Rebalancing when new contributions go into cash

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Tortoise
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Rebalancing when new contributions go into cash

Post by Tortoise » Fri Jun 01, 2018 7:16 pm

Something occurred to me just recently, and I don't know why it never crossed my mind before.

In a small PP account in the accumulation phase -- say, a 401(k) started at a new job -- where the new contributions are automatically directed into cash until it hits the 35% rebalance band and the assets are rebalanced back to 25x4, the average cash allocation ends up being about 30% since it moves in a regular saw-tooth pattern between 25% and 35%.

In other words, a PP in this scenario ends up over-weighting cash by about 20% on average.

In order to make the average cash allocation the desired 25%, one should actually rebalance to 15/28/28/28 (cash at 15%) whenever cash hits 35%. Was anyone here already doing that?

(This only applies, of course, to smaller accounts where all new contributions are directed into cash. In larger accounts, for example, rebalancing will be triggered mostly by movements in the volatile assets rather than cash deposits or withdrawals.)
mukramesh
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Re: Rebalancing when new contributions go into cash

Post by mukramesh » Mon Jun 04, 2018 1:25 pm

Interesting point! Another advantage is that it reduces rebalancing frequency. I'll consider implementing this on my next rebalance.
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