What has your hit and miss ratio been?

[DeepState]

Hi RY,

Thankyou for your insights into the market and on rebalancing. I certainly can see the merits on the larger scale. However, on the smaller scale I have great difficulty seeing any merit in a constant change. Transaction and tax considerations are going to kill any benefit in even a $500k portfolio of 20 stocks.

From RY....



No offence taken at all, just the scale and cost of doing business for someone in larger organizations makes a world of difference to performance outcomes compared to small individual traders that pay retail transaction costs (my assumption I'll check).

Looking at my own situation, I'm trying to look at how I would have performed over the last year if I had rebalanced instead of outright selling of stocks. It is a hard exercise as I have a different timeframe for different stocks. So I went back to about 28 months ago to see what the portfolio was then, and if I had kept, but rebalanced instead of trading for others, using the first 20 stocks I traded. The account size is in the hundreds of $k, so reasonable for many on this forum.
As I started doing this, just realized how long this will take, will have to get back to you. I've been trading my own account for over 34 years, still time to learn new tricks.

Again RV, thankyou for your contributions, I was just trying to portray how you sounded from a strangers point of view, I meant no offence and I'm glad for your contributions. Anything that makes me sit up, take notice, and do research is welcome.

Brty

It's a pleasure. You are absolutely right that t-cost considerations are important. If you are hitting minimum trade limits, this is prohibitive. That's definitely a hurdle. Brokerage rates for the on-line services at the main banks are 0.11% or $20. Whichever rips you off more.

I ran a rebalance exercise out of interest. It involved only stocks in the ASX 20 at the moment. Due to some activity, data was missing for Westfield in the early years and I just left that out. As it has been left out of both the unbalanced and rebal process, I hope you'll accept the study remains valid. The study was for the 10 years to June 2012. For some reason my data vendor has problems dumping data for 2013 via this particular extract tool that I was using for annual returns, but I doubt it'll change the picture. It's an honest attempt at a demonstration. Here's the figures. I assumed ANNUAL rebalancing each 30 June. Nothing could be simpler. Here are the results. Please sit down...

Unbalanced portfolio starting at 1/19th in each stock in 2002: 9.63% per annum

Annual rebalanced portfolio to 1/19th for each stock without t-cost: ................................................. oh yeah................wait for it........................15.2% per annum.

Please jump around.

Now, that 5.5%pa difference is far higher than I would anticipate so luck was with the rebalance process and I'm not going to claim it. But the point is that, for a $500k portfolio, if you rebalanced maybe 10 stocks out of your 20 - those with greatest deviation - the cost will be $200 max. $200/$500k = 0.04% per annum. That's tiny compared to the potential gains...not including tax or market impact. Market impact for this trade size is essentially zero. There is no rush, so sit on the limit order book. Tax....that's yours to figure out.

I think that rebal remains valid for your portfolio despite not being a multi-billion active fund. It would be valid for portfolios much smaller than you happen to be managing.

Best

 

[brty]

Hi RY,

Look at this bit from your sums, I'm surprised you didn't recognize the survivorship bias immediately....

It involved only stocks in the ASX 20 at the moment.

A far better comparison is taking the ASX20 from 2002, and walking forward. The current ASX20 are where they are because they performed better than others over that period, with wiggles.

I am still working on mine, the old fashioned way, number crunching each trade to see the strengths and weaknesses. The portfolio is close to random with a scattering from different market segments and vast differences in size of company. I'm doing it quarterly over the last couple of years.

 

[DeepState]

Hi RY,

Look at this bit from your sums, I'm surprised you didn't recognize the survivorship bias immediately....



A far better comparison is taking the ASX20 from 2002, and walking forward. The current ASX20 are where they are because they performed better than others over that period, with wiggles.

I am still working on mine, the old fashioned way, number crunching each trade to see the strengths and weaknesses. The portfolio is close to random with a scattering from different market segments and vast differences in size of company. I'm doing it quarterly over the last couple of years.

Hi Brty



Thanks for being surprised. This stuff was bread and butter for us. The universe selection was deliberate.

