Gyroscopic Investing

I hold >25% in cash for two main reasons.

1. Emergency fund requirements exceed the 25% cash portion of the portfolio. These reserves are held in CD's earning between 1.5-3.0%.
2. The portfolio is 95% taxable and I would prefer to use the additional cash reserves to re-balance when a threshold (15/35) is breached.

Is this logic sound? Volatility is dampened, but higher returns are compromised. CD's with a 3% yield mature Q1 2015.

#1 speaks for itself. You can hold extra cash outside of the pp. But, if it's emergency money, are CDs the best place for it? Can you access the money quickly? Penalties?
#2 Looks like it's your real topic. I should wait for wiser posters to chime in, but I think I would just follow the standard rebalance bands and pay tax when I need to pay tax. I'd rather pay tax because the pp is making money than to miss out, and I don't let taxes drive my investments decision other than asset location.

dualstow wrote: #1 speaks for itself. You can hold extra cash outside of the pp. But, if it's emergency money, are CDs the best place for it? Can you access the money quickly? Penalties?
#2 Looks like it's your real topic. I should wait for wiser posters to chime in, but I think I would just follow the standard rebalance bands and pay tax when I need to pay tax. I'd rather pay tax because the pp is making money than to miss out, and I don't let taxes drive my investments decision other than asset location.

CD.'s are held at Ally bank and the emergency (for discussion purposes) is a job loss.

I do not intend to violate the 15/35 re-balancing bands, but rather contribute from the cash reserves to re-balance the portfolio to approximately 4x25. If the 35% threshold is breached, I purchase the other assets to re-balance the portfolio. If 15% is breached, I buy the lagging asset to re-balance. Neither of these activities incur any taxes. The negatives are an increase in overall portfolio volatility, reduced cash reserves and the outperforming asset is not trimmed (in dollar terms). Also, as the portfolio increases in size, this re-balancing approach becomes less likely as the amount of cash reserves required grows quite large.

Ah, I  get it. Interesting. Yeah, there are plenty of people who buy the lagging asset rather than sell anything, with the idea that every asset goes up evenutally. (Will it? I don't know). But, to try to keep cash reserves not just for emergencies but to rebalance (vs simply throwing new cash on hand at the lagging asset) is a new one for me. Hmm.

Doesn't it seem like you'd eventually have a big vp of cash at a time when it sucks to hold cash?

dualstow wrote: Doesn't it seem like you'd eventually have a big vp of cash at a time when it sucks to hold cash?

Yes - PP 4.67 YTD and 3.96% with cash reserves. The approach works better when required to purchase only a single lagging asset (15% tolerance band breached), and less so when required to purchase all three lagging assets (35% band breached) to restore the 4x25 allocation. Unfortunately, I recall a comment by Craig (I believe) that the 35% threshold was triggered more frequently than the 15% one. Perhaps I need to rethink this one...

I think HB suggested putting new money in cash so I can't see where he would have a problem with your strategy. Except for the CD part this is basically what I've been doing lately. I'm not doing it for cash reserve purposes however. I'm doing it because I would have to actually look at the portfolio close enough to figure out where to put the new cash and I've resolved not to do that again until next January.

I think the problem would be that with this strategy he could end up keeping way more in cash, more than 35%.  Which I really don't see any advantage of at all.  Taxes are a percentage of what you gained, so it's a little silly to avoid gaining anything at all in order to avoid taxes.

There are circumstances where an investor could pay capital gains on an asset and also have a loss in the value of the overall portfolio. I agree, exceeding 35% in cash is nonsensical.

buddtholomew wrote: I do not intend to violate the 15/35 re-balancing bands, but rather contribute from the cash reserves to re-balance the portfolio to approximately 4x25. If the 35% threshold is breached, I purchase the other assets to re-balance the portfolio. If 15% is breached, I buy the lagging asset to re-balance. Neither of these activities incur any taxes. The negatives are an increase in overall portfolio volatility, reduced cash reserves and the outperforming asset is not trimmed (in dollar terms). Also, as the portfolio increases in size, this re-balancing approach becomes less likely as the amount of cash reserves required grows quite large.

You're not really talking about a rebalancing discipline here, you're talking about a new contribution discipline.  Rather than add new contributions to "PP cash" you're adding them to "VP cash" - and deferring contributing to your PP until you hit a rebalancing band.  If you instead contribute to PP cash as you accumulate more cash (I assume this is ongoing savings of some sort), you'll rebalance either when your cash hits the 35% band, or any of the other assets hits a band.  Your current strategy will eventually break down (per the bolded part of your quote above). 

