Gyroscopic Investing

I'm looking for comments on if you have / are close to rebalance points due either to rising stock and / or falling gold. I haven't been running the most "pure" PP and am thinking maybe I should be rebalancing anyways

I'm interested to know:

1. your rebalance bands (15/35, 20/30, year end automatic rebalance, other)
2. previous time you rebalanced

no replies...maybe nobody has reached a rebalance band recently?

What are your... impurities? 

I run a UK PP and I am probably about to hit a rebalance band for stocks. I am waiting for 35% and not jumping the gun. Last proper rebalance was summer 2011 when I sold gold (how times have changed!).

However, I did have a semi-rebalance in 2012, which was triggered by administrative changes. Long story short, I had to move my pension from one provider to another. When I rebought assets in the new pension provider's scheme, it seemed more logical to rebalance, to the degree that was possible inside the pension scheme only.

My bands are 15/35.  Cash (!) hit 35 on the big gold smack down on April 15.  Stocks and bonds were pretty close to 25% each, so I rebalanced on that day by buying gold (GTU - which was at a 5% discount).

My band is 35/15.  Since I'm still in accumulation mode, I add money every year, and that always pushes cash over the limit.  So rebalance every year, by default.

smurff wrote: My band is 35/15.  Since I'm still in accumulation mode, I add money every year, and that always pushes cash over the limit.  So rebalance every year, by default.

I do the same thing. I put all contributions into cash and use the standard 15/35 bands. I have a large account that hasn't been rebalanced in years. And a small one that gets overweight in cash about once a year. Those rebalances get less and less frequent as the portfolio grows. It's a good system.

I aim for 15/35 but jumped the gun with VTI at 32 so I could harvest gold losses in a taxable account on 4/15/13.  I sold Zroz and iau and bought GLD to 25% [O.K. with the Irs?]with this plus Vti>25% that I sold..  I also bought some SHY with the VTI>25%.
This was my first rebal in 1 1/2 yrs and my second tax harvest.

MangoMan wrote: Could you qualify that statement? How does the size of the portfolio affect the frequency of rebalance bands being hit? If the stock market is up 50%, your VTI is larger by the same % regardless of the $ value, and relative to the other assets. What am I missing?

So far all of my rebalances have been triggered by cash exceeding 35%. The other assets fluctuate but the contributions relentlessly push cash up faster than everything else. When those cash-induced rebalances happen I buy the other assets up to an even 25%, which also makes them less likely to get out of their bands.

greenv wrote: I aim for 15/35 but jumped the gun with VTI at 32 so I could harvest gold losses in a taxable account on 4/15/13.  I sold Zroz and iau and bought GLD to 25% [O.K. with the Irs?]with this plus Vti>25% that I sold..  I also bought some SHY with the VTI>25%.
This was my first rebal in 1 1/2 yrs and my second tax harvest.

Did you buy the GLD within 30 days of selling?

I'm afraid that if the answer is "no", you may have a wash sale instead of a tax loss harvest for the gold.  There's some debate over whether gold ETFs are sufficiently different from either closed end funds like GTU or physical gold coins to avoid the wash sale problem, but I'm pretty sure that IAU and GLD are in the same sandbox.

KevinW wrote:

MangoMan wrote: Could you qualify that statement? How does the size of the portfolio affect the frequency of rebalance bands being hit? If the stock market is up 50%, your VTI is larger by the same % regardless of the $ value, and relative to the other assets. What am I missing?

So far all of my rebalances have been triggered by cash exceeding 35%. The other assets fluctuate but the contributions relentlessly push cash up faster than everything else. When those cash-induced rebalances happen I buy the other assets up to an even 25%, which also makes them less likely to get out of their bands.

However, if the amount of cash you're adding stays relatively constant, say $X per month, it will take longer for this addition to push cash over its 35% band the larger the portfolio size.  For example, assuming the other 3 stay about the same, with a 10*X portfolio it only takes 2 months (probably not long enough for the other assets to move very much).  With a 100*X portfolio it takes 16 months (may be long enough that some other asset will force a rebalance).  With a 1000*X portfolio it takes 154 months (almost certainly long enough for some other asset to force a rebalance).  Assuming your portfolio grows faster than the amount you're adding, the rebalances will ultimately be driven by changes in the non-cash assets.

Which, I think, is why adding new contributions to cash is the worst of the options.  Why should the frequency with which you rebalance depend on anything other than the performance of the volatile assets?  And why would it be good to rebalance so frequently at the beginning of your investing life compared to the end?  Answer: it shouldn't, and it's not.

Xan wrote: Which, I think, is why adding new contributions to cash is the worst of the options.  Why should the frequency with which you rebalance depend on anything other than the performance of the volatile assets?  And why would it be good to rebalance so frequently at the beginning of your investing life compared to the end?  Answer: it shouldn't, and it's not.

