Tempted to rebalance at 30

[LazyInvestor]

My equity portion reached 30 and I have a strong urge to rebalance. Should I do it?

I've been planning to use 15/35, but given that I don't have to pay capital gains tax as a non-resident, maybe it's better for me to do it at 20/30?

[brownehead]

Usual advice is "stay the course" and "don't play with the strategy", but I think peace of mind is critical and while you don't do any dangerous there is no problem with that (in fact more frecuent rebalances is a safer strategy).

[sophie]

In backtests, the 15/35 bands outperform the 20/30, because it allows you to capture some momentum effects.  That is, the asset that's doing well now is more likely (on average) to go up in value, rather than down.

However, I get what you're saying.  Let me interpret:  "The stock market is going to plunge back down any day now, gold and bonds are both underpriced and will go up, and if I don't rebalance now I'll miss a tremendous opportunity."

I confess I'm wrestling with this as well (not QUITE at the 15/35 mark for rebalancing), but here's the problem:  you don't know when this will happen or how much higher stocks will go, etc.  The last time I tried to second guess something like this, it felt good at the time, in the short run it looked like I'd made a smart decision, but in the long run (> 6 months) it turned out to be a poor move.

[annieB]

I agree with Sophie.
To change your plan you need to make some very aggressive calls on market turns.
But it sure is tempting!

[dualstow]

I think there are plenty of worse kinds of tinkering than rebalancing at 30, and some people do just that at 30 anyway, deliberately and without guilt.
Of course, you won't know if it was a great move until later.
Do you have vp stock that you could reduce instead and put into short-term bonds or cash?

Is this your first rebalance, by the way? My stocks are at about 30% as well (0.297), and I'm also chomping at the bit. What helps is that I rebalanced out of stocks a few months ago and trimmed my vp stocks. I want to let the stocks run wild for now, but hopefully up. ;-)

Same deal with gold. It looks cheap, but it may look even cheaper at 15/35.

[Gosso]

...but given that I don't have to pay capital gains tax as a non-resident ...

Are you sure about that?

[Libertarian666]

...but given that I don't have to pay capital gains tax as a non-resident ...

Are you sure about that?

I am not a lawyer, but I believe that is correct. The US is a great tax haven for non-resident non-citizens. Isn't that ironic?

[LazyInvestor]

Thanks all. I'll hold on with rebalancing and stick to 15/35.

Re: dualstow: Yes, this would be my first rebalance. I'm in PP for already 3-4 years, and I was always buying the cheapest asset with new money until this year when I decided to add new money in equal proportions so that I hopefully reach rebalancing point at some time :-), in addition to some recommendations that it performs slightly better based on backtesting.

Re: gosso: Yes, for countries without treaty with US you don't pay tax on capital gains and interest in US. You pay only 30% tax on dividends. This makes US with its cheap broker commissions and ETF fees an awesome place for foreigners to invest (one bad thing is the estate tax, but gotta take some risk somewhere).

[Gosso]

Re: gosso: Yes, for countries without treaty with US you don't pay tax on capital gains and interest in US. You pay only 30% tax on dividends. This makes US with its cheap broker commissions and ETF fees an awesome place for foreigners to invest (one bad thing is the estate tax, but gotta take some risk somewhere).

Right, but you still have to pay the cap gains to your home country (unless your country doesn't have a cap gains tax).

[brownehead]

The key is the "strong urge", if it is because you dont't feel your portfolio safe enough with so many stocks, go ahead and get your pace of mind! The worst sceneario would be to lose some stock earnings... but chances of losing and winning are equal (I mean nobody know) so the pace of mind is a sure benefit.

And about taxes, even that US don't withdraw them you probably have to pay in your country (and if it you are European now the US share fiscal information with our governments).

[blackomen]

I think the results aren't that much different for 20/30 rebalancing vs. 15/35..  I personally make rebalancing optional at 20/30 (based on my own discretion) and mandatory at 15/35.

[brownehead]

I think the results aren't that much different for 20/30 rebalancing vs. 15/35..  I personally make rebalancing optional at 20/30 (based on my own discretion) and mandatory at 15/35.

According to my backtests for a strict PP portfolio (with t-bills) there were some differences in CAGR and volatility:
20/30 -> CAGR: 9.27%  stdev: 7.84
15/35 -> CAGR: 9.95%  stdev: 9.19

Btw, other "interesting" bands for a possible VP based on the PP assets:

0/50  ->  CAGR: 10.40%  stdev: 8.61 (best risk adjusted return, for that historical period)
0/62.5 ->  CAGR: 11.72%  stdev: 13.07 (best return, for that historical period)

[Mark Leavy]

Btw, other "interesting" bands for a possible VP based on the PP assets:

0/50  ->  CAGR: 10.40%  stdev: 8.61 (best risk adjusted return, for that historical period)
0/62.5 ->  CAGR: 11.72%  stdev: 13.07 (best return, for that historical period)

Thanks brownehead.  Very interesting.

In summary:
Never rebalance on the downside.
[Almost] Never rebalance on the upside.

Historically resulted in:
Improved risk adjusted return, greatly reduced taxes and slightly reduced trading costs.

Thank you for highlighting another dimension worth understanding.  It seems worth trying to tease out any anomalies that could be tied to economic models.

[Xan]

Of course that optimum rebalance of 62.5% is entirely a one-time thing.  Planning to "almost never" rebalance on the upside means that you have 62.5% of your wealth in an asset that's at an all-time high and that is *just about* to come crashing down.  I wouldn't feel comfortable timing that perfectly.  I think I'll stick with a max of 35% of my wealth in any given category.  But it's very interesting to see what happens when that gets tweaked!

