Rebalancing

[6 Iron]

As I am still in the accumulation phase, and started my transition to the permanent portfolio in late October, 2009, I have yet to reach a rebalancing that required me to sell one of the volatile assets. I am curious, from longer holders, how it felt to sell an asset that was "carrying the water", if you will. For example, long bonds in late 2008.

[craigr]

As I am still in the accumulation phase, and started my transition to the permanent portfolio in late October, 2009, I have yet to reach a rebalancing that required me to sell one of the volatile assets. I am curious, from longer holders, how it felt to sell an asset that was "carrying the water", if you will. For example, long bonds in late 2008.

Felt great to me. I don't like being overweight into assets that everyone wants. I sold the bonds down, bought stocks back up, and was glad about the entire thing.  Honestly I couldn't wait to sell the bonds down with all the press they were receiving at the time.

The portfolio strategy requires a shift in attitude. It forces investors through rebalancing to sell high and buy low and ignore the news. Although I admit that for many people this may not come naturally. Once you do the rebalancing, and see that it works, then you'll relax more about the entire thing. In a way, I look forward to rebalancing because my experience has been that it helps control risks and can help returns over time by buying into assets that are undervalued.

[julian]

Has anyone calculated the annual results using the 40% bands for rebalancing. The only data I can find is based on annual rebalancing?

[simata]

After playing with numbers and thinking it looks rebalancing would be best when portfolio is up from last rebalancing. So one should wait if portfolio is down after last rebalancing. Any comment?

[pplooker]

I honestly can usually rebalance by changing my contribution rates to different slices of the portfolio rather than selling anything down.  But I'm weird, I can set things in a spreadsheet and resolve myself to hit that number and not give a crud about what else is going on in the world.

I've noticed that everyone who invests likes to feel like they're "doing" something.  I've mentally tricked myself into thinking that rebalancing is the same thing as market timing, and arguably it is, but I think if you can trick yourself into thinking like that it makes following the permanent portfolio strategy easier.

[6 Iron]

I honestly can usually rebalance by changing my contribution rates to different slices of the portfolio rather than selling anything down.  But I'm weird, I can set things in a spreadsheet and resolve myself to hit that number and not give a crud about what else is going on in the world.

I've noticed that everyone who invests likes to feel like they're "doing" something. 

This is also what I am doing, and I agree, I like the feeling of "doing something" that adding new contributions to lagging assets inspires. I feel great security in seeing the balances of the assets well within their respective bands.  Still, I am wary of the seductiveness of the market-timing siren, when one is selling a hot asset.

[Wonk]

6 Iron, I didn't sell LT bonds, I just added to stocks and gold.  Felt similar to spreading topsoil over a lumpy yard to make it nice and level. 

[Wonk]

Has anyone calculated the annual results using the 40% bands for rebalancing. The only data I can find is based on annual rebalancing?

Julian,

Clive shared some data with craig and craig posted on the BH board a while back.  Maybe either will share the results as I thought I could easily find the reference but cannot find it quickly.  As I remember, 35% bands resulted in about 50bp benefit and 40% was slightly more. 

[gonetowindsurf]

This is more of a basic rebalancing question. If I have one of the assets that has dropped to 15% weight, yet the other assets are also underwater, (or combined do not have enough positive returns to bring the underweight asset up to balance), what should be the protocol?
thanks,
mike

[gonetowindsurf]

Thanks Clive!
So if i understand correctly, lets say my portfolio starts with 5K in each asset class =$20,000

Gold drops to $4500 (and now needs to be rebalanced because it has dropped 10%)
Cash is at    $5100
Stock is at    $5200
LT is at        $4900

Port. is now  $19,700 - I would rebalance by dividing my new portfolio balance by 25%
which would mean I would rebalance each asset class to $4925.

[Wonk]

Thanks Clive!
So if i understand correctly, lets say my portfolio starts with 5K in each asset class =$20,000

Gold drops to $4500 (and now needs to be rebalanced because it has dropped 10%)
Cash is at     $5100
Stock is at    $5200
LT is at        $4900

Port. is now  $19,700 - I would rebalance by dividing my new portfolio balance by 25%
which would mean I would rebalance each asset class to $4925.

Just take each asset class and divide it into the sum of the portfolio as a whole.  I like to have a spreadsheet with formulas that do it for me, but I'm also OCD.  In this case it's 4500/19700 which is 22.8% of the whole.  Your 15% band hasn't been hit yet so you have nothing to do except some windsurfing...

[l82start]

http://www.math.com/everyone/calculator ... ercent.htm

3 way percent calculator,
very helpful, it's almost like cheating

[gonetowindsurf]

Thanks Wonk and l82start - i get it now!!!
mike

[ak]

folks, i am not that good with numbers.!!!

carrying on from wonk's example. I would like to do periodic investing. i would like to invest 4000 dollars every 3 months. how do i go about doing it?

do i just invest 1000 dollars into each asset category?  or can i allocate money in such a way that all of the asset categories are at 25% ( rebalancing). mind you, none of the asset categories have busted the 15%/25% limit yet!!

please advice.

[rantsalot]

do i just invest 1000 dollars into each asset category?  or can i allocate money in such a way that all of the asset categories are at 25% ( rebalancing). mind you, none of the asset categories have busted the 15%/25% limit yet!!

It depends on whether you're obsessive-compulsive or not. 

You can use new dollars to bring the categories closer to the 25% guideline for each.  By doing so, you will be buying assets while they're cheaper and reducing the overall volatility of the portfolio.

rantsalot

[moda0306]

I think it is pretty well figured that making your rebalancing bands too small can 1) be very tax inefficient, and 2) actually hamper the gains of the portfolio if given 15/35 bands instead of 20/30 or something tighter.

Some considerations would be:

1) your risk tolerance
2) whether these funds are in a taxable vs nontaxable account
3) future tax rates... you always want to be carefull if capital gains rates are in debate, and be prepared to act quickly
4) which one are you looking at selling... if it's gold, there's a 28% capital gainst rate associated with that at the federal level.