Yes, the figures include bias because it includes stocks that are present in the ASX20 today. The key figure of interest is the difference between the two sets of returns. Since the universe is identical for both the unbalanced and balanced portfolios the difference between them remains largely valid.

Actually, the use of this universe is actually meant to make things harder. ASX 20 stocks or those that became them are less volatile. For them to have become ASX 20 stocks or stayed there, they would have been successful in general. Hence, the correlation between them is higher than the average random pick of 19 or 20 stocks. Further, at least fundamentally and many people also think technically, the ASX 20 is almost impossible to make money from in a relative sense because it is so closely followed. Lastly, it was only rebalancing over a relatively concentrated portfolio of 19 stocks.

Under these 'harsh' conditions for rebalancing, the worth of it shone through - by a margin greater than I would have expected. I caution against the magnitude reported. However, it demonstrates that rebal probably adds value over whatever portfolio you happen to be holding if given a chance to do so.

All the best with your own tests. Just remember that everything is probability and whatever you find is just one draw from the biased pool. On average, if you build portfolios pseudo randomly and did it a gazzillion times, it'll be as clear as daylight. Pls also remember that, the presence of expected profitability from rebal is a given. You don't argue with gravity. And you shouldn't argue with rebal probablistically. However, it remains just a point of departure or a default position unless you have a better idea which is strong enough to overcome it. Hopefully the examples/rationale provided to Julia gives you a notion of how it is actually done in practice when pushed to the max.

BTW, we know a thing or two about Piotroski. It's useful. Rebal is about twice as profitable in a diversified long only portfolio. Yup.


Cheers

 

[Julia]

Pls also remember that, the presence of expected profitability from rebal is a given. You don't argue with gravity. And you shouldn't argue with rebal probablistically. However, it remains just a point of departure or a default position unless you have a better idea which is strong enough to overcome it. Hopefully the examples/rationale provided to Julia gives you a notion of how it is actually done in practice when pushed to the max.

Um, can you say what examples/rationale were provided to me ?
I don't recall asking a question amongst this discussion.
My only participation in the thread has been a brief response to the OP on his apparent assumption that if he waited long enough a loss would reverse.

 

[DeepState]

Um, can you say what examples/rationale were provided to me ?
I don't recall asking a question amongst this discussion.
My only participation in the thread has been a brief response to the OP on his apparent assumption that if he waited long enough a loss would reverse.

Whoops. My bad. Sorry. I should have written Ves. Apologies.

 

[brty]

RY,

If you really think using the current ASX20 as a means to prove a point, your assumptions are sadly mistaken. I could prove anything works better than just buy and hold using the stocks that make up the top of the tree now, with the benefit of hindsight.

Actually, the use of this universe is actually meant to make things harder.

Utter garbage, this universe makes 'things' much easier to 'prove'.

This stuff was bread and butter for us.

Hmmm. I've been involved with investing for 34 years, never was anything, bread and butter. There are always risks. Just ask LTCM, the masters of the universe, how the bread and butter trades are going, or for that matter Victor Neiderhoffer, again with bread and butter trading.

Just remember that everything is probability and whatever you find is just one draw from the biased pool.

Has your tune already changed from always working? Especially when you quoted this.....

This equation is water tight. Feel free to kick it around. We've had 30 years to do it and instead of being killed, there are entire institutes and huge firms devoted to it.

So which is it? watertight or one draw from a biased universe? I'm kicking it around, slowly but surely. I'll tell you my finding when I get there.

 

[DeepState]

RY,

If you really think using the current ASX20 as a means to prove a point, your assumptions are sadly mistaken. I could prove anything works better than just buy and hold using the stocks that make up the top of the tree now, with the benefit of hindsight.



Utter garbage, this universe makes 'things' much easier to 'prove'.



Hmmm. I've been involved with investing for 34 years, never was anything, bread and butter. There are always risks. Just ask LTCM, the masters of the universe, how the bread and butter trades are going, or for that matter Victor Neiderhoffer, again with bread and butter trading.



Has your tune already changed from always working? Especially when you quoted this.....



