What We Have Learned About Rebalancing

[stone]

Clive, the performance of your hypothetical WY:EDV combination is all the more remarkable when you consider what a disaster WY has been since the housing bubble burst and housebuilding timber was no longer needed. WY is back to where it was is 1978 or something ridiculous.

[stone]

Clive, GMO are also saying that timber producers are the thing to own now. Those huge dividends you mentioned are amazing. If companies like HP and RIMM actually converted their supposed P/E into dividends then might those be like that too?

[clacy]

I believe that I once read that forestry/woodlands were an excellent hedge during the German hyperinflation era. Can't recall where though.

It takes a lot of lumber to print enough currency to fill a wheel-barrel for every loaf of bread purchsed.

[ngcpa]

Using almost 18 years of data with VUSTX and RYN (a timber REIT which I own and have a lot of data) 50/50, rebalancing with 40% bands I obtained similar results.  About 83% of the years were gains, worst year was a 12.2% loss, average gain (of only the years with gains) was 15.1% and average loss (of only the years with losses) was 2.6%.  Average annual gains were 12.1%.  I think RYN is the best of the three (WY, PCL and RYN) timber REIT's.
Norm

[ngcpa]

Sorry, I forgot to mention with RYN/VUSTX there was 1 rebalance at about 12 years.
Norm

[gap]

I don't have access to all the historic data for individual assets in PP. However, from the little data I have I agree the 15/35 has better returns. But then again I have noticed that both the Max Drawdown and Standard Deviation get worse. For me the resulting increment in returns is of less value than the  impact on drawdowns or Std Dev. I am curious what the MAxDD and St dev are for the longer historic period that yoiu are measuring.

[steve]

If this is true, it might be a good argument for using zeroes in the LT treasury portion of the PP for their greater volatility.

It drives me nuts that the PP doesn't use zeroes.  The spirit of the strategy is that it captures asset volatility, so it seems like zeroes would be the natural choice for the LT treasury portion, at least in a tax sheltered account.

Having said that, I love getting cash from my Treasury Bonds twice a year, which, in a sense, is a kind of rebalancing.  

It seem to me that EDV although considered zeroes in a way it is not because it does distribute real dividends quarterly. I wonder what Harry Browne would say about an ETF like this if it if it existed when he was alive.

[murphy_p_t]

CraigR wrote: "Also, rebalancing is first and foremost for risk management. Any rebalancing bonus that generates extra returns is just gravy."

Just want to confirm that this is the general consensus. I'm looking to see if there are any good arguments opposed to the idea that rebalancing is "just gravy"...I'm thinking that "just gravy" probably is <0.5% additional performance per year? Just trying to understand the finer points of the PP...

Also, for those who have run the PP for several years, I'm curious how often you have had to rebalance if using the 15/35 guide?

[moda0306]

murphy,

I'd say that the MAIN reason for rebalancing is risk management... having less than 15% of any asset, or more than 35% of it, starts to bring too much risk into the equation.

The nice thing is, assuming we go through ebs and flows over the coming decades, is that if everything is up by the end of that period, you will have been likely buying low and selling high along the way.  The extra .5%-1% is icing on the cake... the cake being not having stocks & gold both tank when each are at 40% of your portfolio.

See what I mean?  Just my 2 cents, but I'd say others generally agree.

[AdamA]

Also, for those who have run the PP for several years, I'm curious how often you have had to rebalance if using the 15/35 guide?

I think rebalancing events occur, on average, every 4 or 5 years.  It also depends if you're still adding funds to the portfolio.

[Kel]

One question I have is what do folks suggest when one asset is up nearly 10% and the worst performing asset is down say 5% or more but as a whole everything falls withint the 15/35% bands...but the difference between worst and best exceeds 15% for example.

Has anyone tested this type of scenario? I searched around a little ....but didn't see anything although i can't imagine this has not been discussed.  I am rather new to 4 asset class version having started at the beginning of this year but already the best performing asset class is at 8.3% and worst is a -1.1%

[MediumTex]

One question I have is what do folks suggest when one asset is up nearly 10% and the worst performing asset is down say 5% or more but as a whole everything falls withint the 15/35% bands...but the difference between worst and best exceeds 15% for example.

Has anyone tested this type of scenario? I searched around a little ....but didn't see anything although i can't imagine this has not been discussed.  I am rather new to 4 asset class version having started at the beginning of this year but already the best performing asset class is at 8.3% and worst is a -1.1%

I wouldn't try to slice it that finely.

Just stick with 15/35 on the whole portfolio.

[Kel]

MT - I very much appreciate that suggestion  - just wondering if anyone ever did any research on rebalance looking at the scenario

[MediumTex]

MT - I very much appreciate that suggestion  - just wondering if anyone ever did any research on rebalance looking at the scenario

Not to my knowledge.

