Rebalancing bands

[bedraggled]

I am considering setting up a PP different from the conventional 25/25/25/25 allocation.  If  I were to decide on cash 20%, bonds 35%, gold 15%, stocks 30%, what would be the rebalancing bands be for each category? 

[sophie]

You could try to set yourself some rebalancing bands based on +/- 40% of the original target percentage, but with a portfolio sliced that finely I'd be inclined to rebalance annually and call it a day.

May I ask why you selected that particular allocation?  There have been several threads on PP tinkering, but mainly they proposed reducing or eliminating the cash allocation.  I don't remember seeing anyone talk about increasing long bonds.  In general, tinkering with the PP is something that new PP investors think about a lot but eventually abandon.

[Pointedstick]

Yeah, be careful. Bonds are doing great this year, but they might keel over and die next year. Equal weighting has a lot going for it. If you want more pop to your bonds, you could try using zero-coupon treasuries or a fund like EDV or ZROZ.

[Mark Leavy]

I am considering setting up a PP different from the conventional 25/25/25/25 allocation.  If  I were to decide on cash 20%, bonds 35%, gold 15%, stocks 30%, what would be the rebalancing bands be for each category?

If you are choosing different ratios, then one must assume that you have put some serious thought into those ratios.  Perhaps doing some sophisticated back testing or a new economic model or some advanced divination as to the future.

Whatever methods drove your ratios should also drive your rebalance bands.

Don't modify the fundamentals of someone else's theory and then ask "Okay, how do their rules apply to my modification?"

Either you understand what you changed, or you are pissing in the wind.

Update: I reread this and it comes across much harsher than I intended.  Please don't read it that way.  But, do, please consider your reasons for deciding on a ratio for each asset - and then consider how those fundamental insights might affect how much of each you would be willing to carry at any one time.

[KevinW]

Alternatively, you could achieve an overall allocation very close to that, but in a PP-orthodox way, by putting about half your portfolio in a vanilla 4x25 PP, and the other half in a Variable Portfolio holding a mainstream conservative vehicle such as a 40/60 Boglehead portfolio or Vanguard Wellesley.

[bedraggled]

Thanks all,

If  news of Germany's and China's slowdowns is worthy of consideration, bonds may be the place to be.

Such poor economic news may indicate deflation.  Is my thinking reasonable?

[Pointedstick]

Thanks all,

If  news of Germany's and China's slowdowns is worthy of consideration, bonds may be the place to be.

Such poor economic news may indicate deflation.  Is my thinking reasonable?

Maybe. But who knows? Perhaps they'll rebound. Or perhaps the bonds won't react in the way you expect. Or perhaps Germany and China are immaterial to the market price of U.S. Government long bonds. You just never know.

[Alanw]

Alternatively, you could achieve an overall allocation very close to that, but in a PP-orthodox way, by putting about half your portfolio in a vanilla 4x25 PP, and the other half in a Variable Portfolio holding a mainstream conservative vehicle such as a 40/60 Boglehead portfolio or Vanguard Wellesley.

It seems to be much easier to set up a pure 4x25 PP and treat the rest as a VP. Easier to rebalance also. Just choose the percentages you want in PP vs. VP and set your rebalance bands for each. Wellesley and Wellington are good funds to use in the VP and the fund mgr. does the rebalancing. The less tinkering the better IMHO.

[bedraggled]

There is wisdom in the forum.  Maybe a small VP is an answer.  Considering the tone of my question, and my 60 years of age, what portion of the retirement money should I place in a VP?

[barrett]

FWIW I am 56 and look at my current assets as most of what I will be able to accumulate in my working career. As such, I am trying to be super cautious about protecting what I have. I went with a standard 4X25 at the beginning of this year. Any VP I have is just vestigial and will be gone as soon as I can get everything into my PP.

Bonds have done great this year but that doesn't mean they'll be the asset to carry the portfolio next year and beyond (er... make that tomorrow and beyond). The 4X25 allocation already has some deflation protection built in... actually WAY more than most portfolios because the 25% allocation to cash holds its own in a deflationary environment as well.

My two cents worth is that it's hard to find a better portfolio for the long run. Good luck with whatever you decide.

[bedraggled]

Barrett, et al,

I can see how your thoughts are probably on target.  Thank you.

Germany and China are worth watching to get a sense of direction that may continue for years.

Do you think it would be difficult to maintain a positive return n a 25/25/25/25 PP in a Japan-styled investing environment?

[Alanw]

I am retired with approximately 80% in HBPP with 20/30 rebalancing bands. Most of the rest is in Wellesley because I wanted a slight tilt toward stocks and bonds and because I wanted to hold a little less than 25% gold. The PP was set up in early 2011 and has been working quite well (except for 2013) but for me it is much easier to stomach a 2% decline rather than a large drawdown with a stock heavy portfolio. Guess we'll see what the future holds.

[buddtholomew]

I second the recommendation to maintain a traditional 4x25 allocation and speculate in a variable portfolio. The PP makes complete sense once you internalize that it is impossible to anticipate the direction of equities, fixed income or gold investments over a specific time frame. 25% in each of these asset classes + cash ensures that you are impartial to the future direction of any of these investments and will achieve the market return (equity, bond, PM, cash) no matter which economic environment takes hold.

A variable portfolio can range from a 60/40 Boglehead allocation to 5K invested in the miners (e.g. GDX). It is up to the individual to decide.

