What has your hit and miss ratio been?

[burglar]

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.

Ok. Yah picked me!
Not just me, but many others.
We find our portfolios do not balloon whilst we learn.

Stock market investment is not my life.
It is my hobby.

So far it is cheaper than boating or 4wheel driving!

 

[brty]

RY,

I haven't had time to go through all of your long post today at all, but just had a quick reread, and this springs up...

There is overwhelming statistical evidence that rebal works in the universe which has been specified and the time period used.

That is just garbage. In the real world the rebalancing cost money over buy and hold during the period, thousands of dollars before transaction costs or tax, both of which in reality are higher than you make out. It is a shame my duaghter who is doing a Phd in statistics left after visiting yesterday before you posted your post. Next time she is home I'll show her your statistical insights and get comments from her.
Needless to say though, your tune on rebalancing changed as the real world example, that lost money (compared to buy and hold), went through it's changes.
Instead of just using the example, you changed the example to a universe of stocks. No it wasn't, it was a group of stocks in a theoretical portfolio of 20 stocks, not 10, nor 10 groups of 2, all of which are changes in parameters to prove something works that clearly did not.

Running Monte-carlo simulations is something that Tech/A does, I don't, as I don't agree with the assumption that anything can happen. Clearly price movements are in responce to real world events/prices, not statistical outliers that have no chance of occurring in the real world.

Rebalancing is just a fancy way of re-stating averaging down, by selling your winners on a regular basis to add to your losers, the results of my small study highlighted this. If I were to continue andjust one of the stocks continued to go down in price and then get delisted, over a period of years, the entire funds of the portfolio would be directed toards that one stock, a rediculous situation. Yet that is where re-balancing leads.

If I get time, I will go back over that portfolio and instead of rebalancing, do the opposite, add to winners and cull the losers to see where it would lead. my real life trading experience tells me it will work well, especially asI have the advantage of hindsight to optimise it. However I will do several different types of adding and culling.
I may even do a live real time thread on trades with a small $100k portfolio to see where it leads as I will have plenty of free time thanks to surgeon, shortly.

 

[DeepState]

RY,

I haven't had time to go through all of your long post today at all, but just had a quick reread, and this springs up...



1. That is just garbage. In the real world the rebalancing cost money over buy and hold during the period, thousands of dollars before transaction costs or tax, both of which in reality are higher than you make out.

2. It is a shame my duaghter who is doing a Phd in statistics left after visiting yesterday before you posted your post. Next time she is home I'll show her your statistical insights and get comments from her.

3. Needless to say though, your tune on rebalancing changed as the real world example, that lost money (compared to buy and hold), went through it's changes.

4. Instead of just using the example, you changed the example to a universe of stocks. No it wasn't, it was a group of stocks in a theoretical portfolio of 20 stocks, not 10, nor 10 groups of 2, all of which are changes in parameters to prove something works that clearly did not.

5. Running Monte-carlo simulations is something that Tech/A does, I don't, as I don't agree with the assumption that anything can happen. Clearly price movements are in responce to real world events/prices, not statistical outliers that have no chance of occurring in the real world.

6. Rebalancing is just a fancy way of re-stating averaging down, by selling your winners on a regular basis to add to your losers, the results of my small study highlighted this. If I were to continue andjust one of the stocks continued to go down in price and then get delisted, over a period of years, the entire funds of the portfolio would be directed toards that one stock, a rediculous situation. Yet that is where re-balancing leads.

7. If I get time, I will go back over that portfolio and instead of rebalancing, do the opposite, add to winners and cull the losers to see where it would lead. my real life trading experience tells me it will work well, especially asI have the advantage of hindsight to optimise it. However I will do several different types of adding and culling.
I may even do a live real time thread on trades with a small $100k portfolio to see where it leads as I will have plenty of free time thanks to surgeon, shortly.

Nice to hear from you.

