New to Permanent Portfolio

[eufo]

With regards to my earlier statement about preference to narrower bands to capture gains... let me put some qualifiers on that. My calculations were based on a non-taxable account using commission free ETFs. Taxable accounts or situations that would involve a lot of friction (trading fees) should be broader banded to avoid grinding away capital.

Markets trend and they countertrend. We never know which it's going to be. Assuming no friction or taxes... in a countertrending instrument, frequent rebalancing creates a gain from no movement. This is enough reason to enjoy frequent rebalancing in my mind.

Letting winners run is more profitable right until they turn over and suddenly we're overweight in something that often is seeing a steep decline, while likely underweight something that is making a huge comeback. Broader bands rely more on market timing than narrow bands, because to truly enjoy the fruits of broader bands, they need to be near reversals. If we miss the reversal by even just a percentage point, we may give all those potential gains right back.

We can't know the future, so, in my opinion, it's best to stick as close to our preferred asset allocation as we can (within reason).

[eufo]

With regards to my earlier statement about preference to narrower bands to capture gains... let me put some qualifiers on that. My calculations were based on a non-taxable account using commission free ETFs. Taxable accounts or situations that would involve a lot of friction (trading fees) should be broader banded to avoid grinding away capital.

Markets trend and they countertrend. We never know which it's going to be. Assuming no friction or taxes... in a countertrending instrument, frequent rebalancing creates a gain from no movement. This is enough reason to enjoy frequent rebalancing in my mind.

Letting winners run is more profitable right until they turn over and suddenly we're overweight in something that often is seeing a steep decline, while likely underweight something that is making a huge comeback. Broader bands rely more on market timing than narrow bands, because to truly enjoy the fruits of broader bands, they need to be near reversals. If we miss the reversal by even just a percentage point, we may give all those potential gains right back.

We can't know the future, so, in my opinion, it's best to stick as close to our preferred asset allocation as we can (within reason).

I agree. There have been times when larger rebalancing bands resulted in higher returns, and the opposite has also occurred. I think it mostly comes down to preference. I like the idea of establishing a percentage rebalancing threshold, and then sticking with that, whatever one decides on. Personally, I lean toward the larger bands, because I've lived through some pretty large market downturns. And I hate buying more of the stuff and watching it go down. In other words, it's easy to sell winners, but it's hard to buy losers. Keeping the bands relatively large is probably going to result in less short-term regret.

You're right that it mostly comes down to preference. Even in my taxable account I prefer more narrow. I use tax harvesting to ensure the most tax friendly lots are being sold. I'm not sure if I'm leaving money on the table there, but even if I am, I just feel more comfortable being closer to my preferred allocation.

It's funny that you say it's easier to sell winners than buy losers, because I feel almost the opposite. It's hard for me to sell on the way up. I do it, but I hate doing it. Conversely, I love buying on the way down. It's still a little painful when I buy and then a sharp downward leg occurs IMMEDIATELY after a buy, but for me, it's an easier process emotionally than selling.

[vnatale]

Seems like eufo was the only one here in favor of narrow bands while all else were in favor of wider bands.

Everyone still singing the same tune?

Vinny

[Smith1776]

Seems like eufo was the only one here in favor of narrow bands while all else were in favor of wider bands.

Everyone still singing the same tune?

Vinny

I'm personally in favour of 20%/30% rebalancing bands as well. Tax efficiency be damned.

In the original HBPP thread I think it was determined that the overall behaviour of the portfolio wasn't drastically different if you went for 20/30 rather than the traditional 15/35.

[senecaaa]

Seems like eufo was the only one here in favor of narrow bands while all else were in favor of wider bands.

Everyone still singing the same tune?

Vinny

Instead of personal preferences it would be cool if this is back-tested somehow. Someone must have done this?

[tarentola]

Michael Kitces has an article which concludes that it is best to check frequently and rebalance opportunistically at 20% bands.