[barrett]

Do you think it would be difficult to maintain a positive return n a 25/25/25/25 PP in a Japan-styled investing environment?

The Japan question is on a lot of people's minds right now. Interesting because there seem to be fewer people saying that interest rates just HAVE to go up. That has been the mantra for the last six years or so.

I think in a true deflation, especially one that is worldwide, you are doing well if you can keep your returns slightly positive or even at zero. The way I picture it is that if the whole pie is shrinking and your slice stays the same size, you are gaining ground relative to everyone else.

Of course, if you are fully retired with no income, you still need to draw from the PP to pay your living expenses. That sounds like a bad deal but if deflation is driving prices down, overall you would need fewer dollars to pay for stuff.

[Libertarian666]

Do you think it would be difficult to maintain a positive return n a 25/25/25/25 PP in a Japan-styled investing environment?

The Japan question is on a lot of people's minds right now. Interesting because there seem to be fewer people saying that interest rates just HAVE to go up. That has been the mantra for the last six years or so.

I think in a true deflation, especially one that is worldwide, you are doing well if you can keep your returns slightly positive or even at zero. The way I picture it is that if the whole pie is shrinking and your slice stays the same size, you are gaining ground relative to everyone else.

Of course, if you are fully retired with no income, you still need to draw from the PP to pay your living expenses. That sounds like a bad deal but if deflation is driving prices down, overall you would need fewer dollars to pay for stuff.

Yes, I'm terribly worried about deflation!
As worried as I am about zombies!

Since both of these threats are about as likely...

[Reub]

Thanks all,

If  news of Germany's and China's slowdowns is worthy of consideration, bonds may be the place to be.

Such poor economic news may indicate deflation.  Is my thinking reasonable?

I think that its important that you read Harry Browne's books (as well as craigR's) and begin to understand that the future is indeed unknowable.  This is a basic precept of the PP. Look over some of our early year predictions and see how wrong most of us are. This is why I recommend the vanilla PP, not one based on market hunches.

[Lowe]

All deflation takes is for the new money entering the economy, though the creation of debt by banks and by gov't fiscal policy, to be outpaced by the number of people wanting that money.  That seems a lot more likely than zombie apocalypse.

[bedraggled]

Max Brooks is the author to consult on zombies.

I was reading HB in the early 1980s and did read craig's book. 

I have the advantage of waiting as retirement is a year from now.  So if Germany and China lead us to the Japan experience, that could be noteworthy.  Or, as Barrett said, 25/25/25/25 is the best bet in a deflation.  Does this mean a bias, 35% -40% is dangerous tinkering?

Now thanks to you esteemed people, I must consider the merits of a VP weighted in 30 year treasuries.

My, but this forum is excellent.

Pardon me if I revisit the Germany-China situation.  I have read a bit of Harry Dent and he may have called this.  Of course and if so, he has been 9 or 10 months off.  We will see.  Then maybe you can advise me on PP in a deflation.

My apologies as I have been a deflationist for 34 years, ever since I saw the chart of Nikolai Kondratief, the Soviet economist.

Thank you to all of you insightful people.

[bedraggled]

I believe Buddtholomew  gets my thanks for the VP idea. If I profess a bias toward 30 year Treasuries in a year, maybe you good people could shower me with skepticism.

Thanks to all!

[bedraggled]

Hey Mark Leavy,

I just reread your comments.  Thanks.  As I said, there is wisdom in this forum!

[dualstow]

Max Brooks is the author to consult on zombies.

I was reading HB in the early 1980s and did read craig's book. 

I have the advantage of waiting as retirement is a year from now.  So if Germany and China lead us to the Japan experience, that could be noteworthy.  Or, as Barrett said, 25/25/25/25 is the best bet in a deflation.  Does this mean a bias, 35% -40% is dangerous tinkering?

Now thanks to you esteemed people, I must consider the merits of a VP weighted in 30 year treasuries.

My, but this forum is excellent.

Pardon me if I revisit the Germany-China situation.  I have read a bit of Harry Dent and he may have called this.  Of course and if so, he has been 9 or 10 months off.  We will see.  Then maybe you can advise me on PP in a deflation.

My apologies as I have been a deflationist for 34 years, ever since I saw the chart of Nikolai Kondratief, the Soviet economist.

Thank you to all of you insightful people.

I think we should be learning from you, not the other way around!
Seriously.

[bedraggled]

Dualstow,

THat was a lovely comment.

Thanks.  And is there much knowledge and wisdom in the VP forum?  To restate the question, do the people in the VP forum make money in the long term?  They speak with authority.

[sophie]

I think all of us speak with self-granted authority 

The VP is for speculation, which appears to be what you're wanting to do with long bonds.  It lets you scratch that speculative itch without risking the portion of your savings that you most need to protect.  You might want to download the Harry Browne radio show (google it or there's a link on Craig's website) where he discusses this at length.  In his books he also has some recommendations for managing VP investments, e.g. using stop-loss orders.

I don't remember seeing a poll regarding VP performance, but I know a few people have done very well with individual stocks and Bitcoins, and a couple are fans of Decision Moose.  My VP performance has been a lot less impressive than I thought :-)  So mine is just a small amount of "fun money", nothing more.

[bedraggled]

Thank you, Sophie.

[dualstow]

I agree with Sophie (and Harry). I think if the vp doesn't overshadow the pp, and if it keeps you from tinkering with a pp, it has value in that sense. I'm sure the value of our collective vp holdings is all over the place.