If you incur costs (commissions) to purchase the non-cash assets in your PP, then simply adding to cash (money market or sweep account) might be prudent until you hit a rebalancing band. 

rocketdog wrote:

Xan wrote: Which, I think, is why adding new contributions to cash is the worst of the options.  Why should the frequency with which you rebalance depend on anything other than the performance of the volatile assets?  And why would it be good to rebalance so frequently at the beginning of your investing life compared to the end?  Answer: it shouldn't, and it's not.

If you incur costs (commissions) to purchase the non-cash assets in your PP, then simply adding to cash (money market or sweep account) might be prudent until you hit a rebalancing band.

Yes, but if you're starting from $0, and adding $X/month, you'll hit a rebalance band every month for the first 6 months and then every 2 months for about the next 6 months.  Depending on the relative size of $X and your commissions, it might be better to let it build up as cash and rebalance only every 6 months or so.  Another option is to start with monthly investments into PRPFX or PERM for the first couple of years and then switch to a self-managed 4x25 portfolio.  If your portfolio size is 24*X (and gold, stocks, and bonds are neither falling or rising quickly) it would take about 4 months to hit a 35% cash rebalance band due to cash accumulating at $X/month.  After adding $X/month for 5 years your portfolio should be around 60*X, at which point (assuming the other assets stay relatively even) it should take slightly more than 17 months to hit the cash rebalance band (still adding $X/month). 

I think what Xan is suggesting is that rather than rebalance to 25% each every time your cash hits 35% (because you're adding cash), you might let the cash build up outside of your PP (until there's enough that the commissions are not an annoyingly large percentage) and then add in such a way as to preserve the current ratios at the time you add.  Doing it this way, you won't be rebalancing frequently simply because you're adding - rather you'll rebalance because one of the volatile assets hits a band.  You may get some momentum benefit if you do it this way, but my guess is it won't make much difference in the long run (and whether you win or lose by doing it this way depends on how things move during the specific time period you're at this stage of accumulating).

rickb wrote: I think what Xan is suggesting is that rather than rebalance to 25% each every time your cash hits 35% (because you're adding cash), you might let the cash build up outside of your PP (until there's enough that the commissions are not an annoyingly large percentage) and then add in such a way as to preserve the current ratios at the time you add.

This is exactly what I do for my PP that's not all commission-free ETFs.

Pointedstick wrote:

rickb wrote: I think what Xan is suggesting is that rather than rebalance to 25% each every time your cash hits 35% (because you're adding cash), you might let the cash build up outside of your PP (until there's enough that the commissions are not an annoyingly large percentage) and then add in such a way as to preserve the current ratios at the time you add.

This is exactly what I do for my PP that's not all commission-free ETFs.

I invest in IT-TE munis and plan to exchange out of this fund to rebalance lagging assets. I do also hold a 25% cash position in the portfolio. I wonder whether it makes sense to rebalance with cash outside of the PP when an asset reaches 35%. Is this an option for a taxable investor? It certainly would place more $ at risk.

buddtholomew wrote:

Pointedstick wrote:

rickb wrote: I think what Xan is suggesting is that rather than rebalance to 25% each every time your cash hits 35% (because you're adding cash), you might let the cash build up outside of your PP (until there's enough that the commissions are not an annoyingly large percentage) and then add in such a way as to preserve the current ratios at the time you add.

This is exactly what I do for my PP that's not all commission-free ETFs.

I invest in IT-TE munis and plan to exchange out of this fund to rebalance lagging assets. I do also hold a 25% cash position in the portfolio. I wonder whether it makes sense to rebalance with cash outside of the PP when an asset reaches 35%. Is this an option for a taxable investor? It certainly would place more $ at risk.

To rebalance you add up the current total, divide by 4, and adjust accordingly.  I'm not sure what "rebalance with cash outside of the PP" means.  If you add cash, the total changes, so 1/4 of the total changes.  Perhaps you mean add/subtract to the volatile 3 (gold, stocks, bonds) so they match the current cash amount, and if this requires adding money (which will usually be the case) then do so.  If you do this (and it requires adding money), you're adding to your PP.  In the opposite case (everything except cash has gone down), you're presumably transferring money out of your PP.  Transferring money out is against the rules.  Transferring money in is OK (whether you're taxable or not). 

If you transfer money in (from a cash source), you're putting more $ "at risk", but you're also increasing the amount that is protected from the catastrophic events the PP protects you against (bank failures, stock market collapse, hyperinflation, currency collapse).  I think the general idea is that putting assets in a 4x25 PP is less risky than keeping assets in pretty much any other form - for example, even if you keep 100% in short term treasuries you're screwed by hyperinflation (and 100% in bank CDs has problems in more cases).