[craigr]

MT - I very much appreciate that suggestion  :)- just wondering if anyone ever did any research on rebalance looking at the scenario

You eventually reach a point where you are dancing on the head of a pin. What may work this year as optimal may be the least optimal the next.

I have found the best strategy through the years is to tinker with the portfolio as little as possible.

[cowboyhat]

Another consideration is how much return you are getting from cash, and whether you are in the accumulation phase or draw down phase, and whether your annual accumulations or draw downs are likely to trip the 35/15 cash band.

I'm accumulating, cash is return is negative in real terms, and my contributions are small relative to the size of my capital.

Since I have to get out a pencil and paper to write down how much is in all my accounts at the end of the year anyway, my choice is to deploy cash holdings over 25% into lagging assets in proportion to how far behind they are. So, for example, at the end of December I bought a bunch of S&P500 and a small amount of gold.

With cash returns negative in real terms, if I were in a drawing down phase and my capital was large relative to my needs I would probably let cash balance drift down to 15% before rebalancing by selling some winners back to 25%.

Maybe this is too much tinkering, but it minimizes taxes for a person accumulating and minimizes trading costs for a person drawing down.

[shoestring]

I am going to make you all laugh.

I have to admit that I'm a bit anal retentive about numbers sometimes.  I like everything to be "perfect".

A percentage based allocation brings out the worst in me.  I want to be perfectly aligned constantly all the time with every little fluctation.

I don't do that, that would be madness and very expensive to boot, but it's my tendency and desire.  I want everything to be exactly 25% all the time.  It's an irrational compulsion I have to fight constantly.  It makes me feel like I'm accomplishing something to correct things to the penny.

Once a year on my birthday I let myself rebalance to 4x25 whether I really need to or not.  That is a good day for me.

Luckily I let my 401k rebalance itself monthly (which does nothing to change the fees I pay so why not) and I can pull that up and look at it any time I want, and that usually satisfies me.

I also figured out I can sign in and shift pennies between savings accounts if I get really hot and bothered about it and it the desire soon goes away.

It is all very silly.  It's nice to know it's not screwing anything up though.

For all I know it's probably better to be silly this way than be completely lax about it.

[dualstow]

{ laughing out loud! }

[MediumTex]

Seriously, though, you wouldn't ever want to keep each asset at exactly 25%, for the same reason that you wouldn't want to plant four trees and diligently prune the taller ones to maintain the exact same height as the shortest one at all times.

Isn't that what they were trying to do in the Rush song "The Trees"?

I suppose what we are doing with the PP is sort of like what was happening in "The Trees" except that we use rebalancing bands to level everything out after a cetain amount of divergence occurs, which allows us to capture larger gains, rather than depending upon the gradual process of all four assets rising in value.

For the non-Rush fans, here are the lyrics to "The Trees":

There is unrest in the forest
There is trouble with the trees
For the maples want more sunlight
And the oaks ignore their pleas

The trouble with the maples
(And they're quite convinced they're right)
They say the oaks are just too lofty
And they grab up all the light
But the oaks can't help their feelings
If they like the way they're made
And they wonder why the maples
Can't be happy in their shade

There is trouble in the forest
And the creatures all have fled
As the maples scream 'Oppression!'
And the oaks just shake their heads

So the maples formed a union
And demanded equal rights
'The oaks are just too greedy
We will make them give us light'
Now there's no more oak oppression
For they passed a noble law
And the trees are all kept equal
By hatchet, axe and saw

[shoestring]

Oh I assure you, it's not rational.  It is however hilarious, or at least it is once you own it and realize it doesn't make any sense.

I've just always been that way with numbers ever since I was a child.  I have a strange compulsion for perfect partitions of a whole especially with percentages.

[dualstow]

<pruned>
Seriously, though, you wouldn't ever want to keep each asset at exactly 25%, for the same reason that you wouldn't want to plant four trees and diligently prune the taller ones to maintain the exact same height as the shortest one at all times.

Isn't that what they were trying to do in the Rush song "The Trees"?
<pruned>

I've always assumed that they were just trimming some branches of the trees and taking a few out altogeth-- oh god, I can't believe I'm typing this.  :D

[lazyboy]

Last year, I did my rebalancing at 30% and 20% and it actually worked out well for me. It gave a little boost to performance because there was so much volatility. Mainly, though, I rebalanced at those bands because I didn't feel comfortable yet with 35/15. I'm in the withdrawal phase, being retired, and all of my investments are in an IRA mainly using ETFs. Late last year I experimented with EDV for a third of my LTT with  two thirds in TLT, thinking I wanted a bit more volatility. I got nervous about it in January though and switched back to TLT just as LTT started trending up.  It makes sense not to micromanage or try to time the market. I see that now. I'm still left with the question of whether EDV better or worse than TLT for the PP. Any thoughts?