Gyroscopic Investing

I think everyone on here is pretty much in agreement that we are in a low-return environment and may be so for at least another several years going forward. Bonds and stocks could both move up from these levels but it's harder for them to make a major move, one that would push them up to 35% of a portfolio if the starting point were 25%. Does a low-return environment call for tighter rebalancing bands, say, 30/20 or maybe even 28/22? With a strategy whose performance is at least partially dependent on harvesting gains and putting them in under performers, shouldn't taking advantage of smaller moves be considered if the larger price moves are unlikely?

For the sake of keeping the scope of this conversation simple, let's assume that these sell/buy moves can be done without major tax consequences.

I look forward to hearing from everyone on this. My PP is in my 401k and all funds are commission-free, so there is no monetary cost for frequent rebalancing for me.

many funds though have restrictions on round trips . whip sawing markets could cause to many frequent buys back in  or out before  minimum time frames for holds .

fidelity as an example requires at least a 30 day hold . 

you may also effect the gain side of things taking money out of an asset that finally manages to get some traction going only to put that money in to something not going anywhere for a while .

trends typically run quite a while once they start and to frequent  rebalancing can hurt more than help .

I think the consensus is that tighter bands will help during a period like this when there is no perceptible short-term trend in any asset. But when the market gains some clarity and returns to more normal behavior, the tighter bands will cause you to miss out on more of the gains from whichever asset(s) eventually become the winners. I say go for it if it makes you sleep better.

barrett wrote: I think everyone on here is pretty much in agreement that we are in a low-return environment and may be so for at least another several years going forward. Bonds and stocks could both move up from these levels but it's harder for them to make a major move, one that would push them up to 35% of a portfolio if the starting point were 25%. Does a low-return environment call for tighter rebalancing bands, say, 30/20 or maybe even 28/22? With a strategy whose performance is at least partially dependent on harvesting gains and putting them in under performers, shouldn't taking advantage of smaller moves be considered if the larger price moves are unlikely?

For the sake of keeping the scope on this conversation simple, let's assume that these sell/buy moves can be done without major tax consequences.

I personally plan to stick to the normal bands, though I'm still in the acquiring phase so I'm always adding cash, then rebalancing into the assets that need it when cash goes above 35%.  Even if I were retired though, I think there's a case to be made to let it play out under the normal rebalance bands so you're not having taxable events when you don't need to.

How about adopting a hybrid plan?  Like, combining "35/15" with "every two/three years," and then rebalancing whichever comes first.  That way you would keep the bands wide (handy for taking advantage of rapid and wide market swings), but never leaving the portfolio alone for too long (providing the psychological benefit of a balanced portfolio).

It's certainly true that 35/15 rebalancing has become less frequent.  From peaktotrough.com, the first 22 years of the PP from 1/1/1972 to 1/1/1994 had ten rebalances (one every 2.2 years), while the last 21.79 years have had six (every 3.6 years).  Overall, 16 in 43.79 years, or one every 2.7 years.  So, rebalancing every 30 months or so seems like a nice addition to the 35/15 strategy in this low-interest environment.

Perhaps you could combine this strategy with a second, narrower-bands strategy:  If the 35/15 bands haven't been breached and 30 months have elapsed since the last rebalance, then rebalance today only if your favored narrower bands (e.g., 28/22) are currently breached; otherwise, do nothing for the next 30 months, but keep an eye out for a 35/15 rebalance.  That looks like a pretty good strategy to me.

For people feeling the urge to "do something", rebalancing more often is definitely better than switching portfolios all the time.  I personally wouldn't take it so far as to set very narrow bands that force a rebalance many times a year, so there needs to be a reasonable middle ground. 

I've not looked at too many combos, but at least for the past 10 years, 35/15 wins CAGR, followed by annual, followed by 30/20.

I recall at least a few other checks that seems to consistently show 35/15 is usually the leader, with the least work as well.

But of course, it is human nature to attribute more pain to the asset going to 15 vs. joy at the one going to 35!

I ran backtests when I first started investigating the PP, and found that 15/35 bands definitely perform better than 20/30.  The reduction in tax-instigating events is a bonus.

I think rebalancing is more about taking advantage of big market shifts, which is independent of low returns.  If you see a big market shift, like the stock market dip we just experienced, and you think it's going to be temporary, then you can't really go wrong with rebalancing - especially if the swing is mainly downward in one or more assets.

Where you might lose out is if one asset is gradually going up and the others are drifting down - then by selling the gainer(s) & buying the loser(s) prematurely, you may miss out on some gains and be buying more losers that are still headed down.  This is actually more likely to happen in a prolonged stock bull market.

Ideally, the rebalancing band threshold would be tied to each asset's individual volatility and then backtested as a whole portfolio to determine the four optimal factors.