Year-end rebalancing

[marclewis2003]

I started my PP in January 2011 with 25% each in VTI, TLT, GLD, SHY.  My question is: do I rebalance each to 25% on the first trading day of 2012? or do I wait for the 15%-35% bands being hit before doing anything?  I'm planning to add new money to the porfolio as well, and since the historical returns for the PP seem to be calculated based on 25% in each class at the beginning of every year, it seems to make sense to start that way every year.  Any thoughts would be appreciated..

[AdamA]

I started my PP in January 2011 with 25% each in VTI, TLT, GLD, SHY.  My question is: do I rebalance each to 25% on the first trading day of 2012? or do I wait for the 15%-35% bands being hit before doing anything?  I'm planning to add new money to the porfolio as well, and since the historical returns for the PP seem to be calculated based on 25% in each class at the beginning of every year, it seems to make sense to start that way every year.  Any thoughts would be appreciated..

My understanding is that the returns are a little better if you wait for a band, especially if your investments are not in tax protected accounts. 

The only reason to rebalance annually would be if you wanted to totally ignore the markets for the rest of the year (which is not a bad idea for some people).

[craigr]

I started my PP in January 2011 with 25% each in VTI, TLT, GLD, SHY.  My question is: do I rebalance each to 25% on the first trading day of 2012? or do I wait for the 15%-35% bands being hit before doing anything?  I'm planning to add new money to the porfolio as well, and since the historical returns for the PP seem to be calculated based on 25% in each class at the beginning of every year, it seems to make sense to start that way every year.  Any thoughts would be appreciated..

I wait for the bands. If you are jittery you can set the bands to 20/30 on the low/high side and still be fine. But if you are taxable for your money I would suggest waiting to the 15/35 bands to keep tax costs under control.

Of course new money should go to buy your cheapest asset. Buying assets on sale is always a good idea.

[buddtholomew]

I started my PP in January 2011 with 25% each in VTI, TLT, GLD, SHY.  My question is: do I rebalance each to 25% on the first trading day of 2012? or do I wait for the 15%-35% bands being hit before doing anything?  I'm planning to add new money to the porfolio as well, and since the historical returns for the PP seem to be calculated based on 25% in each class at the beginning of every year, it seems to make sense to start that way every year.  Any thoughts would be appreciated..

I wait for the bands. If you are jittery you can set the bands to 20/30 on the low/high side and still be fine. But if you are taxable for your money I would suggest waiting to the 15/35 bands to keep tax costs under control.

Of course new money should go to buy your cheapest asset. Buying assets on sale is always a good idea.

I have not breached tolerance bands, but have cash to invest in the PP (taxable). Debating whether to purchase GLD (lagging asset) and restore the portfolio to 4x25, or contribute to cash and re-balance at a later time.

Current Allocation:

SPY - 26.46%
GLD - 23.61%
TLT - 25.65%
CASH - 24.29%

Allocation after contribution to Cash only:

SPY - 24.46%
GLD - 21.83%
TLT - 23.71%
CASH - 29.99%

[dualstow]

I was just going to begin a similar thread. Last night I was reviewing Harry Browne's late 1980s 'Best Laid Plans' book ( ISBN-10: 0671672924
ISBN-13: 978-0671672928 ) when I came upon the page about year-end rebalancing- I'd forgotten all about it. In the very same section, Harry discusses how he has already discontinued rebalancing at 30%. However, the year-end rebalance is definitely something I'm going to implement this year.

# We're always resisting the urge not to tinker, but this is an excuse to finally do something.
# I began my pp in late 2010, and this was (accidentally) good timing for long-term treasuries (LTT).
# My LTT share is up big-time. Some components are up as much as 39% (TLT) and 56% (EDV).
# The LTT instruments are held in my tax-deferred account so there's no problem selling some, even before 1-1-12.
# I can always buy real LTT with the proceeds from the TLT sales.
# We have seen from Clive's posts that rebalancing out of LTT due to a 35% share (ie out of bands) is quite rare. Or nonexistent, perhaps.
# I think this will help to keep the urge to tinker in check for another twelve months.

Maybe if I had enough investments to live on, I'd feel differently, but this just seems like perfect timing. And, I'm jealous of those who knocked their gold share back from 31% to something below 30%. Call it smart, call it lucky. I wish I'd trimmed.

[dualstow]

I have not breached tolerance bands, but have cash to invest in the PP (taxable). Debating whether to purchase GLD (lagging asset) and restore the portfolio to 4x25, or contribute to cash and re-balance at a later time.

New cash poses my biggest conundrum. To buy PRPFX would be easy, but I'm doing the DIY hbpp.
I'd like to just buy equal amounts of everything next quarter when I have more cash, but my vp is so stock-heavy that I have a strong aversion to buying stocks. At the same time, gold and treasuries are way up, and there's a psychological electric fence keeping me from only buying them. I'll probably bite the bullet and buy everything, stocks included. The best way out of paralysis is simply sticking to the plan and not looking back.

[buddtholomew]

In the very same section, Harry discusses how he has already discontinued rebalancing at 30%.

Please take a moment to explain this comment further. I am debating whether to re-balance at year's end or wait to contribute cash to the lagging asset when a tolerance band is breached.

Best-
Budd

[dualstow]

In the very same section, Harry discusses how he has already discontinued rebalancing at 30%.

Please take a moment to explain this comment further. I am debating whether to re-balance at year's end or wait to contribute cash to the lagging asset when a tolerance band is breached.

