Rebalancing idea: What if...

[mgtow]

Hi,

  "First time caller, long time listener...."

  I like the idea of rebalancing basically forcing you to buy low and sell high.  Using bonds as an example:  If it hits the 35% band, would one get any extra benefit from selling off the excess gain BUT rebalance it so that the bond allocation is now 20% instead of 25%?  Intention would be to keep it at 20% for say a year or so, and makes the assumption that the outperforming bonds are more likely to go down than up after hitting the upper 35% band.

    I haven't committed to PP just yet;  just thinking ahead at this point.

[dualstow]

What would be behind the assumption that after the 35% threshhold bonds are more likely to go down?

As a counter-example, I believe Craig wrote in this forum that he rebalanced out of gold three times. I think this was during that run-up between 2000 and 2010 although I have not gone back and checked. Why three times? Because gold kept going up. It could happen with stocks, too.
Bonds? Well, no one seems to ever expect that bonds will hit 35% even once,  but we do buy them.

If an asset is going up, you may eventually want to take profits (in the act of rebalancing), but you might also like to maintain a full 25% share while it's on a roll, right?

At some point here, someone will remind us that the 25% figure was set arbitrarily by Harry Browne.

[mgtow]

Wow, I knew gold did well, but I didn't know it caused a rebalance 3 times in a row!

[brownehead]

It's a problem of reversion to the mean VS momentum, sometimes you will earn more with that rebalancing, sometimes you won't. However if you pay taxes the less rebalancing the better.

[rickb]

The question here is whether an asset that hits a 35% rebalance band is then more likely to keep going up or more likely to go down.  You can backtest this til the cows come home, but all you'll actually find out is that whether (or even how often) an asset keeps going up or goes down depends on the particular set of historical prices you're looking at.  What Browne had to say about this is embodied in one of his 16 Golden Rules

Rule #4: No one can predict the future.

Believers in momentum will say that an asset that has gone up will tend to keep going up.  Believers in mean reversion will say the opposite.  Both are making predictions about the future.  IMO, neither really has a clue ("momentum" is the appropriate explanation if the asset keeps going up, but "mean reversion" is the explanation if the asset then goes down).  Another of Browne's rules applies here as well:

Rule #16: Whenever you’re in doubt about a course of action, it is always better to err on the side of safety.

The safest course is to refuse to bet whether the asset will keep going up or will start to go down.  Rebalancing to 25% does this.  Of course, yet another rule also applies:

Rule #8: Don’t let anyone make your decisions.

I think a lot of people here think very highly of Browne's rules.  But, ultimately you need to decide for yourself. 

[dualstow]

Wow, I knew gold did well, but I didn't know it caused a rebalance 3 times in a row!

I'm fairly certain I have that right, but I'm hoping someone will catch this if I'm not.
Craig had the balls to go all in, which was fortuitous.

[ns3]

I'm fairly certain I have that right, but I'm hoping someone will catch this if I'm not.
Craig had the balls to go all in, which was fortuitous.

Don't see where it actually takes any balls to "go all in" with the PP strategy unless you really don't understand what you are jumping into, in which case you probably shouldn't do it.