As far as 0% on the downside: I'm assuming there was never a point at which any asset was worth zero.  brownehead, can you tell us what the lowest point actually was for any asset in this simulation?

[brownehead]

Btw, other "interesting" bands for a possible VP based on the PP assets:

0/50  ->  CAGR: 10.40%  stdev: 8.61 (best risk adjusted return, for that historical period)
0/62.5 ->  CAGR: 11.72%  stdev: 13.07 (best return, for that historical period)

Thanks brownehead.  Very interesting.

In summary:
Never rebalance on the downside.
[Almost] Never rebalance on the upside.

Historically resulted in:
Improved risk adjusted return, greatly reduced taxes and slightly reduced trading costs.

Thank you for highlighting another dimension worth understanding.  It seems worth trying to tease out any anomalies that could be tied to economic models.

That's the consquence of good rebalance timming for 3 big consecutive bull markets (gold-sotcks-gold), but who knows what the future will look like! Anyways I think it's very interesting that a simple allocation and round bands gave so good results (better than complex spreedsheet portfolios).

[brownehead]

As far as 0% on the downside: I'm assuming there was never a point at which any asset was worth zero.  brownehead, can you tell us what the lowest point actually was for any asset in this simulation?

Of course no asset went to zero, but gold almost did: minumum for stocks was 9.63% in 1979 (gold 71.79%), for bonds 8.33% in 1979 too, for gold 1.53% in 1999 (stocks 67.01%) and for cash 10.25% in 1979. But most important, with only a little wider band (72.5%) you wouldn't have rebalanced and it would have been a disaster (well, not so really: CAGR 8.53% and stdev 14..

[rllewis]

When Harry Browne was writing his newsletter, I asked him if rebalancing before the trigger was to be avoided. He said you can rebalance as often as you like, just make sure you do it at least when the triggers come in.  He pointed out that the Permanent Portfilio Fund rebalances every day as it receives new investments. How would you add to your PP otherwise?

[sophie]

When Harry Browne was writing his newsletter, I asked him if rebalancing before the trigger was to be avoided.

You knew Harry Browne???  Do tell!

Based on his radio shows, I'm guessing that Harry Browne answered with the thought of making the PP as investor-friendly as possible, rather than maximizing returns.  He's probably right.  If rebalancing now would make you more likely to stick with the strategy in the long run, then by all means go ahead.  It's better to "panic" and rebalance, than to panic and sell out completely.

[notsheigetz]

I'm a true LazyInvestor. My stock allocation was 34% last time I checked so I decided to quit looking at it for a while.

[rllewis]

You knew Harry Browne???  Do tell!

He was truly an original thinker.  I used to wait by the mailbox for Harry Browne Special Reports, as it was the only clear thinking out there at the time.  Especially on investing.  I met him a few times. His answer to my question on this subject is quoted below.  My question was about adding to the Portfolio, but he addresses frequent rebalancing. If you can get ahold of back copies of the Reports, they are worth reading even though they comment on things that happened years ago.

PORTFOLIO ADDITIONS & WITHDRAWALS

Q. Your discussions of the Permanent Portfolio
usually assume that the investor will create the portfolio
with a fixed sum of money. But I don't recall your
dealing with the matter of adding fresh capital to an
existing portfolio.

I'm able to add money to my portfolio about three
times a year. I never sell any of my holdings. At the
time of an addition, I add to each category whatever is
necessary to make each section worth 25% of the
whole. By doing this, I'm balancing my portfolio three
times a year.

Am I going about this properly? Am I realizing
the profits I would have earned by selling the
investments that had done well? Am I hurting myself
by adjusting so often?

A. There are three alternatives for handling new
capital that becomes available during the year:

1. Add the fresh capital to your portfolio's
cash holdings — probably leaving the
portfolio with excess cash until the an-
nual adjustment. If you know you'll
receive fresh money during the year,
you might leave the cash budget slightly
undernourished at adjustment time —
so that new capital won't make it too fat
when it arrives.

2. Open an account with the Permanent
Portfolio Fund for $1,000, and deposit
new capital there. At adjustment time
reduce the PPF account to the minimum
— allocating the proceeds to the other
investments. Or

3. Use. the new capital to balance the port-
folio, as you would at the end of the
year.

Any of these approaches is reasonable.
Yo u ' r e using #3, but with a variation — since you
say you don't sell any investments, even when the
adjustments call for sales.

There's nothing wrong with balancing your
portfolio three times a year. The Permanent Portfolio
Fund does it almost continually, as it allocates new
capital that shareholders invest in the fund. But the
portfolio adjustment is a tiresome task for most
investors; it's nice to know you don't have to do it more
than once a year.

You are realizing profits on the winners, even
though you aren't selling them, because they become
a smaller share of the growing portfolio than they'd be
without portfolio adjustments.

[sophie]

Thanks!

Although Harry's answer says that frequent rebalancing won't hurt you, the rest of his text suggests that he'd prefer you not do it more often than once/year.  Buying PRPFX and then selling at rebalance time is an interesting way to accomplish that and divide new contributions equally (sort of) to all four assets.  Of course, that was 10 years ago or more...these days, it's just as easy to take your cash and buy equal portions of your 3 favorite funds/ETFs, leaving one quarter in cash.  Then check the portfolio as per usual at rebalance time.

I currently use a "hybrid" method for convenience.  I have automatic contributions set up for cash, stocks and bonds.  Any savings beyond that goes to cash.  I'm currently planning to wait until rebalance time to buy gold, instead of messing around with gold ETFs in taxable.  If I could buy a gold ETF in my retirement account, I'd probably arrange to do that once every 3 months to minimize fees, or add to the automatic setup if fees aren't an issue.