Best-
Budd

If the bands are currently 35% (& 15%), ie one of your four assets has soared (or plummeted) and now constitutes fully 35% (or only 15%) of your total, then you are supposed to rebalance, no matter what the calendar says. Above, I meant that Harry originally considered 30% instead of the higher figure of 35% as a trigger to rebalance.

on P263 of the hardcover,

In earlier presentations of the Permanent Portfolio concept, I suggested making an extra adjustment whenever one investment had risen or fallen by 30% from its price as of the last adjustment. But experience has indicated that this extra attention doesn't materially improve the outcome.

Of course, "extra" means in addition to the calendar rebalance, the year-end rebalance.

Since the radio shows are from the 2000s, perhaps they are a better source of his most recent opinions. I remember him stressing the bands. I think he also suggested an annual rebalance, but it's not like you *have* to do it.

He goes on:

However, if you're aware that either gold, bonds, or a major stock market index has doubled -- or fallen by 50% -- since the last time you made an adjustment, your portfolio probably would benefit from an immediate adjustment.

(p263)

[buddtholomew]

In the very same section, Harry discusses how he has already discontinued rebalancing at 30%.

Please take a moment to explain this comment further. I am debating whether to re-balance at year's end or wait to contribute cash to the lagging asset when a tolerance band is breached.

Best-
Budd

If the bands are currently 35% (& 15%), ie one of your four assets has soared (or plummeted) and now constitutes fully 35% (or only 15%) of your total, then you are supposed to rebalance, no matter what the calendar says. Above, I meant that Harry originally considered 30% instead of the higher figure of 35% as a trigger to rebalance.

on P263 of the hardcover,

In earlier presentations of the Permanent Portfolio concept, I suggested making an extra adjustment whenever one investment had risen or fallen by 30% from its price as of the last adjustment. But experience has indicated that this extra attention doesn't materially improve the outcome.

Of course, "extra" means in addition to the calendar rebalance, the year-end rebalance.

Since the radio shows are from the 2000s, perhaps they are a better source of his most recent opinions. I remember him stressing the bands. I think he also suggested an annual rebalance, but it's not like you *have* to do it.

He goes on:

However, if you're aware that either gold, bonds, or a major stock market index has doubled -- or fallen by 50% -- since the last time you made an adjustment, your portfolio probably would benefit from an immediate adjustment.

(p263)

Interesting, so HB did recommend re-balancing annually even though an asset may not have breached the 15/35 tolerance band.

[MediumTex]

Interesting, so HB did recommend re-balancing annually even though an asset may not have breached the 15/35 tolerance band.

I would say that he acknowledged that annual rebalancing wouldn't mess anything up too badly (other than reducing the long term returns of the portfolio).  I think "recommend" is too strong a word, though.

[dualstow]

I would say that he acknowledged that annual rebalancing wouldn't mess anything up too badly (other than reducing the long term returns of the portfolio).  I think "recommend" is too strong a word, though.

Perhaps "tolerated" is a better word.
I'll probably listen to the shows again in January, and I'll keep an ear out for rebalancing talk.
Or, does anyone recall what he said on the subject?

In any case, if M.T. and Craigr care more about the bands than year-end, that's good enough for me. I'm rebalancing this year because it feels right to sell "high" and there's no tax bite. But, it might not make that much of a difference.

[dualstow]

Hang on- I have the kindle edition of 'Fail-safe Investing', a more recent book, and I was able to quickly find this statement:
"When you make your once-a-year check of the portfolio's value, if all four investments are within the 15-35% range, no rebalancing is necessary."

Why, then, did Harry use the word "extra" above? A rebalance at 30% cannot follow a 35% one- your investment would never reach the 35% one! So, I do believe that he meant in addition to the year-end adjustment, back when 'Best Laid Plans' was written. He also recommended silver once upon a time, so there was some refining, pun intended, of the strategy.

In summary:
HB once recommended an annual rebalance and an extra one at 30% bands. Then,
An annual rebalance. (Best Laid Plans). Finally,
A rebalance at 15%/35%, but not necessarily at year end. You simply need to monitor your account once a year. (Fail-safe).

[buddtholomew]

Interesting, so HB did recommend re-balancing annually even though an asset may not have breached the 15/35 tolerance band.

I would say that he acknowledged that annual rebalancing wouldn't mess anything up too badly (other than reducing the long term returns of the portfolio).  I think "recommend" is too strong a word, though.

Good thing I didn't use the word "advocated" 

Thanks for the summary dualstow. I am leaning towards re-balancing at the EOY, but will wait until tomorrow to decide.

[MediumTex]

Interesting, so HB did recommend re-balancing annually even though an asset may not have breached the 15/35 tolerance band.

I would say that he acknowledged that annual rebalancing wouldn't mess anything up too badly (other than reducing the long term returns of the portfolio).  I think "recommend" is too strong a word, though.

Good thing I didn't use the word "advocated" 

Thanks for the summary dualstow. I am leaning towards re-balancing at the EOY, but will wait until tomorrow to decide.

First and foremost, you have to do what is comfortable for you.  If EOY rebalancing makes you sleep better, then by all means do it.

Over time, though, I like to think that people will gravitate toward more optimized approaches to the PP, and thus use the 20/30 or 15/35 rebalancing bands.

Jack Handy once said about teaching a yodeling class:  “If you ever teach a yodeling class, probably the hardest thing is to keep the students from just trying to yodel right off. You see, we build to that.”?  You could probably say something similar about teaching a PP rebalancing class. 

The PP is simple, but fully internalizing it is hard.

[dualstow]

Only you could make a Jack Handy quote into something so useful, lol.