A 2007 study in the Journal of Financial Planning by Gobind Daryanani entitled “Opportunistic Rebalancing” studied rolling 5-year periods from 1992 to 2004 and found that the optimal rebalancing threshold was at a relative threshold of 20% of the investment’s original weighting. Setting the thresholds narrower, such as only 10% or 15% bands, produced less favorable results, as did rebalancing bands that were 25%. The goal, again, is to set a threshold that is ‘far enough’ out to allow investments to run near extremes, but not so far that they run to extremes and bounce back again, without ever triggering a buy or sell trade.

https://www.kitces.com/blog/best-opport ... hresholds/

Presumably the 20% figure would be applicable to the PP, as the study was done on a comparable multiple-asset class portfolio (large-cap US, small-cap US, REITs, commodities, and intermediate-term bonds).

[senecaaa]

Michael Kitces has an article which concludes that it is best to check frequently and rebalance opportunistically at 20% bands.

A 2007 study in the Journal of Financial Planning by Gobind Daryanani entitled “Opportunistic Rebalancing” studied rolling 5-year periods from 1992 to 2004 and found that the optimal rebalancing threshold was at a relative threshold of 20% of the investment’s original weighting. Setting the thresholds narrower, such as only 10% or 15% bands, produced less favorable results, as did rebalancing bands that were 25%. The goal, again, is to set a threshold that is ‘far enough’ out to allow investments to run near extremes, but not so far that they run to extremes and bounce back again, without ever triggering a buy or sell trade.

https://www.kitces.com/blog/best-opport ... hresholds/

Presumably the 20% figure would be applicable to the PP, as the study was done on a comparable multiple-asset class portfolio (large-cap US, small-cap US, REITs, commodities, and intermediate-term bonds).

Very interesting!

So, 20% would mean 20-30% for each asset class right? Quite a bit narrower from what HB recommended.

[tarentola]

So, 20% would mean 20-30% for each asset class right? Quite a bit narrower from what HB recommended.

Yes, that is my understanding of it as well. HB suggested rebalancing at 15% or 35% of the portfolio, so +/- 40% rather than +/-20%.

[stpeter]

So, 20% would mean 20-30% for each asset class right? Quite a bit narrower from what HB recommended.

Yes, that is my understanding of it as well. HB suggested rebalancing at 15% or 35% of the portfolio, so +/- 40% rather than +/-20%.

Great find! The original paper is well worth reading:

http://resource.fpanet.org/resource/09B ... yanani.pdf

What do our resident permanent portfolio experts think of this research?

[stpeter]

So, 20% would mean 20-30% for each asset class right? Quite a bit narrower from what HB recommended.

Yes, that is my understanding of it as well. HB suggested rebalancing at 15% or 35% of the portfolio, so +/- 40% rather than +/-20%.

Great find! The original paper is well worth reading:

http://resource.fpanet.org/resource/09B ... yanani.pdf

What do our resident permanent portfolio experts think of this research?

Also note that the original paper recommends both a "rebalance band" (for HBPP, that would be 20%-30% of the portfolio rather than HB's 15%-35%) *and* a "tolerance band" (which is the target to which you rebalance an out-of-balance asset instead of rebalancing everything back to the 4x25% benchmark). As a simple example, let's say the rebalance band is 10% and the tolerance band is 5%; if stocks go down to 19% of the portfolio and gold goes up to 31% whereas bonds are 27% and cash is 23%, you wouldn't rebalance everything back to the benchmark of 4x25% - instead, you'd rebalance stocks up to 22% (halfway between 19% and 25%) and gold down to 28% (halfway between 31% and 25%) but leave bonds and cash alone. This reduces the number of trades you have to complete, and seemingly also gives you more flexibility in case a downward or upward trend continues (let's say stocks continue to decline and go down again from 22% to 18% of your portfolio - just rebalance again).

I'm not yet sure what I think of this approach, but it seems plausible.