So which is it? watertight or one draw from a biased universe? I'm kicking it around, slowly but surely. I'll tell you my finding when I get there.

What the... ???

The analysis uses stocks in the top 20 now against another portfolio of stocks in the top 20 now. The analysis takes place amongst those at the top of the tree under both situations. Like for like. Same stocks. I am not showing analysis that says the Top 20 beat the next 20 or something, which is what you seem to be implying. Top of the tree vs top of the tree. It could easily be done for bottom of the tree vs bottom of the tree. This would work very well for the, say, bottom half of the universe. The roots. What would you likely accuse me of then - deliberately aiming to torpedo the analysis? They would be more reliable sources of value add via rebalancing, actually, over time, and would likely deliver a more favourable rebalancing profit than for stocks in the Top 20 whose characteristics in aggregate disfavor rebal profits. The samples demonstrate that outperformance would have been earned by rebalancing amongst a universe of stocks whose characteristics are unhelpful to the value-add from rebalancing.

Once again: yes, there is survivorship bias. However, both samples being compared are drawn from the same biased sample and are thus comparable. I have not made any statements or claims about the portfolio of unbalanced stocks or balanced stocks outperforming anything else, no matter where on the tree they might happen to be. Rebalancing profits are the difference between an unbalanced portfolio of stocks - however selected, biased sample or not - and their rebalanced counterpart. These are reasonably compared.

Being aware of basics like 1+1 = 2 is bread and butter to me. It's an axiom. Perhaps you might disagree - to each his own. Being aware of survivorship bias is the same. There's nothing to assume. You are just aware of it. In fact, if I wasn't capable of buttering my own bread and just plain idiotically forgot about it along with tying my shoelaces, I didn't even need to be aware of it on this occasion. Both portfolios contained survivorship bias of the same source. I was mistaken, it's not even to the level of bread and butter. You are right to suggest survivorship is important to consider. However, in this analysis, it's actually pretty much nothing at all for this analysis which is all that I am talking about here.

When you work at 100x leverage at LTCM and make assumptions that don't hold tightly enough to handle the approximations in reality, that's not bread and butter either. Estimating reversion times for on-off the run bonds and other arb activity is nowhere near the axioms at the base of this simple concept. John Merriwhether and co-founding partner Victor Haghani were deliberately and knowingly pushing the bounds. What they were doing brought material risk to LTCM's solvency and they pushed well beyond their zone of comfort as liquidity availability failed to meet the demands of their growing AUM and greed. That is agency risk. John Meriwether blew a hole in Solomon Brothers and he also blew a hole in the hedge fund he set up after LTCM.

This process is vastly different in its assumption load and any discrediting bread and butter like statements ought to be cogniscent of that before tarring everything indiscriminately. There's bread and butter and there is bread and butter. Is there any agency risk trying to convince a guy with a $500k portfolio to rebal? Crikey! I don't even get carry for all of this effort. Am I asking for a commission? Sheesh. The insto crowd would be shaking their heads for all the pushback I'm getting for handing money out, drizzling around the parks and streets. And very pleased. Hi guys - you've identified me already haven't you - life's good thanks. They are monitoring us you know.

Neiderhoffer's work required a lot of assumptions to come through at material leverage and it was found wanting. He was bending assumptions and hoping they would be right. They are judgments which you see fit to label as bread an butter. Maybe he felt like they were. For me, that's not bread and butter and I would not claim it was. You don't do things for Soros that are bread and butter, I know because I worked with his former Head of Trading who was a creature of Wall Street. What they were cooking up was some three-hat French restaurant dessert and the soufflé fell over under the weight of all the elaborate decorations. Nonetheless, it is reasonable to be skeptical when someone says that something is bread and butter and you feel concerned. It has obviously served you adequately over your many years of investment and an important part of this game...is to stay in it.

