Another Rebalancing Question (15%)

[dualstow]

Most questions about rebalancing are in the vein of "Can I tinker?" or about rebalancing out of a 40% profit, or both.

There's a possibility that my stocks will hit 15% before my gold and treasuries reach 35%. The latter two are of course doing well. I started running my pp sometime late last year, and gold and bonds are at 29% and 28% (of the total) respectively.

My question is, if stocks reach 15% before a "positive rebalance" can occur, can I trim both gold and treasuries to buy stocks?  It seems that selling enough of just one winning asset could put things back within the rebalancing bands. However, it wasn't easy to buy either of these assets and I feel like I should trim both. Harry doesn't seem to have given specific instructions on this. Does it matter?

I have played with a spreadsheet in google docs, but maybe there's an obvious answer that I'm missing and I thought it'd be easier to ask.

Thanks in advance.

[Storm]

Maybe I'm reading your question wrong, but 15% would trigger a negative rebalance just like 35% would trigger a positive rebalance.

[dualstow]

Maybe I'm reading your question wrong, but 15% would trigger a negative rebalance just like 35% would trigger a positive rebalance.

No that's right: 15% = negative rebalance. Most questions are about a positive rebalance. For example, I think craigr has rebalanced out of gold something like 3 times already, because it has soared. I'm asking about rebalancing into stocks: I may have to add to my stock position because it may soon drop to only 15% of my pp, and perhaps it will happen before gold or bonds reach 35%

My question is, if stocks reach 15% before a "positive rebalance" can occur, can I trim both gold and treasuries to buy stocks?

[BRESLOW]

Your cash account which is 25% of total invested is where you would take the money from. 

[MediumTex]

In theory, any time any asset hits a rebalancing band you would rebalance the entire portfolio back to 25% x 4.

In practice, I don't think that the 15% threshold ever triggers a rebalancing band in any backtesting I have seen.  Normally, the 15% rebalancing band would only be hit in cash during the drawdown phase.

Given that stocks have almost doubled in value over the last two years, how did you get close to 15% in the stock piece in the first place?  Stocks are only down about 15% from their recent highs.

[AdamA]

My question is, if stocks reach 15% before a "positive rebalance" can occur, can I trim both gold and treasuries to buy stocks?  

I would do whatever causes the fewest expenses.

The reality is that it doesn't really matter that much.  It's not like you're selling all of your gold or all of your bonds.

As long as you kep all of the asset classes between 15-35% you should be fine, in my opinion.

[dualstow]

Many thanks for all the replies.

In theory, any time any asset hits a rebalancing band you would rebalance the entire portfolio back to 25% x 4.

I guess the above is what I should focus on, which means I could sell both gold and treasuries.

Given that stocks have almost doubled in value over the last two years, how did you get close to 15% in the stock piece in the first place?  Stocks are only down about 15% from their recent highs.

I cannot tell a lie: I fudged. I started with a smaller stock allocation to begin with. Of course, gold and treasuries really soared as soon as I bought them, helping to push stocks down to to 17% or 18%. But, I've got a very stock-heavy VP, mainly full of defensive dividend payers. I took all my VTI shares and reclassified them as the pp's stock portion when I created my pp.

Another reason, MT: I didn't have the pp two years ago. Just the stocks. So while VTI rose in value, it did that in the *vp*. I moved it to the pp last year and it promptly began to decline.

Since I haven't taken any action regarding selling, it's not too late to find some other stock holding in the vp and recharacterize it as part of the pp, but I'm already committed to buying more VTI if it really goes down to 15% of pp holdings.

@BRESLOW: the cash portion is also below 25%, thanks to the rise in the value of gold and bonds.

18.54% stocks
28.21% treas.
29.14% gold
24.10% cash
---------
sum: 1

[stone]

Clive "Since the 1970's we've endured a couple of currency/debt crises, which creates more extreme moves in the price of gold (and stocks). Other periods of time might not see such excesses/extremes."

Clive, the only hope I can see for getting a "mundane period" ahead would be if we had a truly radical change of course. If savers all followed a PP (or any lazy portfolio style) and if governments balanced their budgets via an asset tax; then I guess things would turn mundane. As it stands we seem set on a course towards wilder and wilder times. I don't see why it would come as unexpected looking forwards to see long term increasingly negative "core" real returns for stocks. As trading becomes faster and more efficient  fair value assumes that ownership is via a co-located ultra-low-latency trading platform buying and selling in mico-seconds. As you point out, trading allows profitable ownership of an asset in long term decline so long as it is volatile enough. That will get priced in.

[AdamA]

18.54% stocks
28.21% treas.
29.14% gold
24.10% cash

I would just leave it alone.

[MediumTex]

18.54% stocks
28.21% treas.
29.14% gold
24.10% cash

I would just leave it alone.

Me too.

I assume you've heard the expression "wait for it...wait for it..."

[stone]

Clive, I haven't managed to get my head around what is underlying that improvement. Is the point that with the pairs, rebalancing bands are only hit by the active movers so ratios in practice drift away from the 28%:33%:22%:17% to favor the assets that are providing the action? If the same 28%:33%:22%:17% ratios were maintained by say daily rebalancing across all four versus daily rebalancing across pairs then, if the net transactions were the same, there would be no scope for a difference. Also are you sure that the improvement versus the HBPP isn't trivially influenced by simply holding more of those assets that happen to have performed best over the backtest period?

I'm struck by the fact that financial companies have been given essentially free lines of credit to use for whatever they want.  If you had a PP with 1% stocks, 1% gold, 1% LTT and 97% interest free credit from the Fed and rebalanced every second and paid the trading costs to yourself; I wonder what annual gain would come from that core 3%? The almost hourly movements of +/- 0.5% we have had lately would become a total bonanza.

[dualstow]

Good advice, guys. Once in a while I ask about the details of implementation, but I think most of us know how running the pp works even if we don't know why it works. Therefore, one of the main purposes of this forum is something like that found in a support group. Instead of telling each other not to have that cocktail, we're telling each other not to sell prematurely.

My pp is up 10.9% since I began, and I'm extremely happy with it, to the extent that I think I can handle some lean years in the future.

[buddtholomew]

Does rebalancing with new cash have the same impact on the portfolio as restoring a lagging asset to 25%? In other words, does it make sense to be fully invested in all assets and rebalance between the holdings, or have cash reserves to increase lagging assets to 25% of the portfolio when they fall below target? The answer may depend on whether the holdings are in tax-deferred or taxable accounts.

[longeyes]

Given that stocks have almost doubled in value over the last two years, how did you get close to 15% in the stock piece in the first place?  Stocks are only down about 15% from their recent highs.

The poster may have initiated a PP "late," as I did last February.

[dualstow]

Good question, Buddtholomew.

Given that stocks have almost doubled in value over the last two years, how did you get close to 15% in the stock piece in the first place?  Stocks are only down about 15% from their recent highs.

The poster may have initiated a PP "late," as I did last February.

Exactly. I think my final gold purchase may have been in December 2010. I definitely started running the pp in 2010 after a year or so of deliberation. I'm a convert from the bogleheads.