Rebalancing vs Holding.. Strategies and discussion

[vand]

So how do we balance the need to "let our winners run..." with the need to "keep within your comfortable asset allocation" and manage risk?

I know there are various "what is your end goal" type threads, but I believe this is an incomplete question. The goal is to grow your wealth, and there should not be any upper boundary on that, even as you pass various milestones of financial wellbeing. More wealth is always more desireable!

The thing is you don't know how much of a good thing you're potentially on to, do you? Silver might easily go past £30 this year or next year, but what if you sold all your silver at new record highs but then it went on to further triple or quadruple in the following couple of years?  

How high might silver go?

Bix Weir can do this much better for me, but let's indulge ourselves for a minute and think of some upside targets that might happen if everyone decides that they want to get in on the act:

£52 - this would match the level of the last GSR bottom in 2011 when it hit ~30
£97 - this would match the bottom of the GSR in 1980 when it hit ~16
£160 - this would match the ratio at which silver and gold come out of the ground
£889 - this would match the Dow/Silver ratio that it peaked at in Feb 1980

You'd feel pretty gutted if you sold all your silver at £52 or even £97 and it went on to reclaim £889, wouldn't you?

So how do you ensure that you participate meaninfully if it turns out to be a once-in-a-lifetime revaluation, with keeping a balanced portfolio, given that you have no idea how high it might go?

I have been thinking a lot about this, and have some ideas, but I'd like to hear from others too.

I have used silver here for obvious reasons but the same applies to anything you invest in - balancing staying in for the duration of the bull market while respecting asset allocation and managing risk that as your portfolio grows you have too much in any one asset that could reverse and lose all its gains, leaving you with nothing but "what ifs".

 

 

[StackerCollector]

You're right - it's pretty damn hard to establish profit targets. My "solution" in regards to silver is this: I would only be willing to sell my entire stack if I can trade it for real estate that I am after. If this scenario doesn't happen, then I'll hold until retirement which is another 26 years.

[KDave]

I liked your idea to simply stop buying something and allocate cash to an under bought area instead. That works during normal times. BUT if an asset is moon shotting then I agree its not going to work. I think there needs to be a balance between selling some moon shot asset in order to allocate to another opportunity, while keeping hold a decent wedge in the event of a mars shot. In other words re balancing when there is significant price movement, but to preset levels. This should in theory lock in the gain and provide additional upside from another diversification, and reduce the risk of downside in the moon/mars shot. I hope that makes sense. I would also during such time put all cash income into the other opportunity and just continue to hold the high flyer until things calm down.

In real terms, there is so much on offer at the moment, so much value in stocks if thinking long term and expecting inflation. I had way too much gold thanks to the recent rises and so sold some to move into areas I think have value, oil mostly. I am putting all cash into stocks that I like and have not bought any metals since June. I am happy to hold what I have and wait for further upside before selling some more, or if opportunity allows, buy some more when we see some downside. There is a balance. 

The only PM mining shares I own now are for diversification purposes in the SIPP (30% of total), I sold half of those off to re balance into oil a few weeks ago because in price terms gold had become the majority of my SIPP. I sold half of it. Now I am still buying gold in the SIPP monthly, in theory cost averaging in, and I will do a rebalance the next time something gets out of whack. Perhaps this is wrong, I have not thought enough on it?

I have sold FRES to move into other stocks and I am still holding my physical silver. I will accumulate some more physical when the hype dies off and we get the pullback. If we don't get a pullback for whatever reason I will start to sell the physical to realign the protfolio, as I don't think such a move is sustainable and I have lots of other things I want to invest in, namely oil, potash, telecoms, mining shares (non PM), infrastructure shares, tobacco shares. BATS is £25 a share and paying 8% dividend at the moment, I would rather that than another ounce of silver at these prices.

[vand]

Awesome reply, @KDave, you've obviously been thinking about this too.

Here is how I'm planning to play it:

I have determined a lower boundary below which I will top-up my holdings, and also an upper boundary which I will simply continuously rebalance so that it doesn't go above that level, and any further gains are automatically liquidated to go into other assets.

Those boundaries I have set at 30% and 65%. So, if the value of my PMs falls below 30% of my total portfolio I'll buy more to top it up from my cash position, and it won't grow to above 65% as if it does keep going up and up and up I'll just continually resell enough to keep it at 65%.

However, I won't just do a dumb hold from 30 up to 65%. What I'll do is a partial rebalance every 5%. So when it reaches 35%, I'll sell enough to bring it back down to 32.5% and redistribute the 2.5% freed up to different parts of the portfolio. The next rebalance boundary then gets set at 37.5%, at which point I'll rebalance down to 35%, redistributing the 2.5% freed up. Again at 40%, down to 37.5%..etc repeat all as much as necessary all the way up to 65%.