The equation is water tight. Feel free to unfurl it and find fault with it. Please. If it's wrong, I need to know. You and I will then have to spend the next 34 years re-writing the textbooks and on the speaker circuit. You can choose whether you want to be the straight guy or funny guy. I'm flexible. It states that rebalancing will probably help you achieve a higher return than a portfolio of unbalanced securities amongst other things. This probability improves with time. I have not changed my tune. I have repeated the probabilistic nature of this several times. And then some. The two are perfectly consistent. My statement is drawn from the equation. It may sound inconsistent because, from what I have encountered, thinking probablistically is very unnatural. Most seem to think of single scenarios...like hold all the way down..or missing out on huge upside...and focus on that.

All the best with your own analysis on your own portfolio. It is important to remember that the wiggles in your portfolio are but one path in a garden of forking paths (actually, in your case, it is a 20 dimension hyperplane - try picturing that in your head!). Most of those paths will lead to outperformance. The longer you meander, the greater the likelihood of this being the case. A backtest of a single portfolio over 28 months balancing quarterly is going to have a hard time proving anything in of itself, good or bad. However, that doesn't diminish the fact that it may be important to you and will help you come to whatever decision is right for you.

If you have the time, try it with all sorts of portfolios that, had things been different, you might have otherwise held and run it back over a longer period of time. Do that enough, and I don't need to await your results...it's already in the equation. And, seriously, this equation is not vaguely disputed by those who do this stuff for a living. Before you say it, this is not like flat earth etc... either. So if your facts don't happen to match the theory - in this case - maybe you might need to get more facts.

All the best with it.

 

[CanOz]

You can choose whether you want to be the straight guy or funny guy. I'm flexible.

ROTF....

 

[brty]

My conclusions, though not complete, are clearly showing a trend. Rebalancing in a portfolio of stocks, where some trend down over the time period selected, is much worse than buy and hold.

In a random portfolio that ended up with 10 stocks going down in price (some of these were positive when dividends were added) 1 that stayed flat(positive with divs) and 9 that went up in price, when all dividends were added to the pool during rebalancing, yet just added to the total for buy and hold, the buy and hold finished 27% ahead, before commissions and taxes were added to the cost of rebalancing.

The reason is clear, there were 2 outstanding stocks that had major outperformance. Rebalancing killed off the excess profit from those. The losers were kept in the portfolio, and at the end of the period, these had large holdings, yet had continued to go down in price, in the rebalanced portfolio, yet stayed a lower percentage of the buy and hold portfolio.

The figures quickly, start $500k, 20 stocks with an equal dollar investment, ie $25,000 or slightly less rounding to the nearest share.

Rebalancing quarterly adding dividends into the mix for the rebalance, finished at $570,541, before subtracting costs for the rebalance, roughly $400/Qr for commissions. As you would be selling winners only (usually), there is a considerable tax payable as well. There was no need to work this out as it subtracts from rebalancing even more. For example the selling of winning shares in the first quarter alone was $25,898, despite the portfolio being down $6000 in total at that point. You would be creating a current tax liability while losing money on the entire portfolio. Not smart!

Straight buy and hold, with just the dividends added at the end and not redistributed to the shares, finished with $589,714.

By the time you added commissions and taxes to rebalancing, while allowing buy and hold to go into Cap gain lower taxes territory, the buy and hold probably outperformed by over 35%.
Rebalancing, which is really stealing from winners to add to losers clearly does not work in the real world where stocks go down and some stay down.
If the universe of stocks included only the stocks that went up in price, say the current ASX20 from 10 years ago, then yes it probably works.

Is anyone prepared to say the current ASX20 will be the same in 10 years time? I'm certainly not.

The stocks used were STO, BSA, OKN, GAP, NBL, MND, AGK, BHP, CAB, NWH, GUD, SHV, ROC, CYG, TGR, RDM, AGO, MGX, NCM, NST. The start date was 9/2/2012, finish 10/2/2014. Closing prices were used.

I traded all the above stocks, in that order, at totally different prices from those on 9/2/2012. This portfolio vastly underperformed the indexes over the time period, my personal results were different.

I was skeptical of the gains claimed, now I'm absolutely certain.

Thankyou RY for making me do the exercise, it was enlightening.

 

[burglar]

... Thankyou RY for making me do the exercise, it was enlightening.

@brty
I have read RY's posts and found them entertaining!
According to his moniker he retired young.

