Frequent Buying & Selling of PP Assets

[barrett]

OK, so I know the standard advice on rebalancing in the PP is to do so once a year or whenever 15/35 or 20/30 bands are hit. But I have been invested in the PP since the beginning of this year and it seems to me that with low transaction fees in my Fidelity accounts, I could be up more for the year if I were frequently selling up assets and buying whatever is down. Important to point out that I am talking about transactions within tax-deferred accounts. I realize that I am talking about low percentages here (i.e. selling a long bond or two and buying stocks, or selling a bit of gold when it's up. etc.). It's obviously a bad idea if the price of an asset just keeps marching upward but that doesn't seem to happen very often. There's all this price fluctuation whether something is generally trending downward or upward. Due to the strong negative correlation of gold, LTTs and stocks, and the fact that all three are rarely all up or down for the day, week, or month, could this be effective? Probably not for some obvious reason that I am missing but I'd appreciate hearing what folks have to say. Thanks.

[barrett]

Pugchief, this is not new money. It's the idea of frequent rebalancing between gold, LTTs and stocks, specifically within tax-deferred accounts. If this has been covered elsewhere, I'd love to be directed to the proper threads.

You are correct that it requires monitoring but it's hardly "work" if it can be done with a couple clicks of the mouse.

And I get that the PP generates real positive returns if one only rebalances once a year or by following the suggested rebalancing bands, but even Harry Browne tweaked his original ideas (nixed silver, Swiss Francs and other commodities besides gold). It seems to me that much of what is discussed on this forum is whether or not further tweaking the PP can be advantageous. The answer is almost always no, but...

I am specifically trying to capitalize on the flow of money between negatively correlated assets. When you watch this day to day, that flow is really noticeable. I haven't done the math so I don't know if what I am suggesting would be profitable.

[murphy_p_t]

i think you'll find your exact question discussed in older threads, but i might be wrong

also to consider, does 20/30 consistently beat 15/35 ?    No

play w/ peaktotrough.com

[Stewardship]

Even if time and transaction costs weren't an issue, and even if you came up with a consistent system to ensure that personal bias and emotions don't influence your trades, I think we should consider rebalancing as a necessary evil for the PP and something that we should want to minimize rather than find ways to do more.

First off, I doubt there is anything to gain by a frequent rebalance.  Secondly, you could end up repeatedly rebalancing into a crashing asset class, and thus lose the PP's protection from that crash.

[barrett]

Yeah, you would appear to be correct, MangoMan. But I was interested to see a post in an old thread that found that daily rebalancing (expenses and hassle not factored in) did almost as well as other bands. There was a clustering of 'most effective' bands all around 15/35. Interesting to me because if you futz around on a daily basis with an all-stock portfolio, you are likely to have a really bad experience. Or is that just my special talent?

[sophie]

Frequent rebalancing is not recommended.  Neither is market timing, which is how I would translate your statement about selling assets that are "up".  We know that annual rebalancing underperforms consistently compared to either the 20/30 or 15/35 band methods, which only require rebalancing every 2-3 years on average.  You'll also pile up transaction fees and you won't much like the resulting tax bill either.

It sounds like you're wanting to tinker with the PP too much, which was true of nearly all of us did in the beginning.  You'll get over that soon enough, but in the meantime try to find some way to keep your itchy fingers off the PP.  Try putting your energy into tracking performance as often as you like - you'll quickly discover that this is like watching paint dry, although it will give you new and useful insights as you watch the daily gyrations.  Alternatively, set aside some money for a variable portfolio and put your energy into that.

Eventually, you'll realize you really don't need to look at it more often than every 1-3 months.  HB recommended checking it just once a year, but I like checking in monthly because I'm always discovering something that requires attention to avoid fees or other unpleasantness.

[barrett]

No tax consequences, Sophie, as I was talking about only buying and selling in tax-deferred accounts. But, yes, there are some fees involved. It's more than a desire to tinker I think. With any investment strategy it seems wise, at least at first, to attempt to poke holes in it or just find little ways to improve it. You are correct that watching daily performance of the PP is like watching paint dry (which is fine with me) but when you check the individual assets each day, it's surprising that you can't make money out off all those little ups and downs. I would guess that there are a lot of people like me who are new to the PP and therefore new to owning both LTTs and gold. I only ever held one volatile asset (stocks) so having three of them takes some getting used to.

Hey, how much am I being charged for this session anyway?

[barrett]

Found these numbers on an old thread. They were put together by edsanville:

Rebalancing band: 25%-25%  Annualized returns: 8.770407%  (rebalance every day no matter what!)
Rebalancing band: 24%-26%  Annualized returns: 8.736676%
Rebalancing band: 23%-27%  Annualized returns: 8.730892%
Rebalancing band: 22%-28%  Annualized returns: 8.633693%
Rebalancing band: 21%-29%  Annualized returns: 8.609356%
Rebalancing band: 20%-30%  Annualized returns: 8.801298%
Rebalancing band: 19%-31%  Annualized returns: 8.746533%
Rebalancing band: 18%-32%  Annualized returns: 8.755651%
Rebalancing band: 17%-33%  Annualized returns: 8.593875%
Rebalancing band: 16%-34%  Annualized returns: 9.144876%
Rebalancing band: 15%-35%  Annualized returns: 9.225508%
Rebalancing band: 14%-36%  Annualized returns: 9.533811%
Rebalancing band: 13%-37%  Annualized returns: 8.762806%
Rebalancing band: 12%-38%  Annualized returns: 8.644704%
Rebalancing band: 11%-39%  Annualized returns: 8.620474%
Rebalancing band: 10%-40%  Annualized returns: 9.013725%
Rebalancing band:  9%-41%  Annualized returns: 9.110751%
Rebalancing band:  8%-42%  Annualized returns: 8.773225%
Rebalancing band:  7%-43%  Annualized returns: 8.848743%
Rebalancing band:  6%-44%  Annualized returns: 8.962410%
Rebalancing band:  5%-45%  Annualized returns: 9.100235%

His analysis:

So, it looks like the results agree fairly well with the other posters here:  rebalancing more often doesn't improve your yields.  The 15-35% band seems to be in a "sweet spot,"  although that could just be a lack of data.  If you take into account transaction costs, of course, then the more frequent balancing will lose a bit more.