IMO this fulfills as best as possible the dual opposing problems of staying invested with the trend, and keeping a somewhat balanced portfolio.

 

Currently I've just done my first rebalance as my PMs got up to 35%, so I sold enough to get it back down to 32.5%.

Doing this with a 100k model portfolio will see it grow to about 375k by the time the silver has risen enough to make up 65% of the portfolio, with the silver price needing to rise to about £380 per ounce. 
Conversely, if we had done no rebalancing we would have reached 375k by the time silver had reached £210 per ounce, but by that time it would have resulted in silver now making up 82% of your entire portfolio; your wealth would be incredibly concentrated in a very volatile asset. By the time silver had gone to £380 the portfolio would be £626k, but now with silver making up over 89% of it.

Anyway, this is a framework for how I plan to keep stay invested for a piece of the action in the event of the rocketship going to Jupiter. No doubt I'll tinker with it along the way, and in all probability silver will top out and crash back into orbit well before any of these outrageous numbers.. but it pays to have a plan. If you don't have a plan then you'll almost certainly sell way too soon in the event that silver does manage to hit the home run of a lifetime.

 

 

[KDave]

43 minutes ago, vand said:

Awesome reply, @KDave, you've obviously been thinking about this too.

Here is how I'm planning to play it:

I have determined a lower boundary below which I will top-up my holdings, and also an upper boundary which I will simply continuously rebalance so that it doesn't go above that level, and any further gains are automatically liquidated to go into other assets.

Those boundaries I have set at 30% and 65%. So, if the value of my PMs falls below 30% of my total portfolio I'll buy more to top it up from my cash position, and it won't grow to above 65% as if it does keep going up and up and up I'll just continually resell enough to keep it at 65%.

However, I won't just do a dumb hold from 30 up to 65%. What I'll do is a partial rebalance every 5%. So when it reaches 35%, I'll sell enough to bring it back down to 32.5% and redistribute the 2.5% freed up to different parts of the portfolio. The next rebalance boundary then gets set at 37.5%, at which point I'll rebalance down to 35%, redistributing the 2.5% freed up. Again at 40%, down to 37.5%..etc repeat all as much as necessary all the way up to 65%.

IMO this fulfills as best as possible the dual opposing problems of staying invested with the trend, and keeping a somewhat balanced portfolio.

 

Currently I've just done my first rebalance as my PMs got up to 35%, so I sold enough to get it back down to 32.5%.

Doing this with a 100k model portfolio will see it grow to about 375k by the time the silver has risen enough to make up 65% of the portfolio, with the silver price needing to rise to about £380 per ounce. 
Conversely, if we had done no rebalancing we would have reached 375k by the time silver had reached £210 per ounce, but by that time it would have resulted in silver now making up 82% of your entire portfolio; your wealth would be incredibly concentrated in a very volatile asset. By the time silver had gone to £380 the portfolio would be £626k, but now with silver making up over 89% of it.

Anyway, this is a framework for how I plan to keep stay invested for a piece of the action in the event of the rocketship going to Jupiter. No doubt I'll tinker with it along the way, and in all probability silver will top out and crash back into orbit well before any of these outrageous numbers.. but it pays to have a plan. If you don't have a plan then you'll almost certainly sell way too soon in the event that silver does manage to hit the home run of a lifetime.

 

 

I really like this and will think on it. I had thought about using static percentages based on required exposure (30% in gold max, 30% in oil max, etc) and initially thought of rebalancing based on asset performance, perhaps twice a year or quarterly if performing well. The trouble with this is it does not involve systemic discipline and leaves one open to missing gains in the event of the kind of moves that, for example, silver is known for, up as quickly as it comes down. Personal timing decisions would be the main driver of rebalancing frequency, which is an aspect open most to the human element of investing. A system like you have laid out is much better, it largely removes emotion so long as discipline to follow the system is maintained. 

I will test this, if we see a pullback in silver I will be buying some paper equivalent and will test it on the upside. I am not sure if it crosses a line from investing to trading given the small 2.5% increments, I will likely use larger increments as I am investing relatively small amounts, certainly not as part of a 100k portfolio. I will have to find an appropriate vehicle as well in regards to buy/sell fees, most ETF's trade like stocks which have dealing costs, vaulting is the same, ideally I will find a no trading cost fund on HL that is suitable. 