Read your posts over many years. Also found them entertaining!
According to your signature, you made your money selling too soon.

So now, I'm torn! :

 

[brty]

Hi Burglar,

I'm happy to hear you find my posts entertaining, some of them anyway.

This thread seems to have gone awfully quiet, perhaps it was something I said.

Sorry my fault.

 

[Julia]

This thread seems to have gone awfully quiet, perhaps it was something I said.

Sorry my fault.

Nothing to apologise for imho.
My only criticism of your posts, brty, is their infrequency. Over now many years I've read from you not especially entertainment, but sensible, mature comments which reflect your obvious experience.

 

[DeepState]

1. In a random portfolio that ended up with 10 stocks going down in price (some of these were positive when dividends were added) 1 that stayed flat(positive with divs) and 9 that went up in price, when all dividends were added to the pool during rebalancing, yet just added to the total for buy and hold, the buy and hold finished 27% ahead, before commissions and taxes were added to the cost of rebalancing.

Rebalancing quarterly adding dividends into the mix for the rebalance, finished at $570,541, before subtracting costs for the rebalance, roughly $400/Qr for commissions. As you would be selling winners only (usually), there is a considerable tax payable as well. There was no need to work this out as it subtracts from rebalancing even more. For example the selling of winning shares in the first quarter alone was $25,898, despite the portfolio being down $6000 in total at that point. You would be creating a current tax liability while losing money on the entire portfolio. Not smart!


2. By the time you added commissions and taxes to rebalancing, while allowing buy and hold to go into Cap gain lower taxes territory,


3. Rebalancing, which is really stealing from winners to add to losers clearly does not work in the real world where stocks go down and some stay down.


4. If the universe of stocks included only the stocks that went up in price, say the current ASX20 from 10 years ago, then yes it probably works.


5. Is anyone prepared to say the current ASX20 will be the same in 10 years time? I'm certainly not.


The stocks used were STO, BSA, OKN, GAP, NBL, MND, AGK, BHP, CAB, NWH, GUD, SHV, ROC, CYG, TGR, RDM, AGO, MGX, NCM, NST. The start date was 9/2/2012, finish 10/2/2014. Closing prices were used.


6. I was skeptical of the gains claimed, now I'm absolutely certain.


7. Thankyou RY for making me do the exercise, it was enlightening.

Wow. I certainly am impressed.

Let's examine the results. I have used the same universe as you have conducted the analysis from. Very good of you to allow your tests to be examined. Research dates are 1/1/2012 to 31/3/2014 to allow clean quarterly rebalancing but otherwise are a representation of the same investment period. I trust they are satisfactory from a survivorship or whatever bias given you were prepared to use it. The data included dividends reinvested as per research convention. They are easily obtained from the ASX or your favoured data vendor.

1. I mentioned earlier, that every portfolio history is just one journey from a garden of forking (got to check my spelling) paths. Just one. And this assertion is a probabilistic one. This message hasn't come through. So let's step it out.

I have taken the selection universe of 20 stocks. We form portfolios in 10% blocks. So each portfolio we are testing contains 10 blocks of 10% initial weight. We then truly randomly build portfolios consisting of 10% blocks taken from the universe of 20. One path in a garden of forking paths.

This simple Monte-Carlo selection method for building portfolios allows for several paths...each of which is at least as valid as the one random portfolio reported. Feel free to question it...it just is. But just in case this helps, I have run the numbers for a 20 unit portfolio, each of 5% which allows up to 20 stocks in the portfolio and the results are stronger than the ones I'll show below.

How many paths are there for the really simple 10 unit portfolio? So many that, if we were to process a portfolio per millisecond (one-thousandth of a second), and assuming the age of the universe is 13.8 bn years as is generally assumed by astronomers and physicists at present, it would need 630 million times as long to check every one. That's a lot of forking paths to explore.

So, given I can't spend all day, let alone 630 million universe years (sure makes dog years pretty trivial), doing this stuff, I'm going to do what everyone else does who understands stochastic processes and has not been able to communicate closed form solutions despite copious efforts - we're going brute force. This is called a Monte-Carlo simulation. It just tries to bring to life what is hard to comprehend behind some squiggly lines full of symbolic stuff.