If you have a significant amount of money, there's simply nothing you can do with it that's completely risk free (where by "risk free" I mean "guaranteed to keep up with inflation").  You can pretty much guarantee you won't lose any principle (measured in dollars) by putting it in short term treasuries - but you almost certainly won't keep up with inflation.  If you want to keep up with inflation, you have to put some portion of it someplace other than short term treasuries - and as soon as you do this you run the risk that however much you don't have in ST treasuries might lose principle.  It sucks, but them's the facts.

Xan wrote: Which, I think, is why adding new contributions to cash is the worst of the options.  Why should the frequency with which you rebalance depend on anything other than the performance of the volatile assets?  And why would it be good to rebalance so frequently at the beginning of your investing life compared to the end?  Answer: it shouldn't, and it's not.

I think practicing rebalancing early on is a good exercise as it instills discipline and teaches one how to manage the portfolio while the figures and stakes involved are low.

My advice for small portfolios -- let's say less than 1 year's contributions or $10,000 --- is to leave it all in cash. That avoids churning every month. After that use a 4x25 with 15/35 bands. As I said my small account with "frequent" rebalances needs attention maybe once per year. I don't think executing 3 trades per year does much harm...

I don't think there's really a wrong answer here; each rebalance method will win in some scenarios.

KevinW wrote:I don't think executing 3 trades per year does much harm...

It's not the number of trades that's the problem, it's that you're missing out on the momentum-capture built into the 35/15 bands.

While we're on this topic, how "strict" are the rest of you on the rebalancing bands?  I mean, do you wait until it literally hits 35% and then rebalance?  What if it gets to 32% or 33% and then that asset seems to "stall" and reach a resistance point, do you go ahead and rebalance anyway to take your profits off the table even though you didn't quite reach the "official" rebalancing band? 

Just wondering what everybody else does...

rocketdog wrote: While we're on this topic, how "strict" are the rest of you on the rebalancing bands?  I mean, do you wait until it literally hits 35% and then rebalance?  What if it gets to 32% or 33% and then that asset seems to "stall" and reach a resistance point, do you go ahead and rebalance anyway to take your profits off the table even though you didn't quite reach the "official" rebalancing band? 

Just wondering what everybody else does...

I'm pretty mechanical with my rebalance bands (I happen to use 15/35), because psychologically it comforts me to know that my portfolio strategy involves precisely zero prediction. If I were to shift my rebalance bands dynamically based on what I think the market is doing or is going to do, that would seem too much like market-timing for me.

If I thought the 15/35 bands were too wide--e.g., if it made me too nervous to "leave that much profit on the table"--I would simply pick something narrower, like 20/30, and stick with those bands. That's just me.

For example, this morning I checked my 401(k) to buy the lagging asset with my semimonthly contribution and noticed that stocks had climbed to 31% with everything else at 22-24%. Since my bands are 15/35, I'll wait until stocks hit 35% to rebalance. If they reverse direction before hitting 35%, oh well--that's just the way the cookie crumbles. Sometimes the 15/35 bands will be more profitable than 20/30 bands, and sometimes they will be less profitable. I can't predict these things; over time it averages out.

Tortoise wrote:

rocketdog wrote: While we're on this topic, how "strict" are the rest of you on the rebalancing bands?  I mean, do you wait until it literally hits 35% and then rebalance?  What if it gets to 32% or 33% and then that asset seems to "stall" and reach a resistance point, do you go ahead and rebalance anyway to take your profits off the table even though you didn't quite reach the "official" rebalancing band? 

Just wondering what everybody else does...

I'm pretty mechanical with my rebalance bands (I happen to use 15/35), because psychologically it comforts me to know that my portfolio strategy involves precisely zero prediction. If I were to shift my rebalance bands dynamically based on what I think the market is doing or is going to do, that would seem too much like market-timing for me.

If I thought the 15/35 bands were too wide--e.g., if it made me too nervous to "leave that much profit on the table"--I would simply pick something narrower, like 20/30, and stick with those bands. That's just me.

For example, this morning I checked my 401(k) to buy the lagging asset with my semimonthly contribution and noticed that stocks had climbed to 31% with everything else at 22-24%. Since my bands are 15/35, I'll wait until stocks hit 35% to rebalance. If they reverse direction before hitting 35%, oh well--that's just the way the cookie crumbles. Sometimes the 15/35 bands will be more profitable than 20/30 bands, and sometimes they will be less profitable. I can't predict these things; over time it averages out.

Interesting.  I sort of do the opposite, meaning I just pick my initial allocations in my 401K and let my bi-weekly contributions purchase the funds I designated, with the hope being dollar-cost averaging will win out in the end.  "Set it and forget it," in other words. 

But for my PP I watch that a little more closely, since nothing gets invested unless I consciously make a decision to do so (because it's in my Roth and IRA accounts).