portfolio), and so you’ll have to rebalance the portfolio more often than you would otherwise.

If you come into a large sum of money all at once, you might want to divide it among the four investments. But small additions can go into the cash section.

Source: Harry Browne, Fail-Safe Investing, p. 76

The main reason I mentioned market-timing was in response to MG's suggestion to possibly use a "trend filter" to improve the method of adding to the lagging asset. For what it's worth, HB specifically mentioned trendlines--as well as technical analysis in general--in one of his other books and called most of technical analysis (with the notable exception of support and resistance) bunk. Here's the passage:

A trendline can't possibly have any meaning when the choice of where to draw it is so arbitrary. There are always many places where a trendline can be made to fit. If you are the one who draws the trendline, you get to decide where to put it.
[...]
Nothing I know about the way investors act indicates that trendlines should mean anything.

But mine is only one man's opinion. Many a technician tends his charts by drawing trendlines wherever possible. And when a trendline fails to do what it's supposed to, he will draw another one--and then another and another--without ever wondering why he spends his time this way.
[...]
Some rules of technical analysis are grounded in the way human beings act. These rules can help you make decisions concerning when to buy and when to sell.

But many other technical rules simply float in the air. There are no foundations for them--nothing to distinguish them from superstitions.

Beyond support and resistance, most of what is called technical analysis is merely ritual that has no tie to the way investors act. Its only justification is "It works." But most of the time, it doesn't work.

Source: Harry Browne, Why the Best-Laid Investment Plans Usually Go Wrong, pp. 129-130, 133

[christina]

Thanks, Tortoise.
I remember HB saying to put new contributions in cash. But I didn't read this passage carefully enough:

"Whenever you have additional funds to invest, you don’t need to divide the additions evenly among the four investments. Just put the new money into the cash portion. If you do this somewhat frequently, the portfolio will eventually become unbalanced (one of the investments being worth at least 35% or as little as 15% of the total value of the portfolio), and so you’ll have to rebalance the portfolio more often than you would otherwise"

Ok. I'm now 40% in cash so I'll do a rebalance now.

[christina]

Thanks, Tortoise.
I remember HB saying to put new contributions in cash. But I didn't read this passage carefully enough:

"Whenever you have additional funds to invest, you don’t need to divide the additions evenly among the four investments. Just put the new money into the cash portion. If you do this somewhat frequently, the portfolio will eventually become unbalanced (one of the investments being worth at least 35% or as little as 15% of the total value of the portfolio), and so you’ll have to rebalance the portfolio more often than you would otherwise"

Ok. I'm now 40% in cash so I'll do a rebalance now.

And yes, I do realize this is exactly what craigr stated waaaay back in this thread :-)

[MachineGhost]

MachineGhost...what are your filters indicating now?

At the time you posted, stocks sucked, bonds sucked, gold sucked and cash was king.  Presently, cash and gold are now king and queen! 

I can't wait for Greece (and Spain and Italy) to exit the EuroZone; bring on the deflation and cheaper gold prices!