So, I'm going to make a horrific assumption that a sample of 10,000 portfolios consisting of up to 10 stocks will do and we'll run it through. Oh, if you checked the trivial example of equal weighted stocks in the entire universe at commencement to see where that went, a portfolio of equal validity to any that could be chosen, you'd find that the cumulative return of the unbalanced portfolio was 35.12% vs the rebalanced result of 39.17. Not to shabby. Anyone out there can verify it. Now we have one random portfolio vs another. Reds-1 vs Blues-1.

So, what do the results reveal? From 10,000 (since I ran the 20-unit portfolio too, it is actually more like 20k vs 1 - and Themistokles thought he was having a bad day) draws vs 1. Well, blow me down...the average unrebalanced portfolio return was 34.99% over the period. This compares unfavourably with its MATCHING rebalanced portfolio counterpart which outperformed by 39.21%. Again, not too shabby over a short period like we are examining.

The chances that this is due to luck as developed by 2-sample t-test on a two-tailed basis (given rebal is being contested, we test for 2-sided instead of one. But what the heck, check the p-tests if you want to quibble) is less likely than drawing 4 ROYAL flushes in a row from a clean deck of cards. That's pretty special. $1 per draw down at Monte-Carlo and four hands later you'll have a couple of million bucks. Keep your winnings in play, assuming anyone could stake you and you'd be richer than all the universe....and then some. Better than Rain Man. Also, the likelihood of the rebal portfolio achieving a superior outcome to the unrebalanced portfolio was 60%. That's a whopping edge when sample sizes are this big, but I am talking to Rockstars (not you, unless you voluntarily wish to be classified as such) who think in terms of certainty - so we'll move on.

There is overwhelming statistical evidence that rebal works in the universe which has been specified and the time period used. This result overwhelms any inference that can reasonably be drawn from a single random portfolio. Four thousand portfolios created in this sample underperformed as well. But six thousand outperformed. This is a probabilistic process. Like everything else in investments except pure arbitrage. It is quite outlandish to draw an inference from a single draw in a stochastic process. It is like using Newtonian Laws in the world of relativity and quantum mechanics. Whatever world that is, it's not the real world. It's the stuff of Laplace. And it's so 17th century.

The longer the time period, the higher the probability of success.


2. Let's see. Didn't we already go through this on Commissions? $500k portfolio. Minimum expenses $20 per trade. Trade quarterly. - which is actually stupid because the people who do this don't just get smacked in the head by expenses but think about it. If we rebal all 10 stocks each quarter, brokerage is approximately 0.5% per annum. Tax? Let's say the stock market goes up 10% per annum or 7.5% real before franking. Feel free to muck about up to +2% before you start being put on CNBC as entertainment fodder. 4% is dividend. 6% is cap gain. This is rebal...it doesn't generate full portfolio turnover every tick of the clock. They are small movements. Pensions are not taxed - but let's make that explicit...NOT TAXED. Superannuation taxes cap gain at 15% worse case. Top Tax rate at around 50%. So let's be nuts. Full turnover in a year will generate 3% tax cost for top tax bracket. Full turnover in a year for Pension will generate 0.9% cap gains. If you know anything about tax at all, you'd know that you have discretion around tax parceling and can use modified HIFO standard, you will also reinvest dividends which creates 4% fresh parcels per year, and you might even have savings contribution going in if you happen to be in anything other than pension - and even then. Turnover is frequently reverse as might be expected. All this keeps your parceling fresh and allows low tax cost turnover for anything that is vaguely in the zone of the real world. Then, if you still want to hold out on this argument, you can lock out stocks with no fresh parcels from any rebal. Please see Ves correspondence for how it is actually done.

Woosh...hurdle cleared. If not, then why are you trading at all? Any trading activity outside of rebal freshens parcels. It is a valid concern for embedded capital gains in place. But parcels freshen with cashflows. If you have negative cashflow, you are probably in pension phase. If you happen to be in the situation of drawdown at max tax rate, there is a balancing act, but the basics apply.


