Rebalancing all or some of components when one reaches 15 or 35%?

[Greg]

Not sure if anyone has done the calculations on this regarding total return:

Has anyone determined whether it is has been a better idea to return all components to 25% after one of the components hit a rebalancing band or do you just sell/purchase the asset that hit the rebalancing band and move money either into/out of the cash component.

[dualstow]

In 'Best Laid Plans', Harry Browne's example is the former: return all components to 25%.

[Greg]

In 'Best Laid Plans', Harry Browne's example is the former: return all components to 25%.

Thanks for the knowledge. For a true HB PP then that's obviously what to do. Not sure if anyone has run a study on whether you can get better returns by only dealing with the lagging/raising asset and the cash component for rebalancing into versus rebalancing all of them.

[dualstow]

Not sure if anyone has run a study on whether you can get better returns by only dealing with the lagging/raising asset and the cash component for rebalancing into versus rebalancing all of them.

I think this came up in Sophie's thread, though I'm not sure. I thought I saw something to the effect that buhing the lagging asset, though tax friendly, was not necessarily the winner in those simulations.

Anyway, I was just looking up the specific quote from 'Plans'. p261 of the hardcover reads:

You might decide at the outset not to split the portfolio evenly among
the four investments, and you may want to include additional investments.
Whatever percentages you choose fo reach investment, that is the percentage to which it should be restored when you make an
adjustment.
If an investment's actual share of the portfolio is large than its
designated percentage, sell the excess. Use the proceeds to buy enough
of the other investments to bring your holdings of them up to their
designated percentages.

Of course, simplicity was the main driver here. I bet even HB didn't know exactly which method would be juicier in the long run, and perhaps it depends on how much of the pp you keep in a tax-deferred account.

[Pointedstick]

Not sure if anyone has run a study on whether you can get better returns by only dealing with the lagging/raising asset and the cash component for rebalancing into versus rebalancing all of them.

I think this came up in Sophie's thread, though I'm not sure. I thought I saw something to the effect that buhing the lagging asset, though tax friendly, was not necessarily the winner in those simulations.

Yeah, if i remember correctly, this was the order in terms of what produced the best returns:

dollar-cost averaging > buy the lagging asset > buy cash; rebalance when cash hits 35%

[dualstow]

Found it, although this was specifically with regard to new contributions.
PointedStick, you remember correctly. :-)

http://gyroscopicinvesting.com/forum/ht ... 628#p35628
(Reply #18)

[Xan]

But there's still also the option of buying into each asset in their current proportions.  I have a suspicion that that could be better.

The general rule seems to be that the less that your contributions affect the timing of your rebalances, the better.  And unlike the other methods, this method would not affect that timing at all.

[Greg]

But there's still also the option of buying into each asset in their current proportions.  I have a suspicion that that could be better.

The general rule seems to be that the less that your contributions affect the timing of your rebalances, the better.  And unlike the other methods, this method would not affect that timing at all.

Well that would be good for if you believe there is momentum to prices of assets. Then you are not affecting the system because if a component drops to 20%, it might want to keep going to 15% but you purchased at 20% to bring it back up to 25% while it was still dropping. Same goes for if the asset was appreciating and you took profits early (if it was up at 30% and you brought it back down to 25% causing potentially a taxable event if held in a taxable account).

[sophie]

This is a good question.  I would guess that rebalancing back to 25% would win, because you sell the leading asset high and simultaneously buy the laggards on sale.  Of course, intuition can be quite wrong!

I think this is completely unrelated to the simulations I did investigating the best way to add new contributions.  Right now, though, HB's Rule #1 trumps running another set of simulations.  Feel free to joggle my elbow if this drops off the queue.

Incidentally, if anyone is curious...I ended up going with the buying the lagging asset strategy for three reasons:  1) my current contributions are small relative to the size of the PP, because the lion's share is going to TIAA-CREF and I gave up trying to PP-ize that, 2) tax consequences of rebalancing, and 3) buying all 4 assets every month would be a PITA.  (And again, remember Rule #1.)

[Pointedstick]

I get paid bi-weekly, so dollar-cost averaging my 401k contributions would involve 48 commission fees (only two assets are commission-free) for a grand total of $332 per year! Instead, I put everything in cash and then every two months, distribute that cash among the remaining three assets, buying the weakest first. That way I only wind up with 12 commission fees per year and end up kinda-sorta dollar-cost averaging. Hopefully it work out. Once the balance gets nice and fat, I may decide that the commission fees don't matter so much.

[Greg]

I get paid bi-weekly, so dollar-cost averaging my 401k contributions would involve 48 commission fees (only two assets are commission-free) for a grand total of $332 per year! Instead, I put everything in cash and then every two months, distribute that cash among the remaining three assets, buying the weakest first. That way I only wind up with 12 commission fees per year and end up kinda-sorta dollar-cost averaging. Hopefully it work out. Once the balance gets nice and fat, I may decide that the commission fees don't matter so much.

Wouldn't it be that once the balance gets nice and fat (as in all of your assets all put together) that your CONTRIBUTIONS don't matter very much? If you were putting in $1000 per week but your portfolio got to $1,000,000, your contributions each week would only increase the total portfolio by .1% while if you had commissions on that much you'd pay $13.83 ($332/48 commissions * 2 for non commission-free) to put in $1000 into your portfolio or a transaction cost of 1.38%. I would think with a larger portfolio you could afford to spread out your contributions since they wouldn't matter very much to the overall growth of the portfolio while the transaction costs still eat away contributions.

[Pointedstick]

Huh, I guess you're right!

[sophie]

Wouldn't it be that once the balance gets nice and fat (as in all of your assets all put together) that your CONTRIBUTIONS don't matter very much?  If you were putting in $1000 per week but your portfolio got to $1,000,000, your contributions each week would only increase the total portfolio by .1%...

