Thus, an asset must move 40% in either direction, relative to another asset in the portfolio, to trigger a rebalancing act. I believe Harry Browne set these bands for several reasons:
1) Reduce the cost of rebalancing. Back in Harry's day, it cost much more money to trade stocks than it costs today. The transaction fees were higher, thus making it less worthwhile to rebalance more frequently.
2) Reduce the cost of taxes. When you sell an asset at a gain, to buy another at a loss, you trigger a taxable event.
3) Simplicity. If you select 35/15 bands, then historically you would only have to rebalance once every 2 years or so.
For my situation, I am considering a 30/20 band. Here's why:
a) My transaction fees are much lower than Harry's might have been. I can sell my Gold ETFs and buy transaction free VG Stock ETFs for virtually nothing. I believe 10+ years ago, the cost to trade stocks was based on a percentage of the overall trade.
b) My PP is entirely held within tax-sheltered accounts. I can sell Gold ETF and buy Stock ETF without triggering a taxable event.
c) I check my PP more frequently than I need to anyway. Thus changing the rebalancing band doesnt add too much undo stress on my life.
Finally, I am considering adding a second rebalancing measure. This being, "If the PP rises 10% in total since the last rebalancing time, excluding the addition of new funds, then trigger rebalancing." I may set that at 15% or 20% rather than 10%.
Theoretically the PP should rise about 10% per year, and on the best years, maybe 20% historically. Thus, even a 10% rise-band wouldn't be too ridiculous to rebalance at. My point of this band being that if the PP rises 10% it's likely due to some deviation within the internal assets. It's unlikely all 4 asset classes would rise 10% at the same time. It's more likely one would rise 40% while another drops 30%. This would likely trigger a 35/15 or 30/20 standard band rebalance anyway.
The biggest downside I see to this change from 35/15 to 30/20 is the loss of momentum investing. If I sell gold at the 30% band to buy stocks, down at 20%, then I risk moving out of the gold position too "early." However, this seems arbitrary and could also be market timing.
Thoughts on this change for my personal situation? From a psychology standpoint, I'm concerned that I really want to rebalance my portfolio from Gold back into Stocks, and am looking for a way to justify it. Then again, if I always pick a 30/20 band going forward, it's not really market timing. I've always been a contrarian investor when I speculated, and always enjoyed selling what was hot to buy what was out of favor. I personally believe the only way the PP makes money is to rebalance, and "lock in" gains.
Finally, there's something cool about the term "30/20-10" meaning rebalance when one asset reaches 30%, or 20%, or the entire PP changes 10% since the last rebalance. 30/20-10 has a cool ring to it