3. Yes it does, welcome to the real real world. Take the Blue pill Neo.


4. In the universe of stocks provided, there were 7 that recorded negative returns over the period inclusive of dividends: BSA, MND, NWH, GUD, AGO, MGX, NCM. Building a trivial portfolio of equally weighting these and comparing the unbalanced vs rebalanced portfolios yields...are you getting tired of this yet (?)...unbalanced -31.57% vs rebalanced -27.37%. Rebalancing adds probable value to any portfolio, including those consisting of stocks that go down - including portfolios consisting entirely of stocks that go down - so long as they wiggle on their merry way to oblivion.


5. Per discussion with MichaelD, this process works if a monkey or astrologer, or monkey who is an astrologer, with a low IQ threw 20 darts and randomly selected stock names. New dart throws can take place every period. It doesn't matter if the monkey was trained by NASA. It doesn't matter if the stocks come from the top, bottom or inside out 20. They can be random numbers as long as they wiggle. Please go ahead and run 10,000 tests and verify this for yourself (you are not the monkey - whether astrologer or other). But in tests, they actually used monkeys to prove the point.


6. I wouldn't be so sure. But that's me. This is not bread and butter. Further, it is probabilistic. So there is always the chance that a single draw won't add value. There is no certainty in a world where Heisenberg exists. To reject rebal with certainty seems...somewhat unsupported.


7. Likewise. It's been fun. All the best with it.

 

[brty]

Julia,

Thankyou for the kind words. I usually don't say much because I don't like getting into arguments on forums. There are so many posters that post so much rubbish that I tell myself to just let it go after putting forward my point of view. Hence I don't post that often.

Every now and again though, a person or group of people propagate a load of tripe and I get involved, the thread on CFU comes to mind here. Then there are those claiming to represent the masters of the universe, have all the answers and use big words to impress the uninitiated poor traders looking for the secret to investing/trading.

RY, I don't have time tonight, perhaps tomorrow, but congratulations for turning a losing portfolio into a winning one by changing lots of parameters, something that is stunningly easy to do with hindsight.

 

[TPI]

Wow. I certainly am impressed.

Let's examine the results.

...

It's been fun. All the best with it.

You sound very knowledgeable and this all sounds great for institutional or high-net worth investors.

But this is not the "real world" for retail investors.

In their world, they have most of their wealth tied up in their own home, residential investment properties, own business premises, commercial investment properties, cash in offset accounts etc.

And of course they pay taxes.

The dominant purpose of investing for these people is to fund a retirement in the long-term and extract themselves from jobs they don't like in the short to medium-term.

ie. Objective/outcome/purpose/"liability"-driven investing.

Rebalancing is not that relevant here, though I don't doubt your evidence.

And it obviously only works for highly liquid assets like listed shares.

Perhaps you have paid off your home loan, and have millions in highly liquid assets, more than enough to meet any retirement income requirements - if so, then these academic theories may have more practical application to your situation, but this is not the norm.

You must have read Buffet's last annual report and his statements about his old farm house property?

And Yale's David Swensen's advice to institutional investors as distinctly opposed to retail investors?

 

[DeepState]

1. this all sounds great for institutional or high-net worth investors. But this is not the "real world" for retail investors. In their world, they have most of their wealth tied up in their own home, residential investment properties, own business premises, commercial investment properties, cash in offset accounts etc.


2. The dominant purpose of investing for these people is to fund a retirement in the long-term and extract themselves from jobs they don't like in the short to medium-term.

ie. Objective/outcome/purpose/"liability"-driven investing.
Rebalancing is not that relevant here.

3. And it obviously only works for highly liquid assets like listed shares.


4. You must have read Buffet's last annual report and his statements about his old farm house property?

I'm really glad you've jumped into this discussion. You are obviously in the game and I look forward to learning heaps from you.

Believe it or not, I could care less if anyone takes this concept up. I am just responding to queries and trying to bring factual truth to the surface and getting my concept of truth better honed. Rebal is a tiny part of investing and I'm sprouting off like an academic having to defend real world activity like I've never seen daylight when I used to have ~$100m daily VaR 95 and know just a little bit more than this concept and stuff out of textbooks.