I recently read a book on the breaking and forming of habits, and this came to mind as true to this process. "You do not rise to the level of your goals, you fall to the level of your system."

[Bratnia]

Rebalancing or not on average produces similar reward outcome. Not rebalancing however tends to accumulate excessive single asset risk and as such rebalancing is a risk reduction measure. A alternative to full rebalancing is to use midway rebalancing, a form of halfway between the two so you're less inclined to have done the wrong thing.

[vand]

Does anyone follow Francis Hunt, aka The Market Sniper?

He's a bit marmite, but I do like a lot of his technical analysis, and the methods he uses. He's uses TA very differently to most others, basically doesn't really care about a lot of the things that other TAs to, but he focusses on getting onto a changing trend and riding as it continues.

Here he makes the ultra-bull case:

 

[vand]

10 hours ago, Bratnia said:

Rebalancing or not on average produces similar reward outcome. Not rebalancing however tends to accumulate excessive single asset risk and as such rebalancing is a risk reduction measure. A alternative to full rebalancing is to use midway rebalancing, a form of halfway between the two so you're less inclined to have done the wrong thing.

Yes. Although there is scant evidence to suggest that any particular rebalancing period is better than another, it's still important in terms of risk management.

And even when choosing to rebalance you have to set your parameters for how you will do it:

- Is you rebalancing frequency determined by calendar or position size?
- Are your rebalancing boundaries for each asset set in absolute or in relative terms?
- Partially rebalance, full rebalance or over-rebalancing?
 

No one got ever got rich by puting 5% of their net worth into an asset that went up 20-fold but then rebalancing every time it grew past 7%..  there is a delicate tightrope to walk between judging how much additional risk you are happy to take on and keeping enough invested to really benefit from a large price increase.

[Bumble]

I suspect many people do their rebalancing near the end of the tax year, since that is when they are likely to be doing tax loss/gain selling anyway. For myself, I tend not to rebalance physical gold, since I regard that as a long-term holding and a form of insurance. I do rebalance gold mining shares, since sometimes these lurch upwards sharply and when that happens it is nearly always a good idea to take some money off the table.

That said, I don't agree with those who say that you should always sell half on a double because then you are supposedly playing with the house's money. The money is always yours not the house's. The reason to sell after a sharp rise is because usually some irrational exuberance has crept in. Ideally, you would have a target price for a share when you buy it, so that you can sell without having to worry about whether you are missing out. In practice, this is hard to do because the value of a miner depends so much on the price of gold (or silver), so the target is really a variable.

[vand]

Indiscriminate periodic rebalancing is far less logical to me than threshold-based rebalancing. The idea for rebalancing is to keep your portfolio's risk profile within tolerable range by taking advantage of mechanical selling high/buying low, but when the markets move quickly then your portfolio can get out of balance quickly regardless of chronological timeframes.

The recent bear/bull market in the S&P is a very obvious example... if your strategy is to only rebalance once a year then you would have completely missed out on any rebalancing over the last 6 months and the opportunity to buy stocks while they were cheap. 

 Yes, sure, in practice markets don't move so fast that annual or quarterly rebalancing don't adequately capture that benefit.. but sometimes they do.

[Au79]

Just curious, Is it possible for physical portfolio rebalancing or only possible for paper portfolio rebalancing. Many thanks in advance.

[Bratnia]

2 hours ago, Au79 said:

Just curious, Is it possible for physical portfolio rebalancing or only possible for paper portfolio rebalancing. Many thanks in advance.

Good question Au79. I've not started on the physical gold side yet, only been rebalancing paper based gold (stock and gold ETF's). Looking to see the prospects of perhaps buying and selling 1oz gold Britannia's (being UK resident) perhaps at around a reasonably consistent spot gold + 3%. If that turns out to be viable then I'd be much more inclined to rebalance using physical (Britannia's) - and hold a lot more physical gold in the process. If not then I'd be more inclined to hold just a amount of core physical gold and continue to use ETF's (paper based gold) for rebalancing. I suspect liquidity could be a issue. If for instance gold was 25% of a portfolio and that had increased to 33% weighting, which perhaps involved selling over £150,000 of gold, maybe 100 Britannia 1 ounce gold coins, in order to realign the portfolio to holding 25% in gold - then I suspect that high number might be difficult to move relatively quickly. But equally maybe selling a few coins each day for a month or so might be OK.

I'd rather be adding/reducing physical gold (coins) at around the same spot + 3% for buying and selling, than holding/trading paper gold (ETF's) as for 1. I'd prefer physical holdings and 2. that would be more cost effective than paying perhaps 0.5%/year in gold ETF fees.