My analysis:

It just may not matter that much when the PP is rebalanced. Assuming his numbers are correct, that clustering of good results right around the 15/35 band may just be coincidence. After all, rebalancing at 13/37 bands seems to give the same results as rebalancing every day (if we are neglecting to take fees and taxes into account).

Thanks everyone for your input.

[craigr]

Keep in mind that there is a momentum element of investing. If you rebalance too often you can miss out on this aspect. Momentum coming/going cannot be predicted despite what chartists say, but you can take advantage of it somewhat by leaving things alone until you hit some reasonable point where risk vs. reward is no longer in you favor.

I have found over my investing lifetime that the less I'm touching my money, the more I make. The more I touch my money, the less I make. I bet most investors will find the same thing to be true.

[barrett]

Agreed on your last point for the most part, craigr, but if I never finagled with anything, I would not have gone looking for the PP!

Can you help me understand how momentum works within the confines of the PP? I get that in general it's good to let a winning assets ride up to a certain point, but if that is valid for the PP, shouldn't the returns in the rebalancing bands listed above show a greater variation? Specifically better returns for wider bands up to a point and then lesser returns beyond those bands?

Again, the data are not mine, but if they are accurate, they would seem to suggest that the only real disadvantages to frequent rebalancing are transaction costs (minimal with a larger portfolio) and a bit of wasted time.

[MachineGhost]

Again, the data are not mine, but if they are accurate, they would seem to suggest that the only real disadvantages to frequent rebalancing are transaction costs (minimal with a larger portfolio) and a bit of wasted time.

I already did backtesting of other time rebalancing periods compared to annual.  There is no net gain to doing it more frequently.  Part of the reason is that the four assets are not non-correlated at all times.  You need momentum when they are non-correlated and that takes quite a while to manifest enough so there is an advantage.  Annual has the advantage plus at 366 days its a lower tax rate as well.

[craigr]

Can you help me understand how momentum works within the confines of the PP? I get that in general it's good to let a winning assets ride up to a certain point, but if that is valid for the PP, shouldn't the returns in the rebalancing bands listed above show a greater variation? Specifically better returns for wider bands up to a point and then lesser returns beyond those bands?

Momentum can't be quantified and exploited consistently. IMO. I think the best way to leverage it is to be very strict about rebalancing bands and not touching things too often. The rebalancing should happen often enough that you don't get too exposed to downside, but not so often that you are messing with things often.

Again, the data are not mine, but if they are accurate, they would seem to suggest that the only real disadvantages to frequent rebalancing are transaction costs (minimal with a larger portfolio) and a bit of wasted time.

Here's the deal, it's behavioral. The more you touch the portfolio, the more chance you have for external influences to get you to change things around. Maybe that market timing guy sounds pretty good after the 10th time you've rebalanced. Or maybe you hear a hot tip and decide to divert core funds to it and take on more risk that you normally would. Or maybe you rebalance, but instead of buying the lagging asset you sit on it because you have a bad feeling and lose money when it goes up instead. Etc.

So touching of the portfolio often will likely hurt returns because you are disturbing any momentum that may be present in the asset, are incurring transaction and tax costs, and finally you could be persuaded to start doing non-passive investing things with the money.

And this applies to any passively managed portfolio, not just the Permanent Portfolio. The less you touch passively invested money in a diversified portfolio, the more money you will make. If you want tighter rebalancing bands, just lower to the levels that make you feel comfortable. But I personally wouldn't be doing it very frequently.

[MachineGhost]

Momentum can't be quantified and exploited consistently. IMO. I think the best way to leverage it is to be very strict about rebalancing bands and not touching things too often. The rebalancing should happen often enough that you don't get too exposed to downside, but not so often that you are messing with things often.

It can, the problem is the edge is really small.  Once you add in taxes and commissions, there's a miniimum threshold that you just can't go below if you want to be profitable.  And since no one wants to just be at break-even, you need a large margin of safety away from that point.  For instance, I read a white paper a few days ago about exploiting industry momentum in terms of the Utilities sector vs the market.  Utilities are quite interesteing in that because they are so overregulated, the cost of capital is the primary metric rather than organic growth.  So they act very much like government bonds.  On weekly basis, switching between the market ETF and utilities ETF outpeforms buy and hold of either ETF.  In the fine print, you find that if commission costs are .37% or higher, the strategy is unprofitable vs buy and hold.  Now, .37% is certainly doable these days with select brokers, but it also presumes no mistakes, no taxes, no slippage, no screws ups and I'm pretty sure they bought at Friday's closing price, not Monday's open.  The outperformance vs B&H is not dramatic, but the maximum drawdown was halved.  But, in the PP we already have the same hedge without having to time it.