I'd recommend contributing new cash as it accumulates to your PP (in the PP cash bucket) and rebalance based on the bands (including your PP cash exceeding 35%).  Another approach, as Dualstow suggests, is to buy the lagging asset with new contributions.  This may keep you from selling anything for a while, but will also eventually break down.  Selling high and buying low is a very good thing - you're currently buying low, so you're halfway there.  If you get into the habit of doing it now, I suspect it will be easier to keep doing it later when the absolute amounts (including the taxes) involved will be (possibly much) larger.  If you're resisting it now, imagine how much you'll resist it when your portfolio is 10x what it currently is.

Interesting.
So now you could be selling cash and stocks,then buying the lagging gold and bonds??
I do think I'd like to be taking profits on my appreciated stocks at some point rather than bringing
the other classes(gold,bonds) up to the dollar value of my stocks?

Xan is correct. There is no difference between my approach and the recommendation to direct new contributions to cash until a rebalancing band is triggered. In the current economic climate, this approach serves to lower the overall duration of the fixed income investments (LTT's and Cash), but can also be considered a lost opportunity. In addition, if contributions to cash mirror returns in the asset that is outperforming, one ends up buying the lagging assets to re-balance in lieu of selling the winner to buy the losers. In this scenario, cash is not the winner although it has reached 35% of the overall portfolio.

You guys have my head spinning!

in two of my accounts, which are IRAs, I will be contributing the max every year in cash.  My plan currently, also, is to rebalance quarterly, vs. the bands.  Somewhere I read the returns on bands vs. yearly vs. quarterly vs. monthly had the quarterly rebalancing doing best.

But regardless, there is always going to be new cash coming in, whether this account or my taxable account.  So cash will alwasy be being "sold" to buy the other assets to get everything back to 25%.  In this case, I am likely never selling winners but only, hopefully, overall growing my portfolio.

So without a static account where no cash is being injected, this now seems unclear in my head a bit.  Obviously, with new cash buying others, it will buy in proportion to how they've done, buying less, if any, or the higher flyers and more of the laggards.  Does this then work out right in the end, even though I am not "selling' winners I am buying the laggards. 

Mike

Cortopassi wrote: You guys have my head spinning!

in two of my accounts, which are IRAs, I will be contributing the max every year in cash.  My plan currently, also, is to rebalance quarterly, vs. the bands.  Somewhere I read the returns on bands vs. yearly vs. quarterly vs. monthly had the quarterly rebalancing doing best.

But regardless, there is always going to be new cash coming in, whether this account or my taxable account.  So cash will alwasy be being "sold" to buy the other assets to get everything back to 25%.  In this case, I am likely never selling winners but only, hopefully, overall growing my portfolio.

So without a static account where no cash is being injected, this now seems unclear in my head a bit.  Obviously, with new cash buying others, it will buy in proportion to how they've done, buying less, if any, or the higher flyers and more of the laggards.  Does this then work out right in the end, even though I am not "selling' winners I am buying the laggards. 

Mike

Cash infusions into the portfolio will have a smaller impact on re-balancing bands as the amount invested grows in value (5K on a 10K portfolio has more impact than 5K on a 100K portfolio). Eventually, you will be required to sell an appreciated asset to purchase one or more lagging assets.

Personally, I try to minimize taxable transactions wherever possible and have allocated an additional 10% cash to inject into the portfolio when an asset reaches 35%. Technically, I should re-balance the entire portfolio now to 4x25% using this 10% cash, but consider the additional reserves (>25%) as part of an extended emergency fund (25% PP cash + 10% VP cash). This additional cash also serves to reduce the overall duration of the fixed income investments in the portfolio (~10% to ~5% FI duration).

In other words, I reached 35% cash in the PP and decided not to contribute to the lagging assets as they are all well within tolerances. I moved 10% of this cash to a VP that will be used to re-balance the portfolio if a 35% or 15% band is breached (both cases require buying the lagging asset/s). I only expect to use this method once, as the amount required to re-balance lagging assets increases as the portfolio gains in value. One downfall is that you may have too much cash on the sidelines waiting for a re-balancing event to occur. A potential benefit is the overall reduction in duration of the fixed income investments.