... then you can retire!

I expect that in this situation, accrued interest and dividends would add considerably to that $1000/week figure.

[Greg]

Wouldn't it be that once the balance gets nice and fat (as in all of your assets all put together) that your CONTRIBUTIONS don't matter very much?  If you were putting in $1000 per week but your portfolio got to $1,000,000, your contributions each week would only increase the total portfolio by .1%...

... then you can retire!

I expect that in this situation, accrued interest and dividends would add considerably to that $1000/week figure.

Hopefully those could be on some sort of DRIP (dividend reinvestment plan) so that you don't have all of the commission costs. I believe KevinW brought up at one point about using Folio Investing to create a Portfolio on there to match the PP allocations. It's around I believe $250 a year which you could split up the costs into however many times you want to invest each month, week, day, hour, etc.

[Greg]

But there's still also the option of buying into each asset in their current proportions.  I have a suspicion that that could be better.

The general rule seems to be that the less that your contributions affect the timing of your rebalances, the better.  And unlike the other methods, this method would not affect that timing at all.

Xan: Isn't this actually just Dollar Cost Averaging? If you had a portfolio that was all different percentages (24/27/35/14) and you added $500 to each one, wouldn't they just keep the same percentages between each of them?

Clive: I'm still reading through that last post. You always seem to have interesting investing ideas.

[dualstow]

If you had a portfolio that was all different percentages (24/27/35/14) and you added $500 to each one, wouldn't they just keep the same percentages between each of them?

Actually, I think they would approach equilibrium, albeit slowly.

[Greg]

If you had a portfolio that was all different percentages (24/27/35/14) and you added $500 to each one, wouldn't they just keep the same percentages between each of them?

Actually, I think they would approach equilibrium, albeit slowly.

You're right. But just ran a couple of numbers. It'd take a LOT of contributions to really push these back to 25% across the board


Total       Stocks     Bonds         Gold     Cash     Stocks (%) Bonds (%) Gold (%) Cash (%)
$100.00   $27.00   $24.00  $35.00    $14.00 27% 24% 35% 14%
$200.00    $52.00   $49.00  $60.00   $39.00 26% 25% 30% 20%
$300.00    $77.00   $74.00  $85.00   $64.00 26% 25% 28% 21%
$400.00    $102.00 $99.00  $110.00  $89.00 26% 25% 28% 22%
$500.00    $127.00 $124.00 $135.00 $114.00 25% 25% 27% 23%
$600.00    $152.00 $149.00 $160.00 $139.00 25% 25% 27% 23%
$700.00    $177.00 $174.00 $185.00 $164.00 25% 25% 26% 23%
$800.00    $202.00 $199.00 $210.00 $189.00 25% 25% 26% 24%
$900.00    $227.00 $224.00 $235.00 $214.00 25% 25% 26% 24%
$1,000.00 $252.00 $249.00 $260.00 $239.00 25% 25% 26% 24%
$1,100.00 $277.00 $274.00 $285.00 $264.00 25% 25% 26% 24%
$1,200.00 $302.00 $299.00 $310.00 $289.00 25% 25% 26% 24%
$1,300.00 $327.00 $324.00 $335.00 $314.00 25% 25% 26% 24%
$1,400.00 $352.00 $349.00 $360.00 $339.00 25% 25% 26% 24%
$1,500.00 $377.00 $374.00 $385.00 $364.00 25% 25% 26% 24%
$1,600.00 $402.00 $399.00 $410.00 $389.00 25% 25% 26% 24%
$1,700.00 $427.00 $424.00 $435.00 $414.00 25% 25% 26% 24%
$1,800.00 $452.00 $449.00 $460.00 $439.00 25% 25% 26% 24%
$1,900.00 $477.00 $474.00 $485.00 $464.00 25% 25% 26% 24%
$2,000.00 $502.00 $499.00 $510.00 $489.00 25% 25% 26% 24%
$2,100.00 $527.00 $524.00 $535.00 $514.00 25% 25% 25% 24%
$2,200.00 $552.00 $549.00 $560.00 $539.00 25% 25% 25% 25%

Note: Sorry for the table not looking pretty, I haven't figured out yet the table command in this program.

It seems like it does go to around 25% again, but takes going from a portfolio size of $100 to the size of $2200, or a 2100% increase in size (if my math is correct). If I can make my portfolio grow by 2100% and it's not puny to start out with, I think I'll have bigger issues to deal with than just how I allocate funding funds hah.

[Xan]

It doesn't have to push everything all the way to 25% to have an effect.  Every "even" contribution that is made delays the next rebalance.  Every contribution doled out in the current proportion has no effect on the timing of the next rebalance.

[dualstow]

I agree. Look at your very first contribution, 1NV35T0R. (to be fair, you said add $500 to each, but as long as you're starting with such a small amount, so small that the first contribution doubles the portfolio, I suppose it doesn't matter).
That first contribution takes you far, far away from those rebalancing triggers of 35% and 14%.

And, the big picture is the rebalancing points, not a perfect 25% four-way split.

[escafandro]

And how should I proceed if I hit the 15% band in my Cash allocation because I make withdrawals to live?

[dualstow]

And how should I proceed if I hit the 15% band in my Cash allocation because I make withdrawals to live?

I think you need to shrink your entire portfolio to a size you can work with. That is, the cash portion *mostly* needs to be left alone for investing, not spending.

[MediumTex]

And how should I proceed if I hit the 15% band in my Cash allocation because I make withdrawals to live?

When you hit 15% in cash because of drawdown just rebalance the whole portfolio.

HB covered this in Fail Safe Investing.