1. I think this is an extent issue. If the meaning of your statement is that the pots of money are too small to spend effort with rebal in person, then I tend to agree that the point is relevant for accounts maybe <250k or something, but not because of irrelevance. People on this site, Aussie STOCK forums, tend to be more inclined to manage their portfolio intensely and the portfolio size of relevance can drop further, particularly as portfolio concentrations tend to be correlated with AUM ie. smaller number of stocks for smaller AUM - in general but with plenty of exceptions. The tax figures are as per above and t-cost is more of an issue but readily overcome by trimming the rebal only for extreme misweights. So, economically, it remains valid for smaller portfolios than HNW or insto. Further, there are $300bn in AUM managed to such strategies in pure form and plenty plenty plenty more than uses it at the periphery which they can access and live pretty quietly on without any more effort than setting up another mutual fund purchase where AUM can get very small. So it is relevant well below the thresholds you are talking about - I believe.


2. If something makes more money, then it will help you to achieve your financial goals sooner. You know the compound math for a simple increment of 1%. Let's do it for the viewers. Aged 45, a $100k portfolio earning 8% per annum after all frictions accumulates to $466k by 65 and if this were boosted by 1%, a figure which I hope you can see is achievable from the above and is actually below the margin earned by intense rebal processes, that figure rises to $560k. What's so irrelevant about that?

I am, as it turns out, thoroughly familiar with liability matching, target based investing , life cycle investing and on and on. Rebal remains relevant. Any matching asset brings risk of mismatch unless we can construct perfect matching streams on assets and liabilities. That situation only exists in the first chapter of introductory books that deal with this stuff. All practical problems in this field are just degrees of matching to the investor objective whose own liability stream is not even known for reasons of inflation, death, and so on. Even target return funds - what a joke - seek to hit their target stochastically - and have fallen into complete disrepair when everyone discovered sequencing risk.

You have to look into a microscope to see the impact that any reasonable rebal has on the gross features of a portfolio. The greatest impacts, as you are undoubtedly aware, are driven by macro, common factors. Just being in equities or bonds totally dominates the risk arising from marginal yet profitable activity like rebal. Go ahead and do the variance decomposition and you'll find that you can't find rebal greater than 1% of overall risk contribution. Yet it's so profitable. In absolute or relative space, this concept is worthy.


3. It works best for liquid assets for all practical reality. Agreed.

But if you have made the decision to be in shares, why not work it hard?


4. Indeed I have. Pls read entry #55 of this thread.

I am utterly indifferent about whether people do this. I just hope it's clear enough now that a decision not to do it comes with probabilistic economic opportunity costs. If you find $50 on the floor and are a retail investor with all sorts of other investments and savings objectives, no-one here is saying you HAVE TO pick it up. But, after conducting a time-motion study and weighing up my alternative uses for the time it takes to bend down and do it, it's likely to be worth it in a financial sense in my case. Maybe others are in a different situation.

 

[burglar]

... the pots of money are too small to spend effort with rebal in person, then I tend to agree that the point is relevant for accounts maybe <250k or something, but not because of irrelevance ...

Some here have smallish accounts because they are unsuccessful ...
But "winners are losers who keep trying!"

(I don't know who to attribute that saying to)

 

[DeepState]

Some here have smallish accounts because they are unsuccessful ...
But "winners are losers who keep trying!"

(I don't know who to attribute that saying to)

Hey champ. It's the cost of education as RoE more or less implies or says. A Harvard/Stanford MBA costs around USD 100k including various costs. It opens a lot of doors and is readily repayed. If the quote refers to you, may your education be fruitful and your future success assured.

 

[McLovin]

RY

I have enjoyed your posts in this thread. Plenty to mull over and a good discussion.

 

[DeepState]

RY

I have enjoyed your posts in this thread. Plenty to mull over and a good discussion.

I enjoyed our discourse. I look forward to many more. You are seriously smart and reasoned (been trailing your thoughts) and I'm a huge fan.