1. Where were my assumptions off? The commissions assumptions matched yours. The tax rates are the tax rates. Do you think we should factor in long term returns of 20% per annum or something outrageous? Do you think turnover of a rebal portfolio exceeds 100% per annum? Do you think you will move markets when you conduct non-urgent trades and sit on the limit order book? Do you think that the Tax Act is different to the one in Australia?

2. You must be proud. Sure, ask her about a two sided, two sample, t-test is and what a P-value less than 0.000000001 implies for the hypothesis of H0 (buy-hold equals rebal) vs H1 (buy-hold is different to rebal) on a sample of 10,000 where mean(rebal) > mean(buy-hold). She would have learned it in Statistics 101. So did I.

3. Where was the tune changed? I think I've been humming this Top 40 hit throughout. The equation is water tight and this is a probabilistic stochastic process (your daughter would nail this).

4. You haven't had the chance to read the post and absorb it. I made mention that I also ran this for 20 stock portfolios. The results were superior to the ones I reported for the 10 stock example.

5. The Monte Carlo (ask your daughter again about whether it is useful for testing stochastic processes, I studied it for 6 years and have made a tidy sum from it in the - OMG - real world. You will find that Monte Carlo is used all the time for statistical inference and in econometrics. Further, rather than returns gleaned from investment fairies, I used the ACTUAL returns from stocks in your universe. These aren't made up. They are available from the ASX. They take into account everything you mentioned because they are real and actually happened. This was clearly stated, but you didn't have time to read it carefully.

6. If you hold a portfolio of stocks and they get liquidated, rebal is toast. Guess what, so is buy-hold. If you argue that you'll get out of the dog stocks, great. Rebal is just added to that too. It is not either or. Refer post to Ves #55.

7. Thanks for that tickler. Ask your daughter about Monte Carlo and hindsight bias from within sample analysis for the purposes of a within sample analysis. Let her tell you about hindsight bias. I have no idea what portfolios are going to be formed. They are randomly generated. All other data was drawn from the example you provided. If you think this is hindsight bias...have a chat to your daughter and see if your life experience improves.

Brty, in all seriousness, please do what you want with your money. In my useless and inexperienced opinion and the useless opinion of $300bn managed to this process (btw, I do know these Masters of the Universe, I have their private numbers and we chat over lunch about many things including bicycle training methods and why certain behaviours and stickiness of beliefs will pump out more returns - but I do not claim to represent them. I just know what they do and think it makes sense), and trillions which practice it in equity portfolios alone let alone the trillions more in multi-asset class portfolio who believe in it with entire agencies set up to research further into it - who employ the best of the best many of whom have a couple of PHD's and then some - think it works. You, of course, may know better. Good for you. Pretty awesome. Light must shine from you.

Please ask your daughter to check the formula and explain it to you and tell you it isn't BS. I gave you the references and originating author in prior posts. Just send these through on email or pigeon. If she finds it to be BS, tell her to check again or write a book and get on the lecture circuit. If she doesn't understand it, ask her to give it to the Professor of Finance at her favourite university for verification. They probably will take one second after seeing who the authors were and probably read that exact paper years ago. I have tried and failed.

Bad trade. Stop loss. Position closed at a net loss with major slippage before allowance for tax and commission.

All the best with it.

 

[cynic]

Nice to hear from you.
...
6. If you hold a portfolio of stocks and they get liquidated, rebal is toast. Guess what, so is buy-hold. If you argue that you'll get out of the dog stocks, great. Rebal is just added to that too. It is not either or. Refer post to Ves #55.
...

Guess What?

Unsurprisingly, you've conveniently misconstrued a perfectly valid argument against the case for rebalancing.

Did you really think we wouldn't notice?

Many of us are already aware of how terribly easy it is to derive a living from managing billions of dollars of other peoples' money. Try doing it with your own funds and see how well your fanciful and idealistic investment theories work.

Do you think you could survive a whole year, solely reliant on investment returns from a sub six figure sum (i.e. <$100k) without diminishing your capital or drawing income from other sources?
(I believe that some of the posters challenging your rebalancing claims are able to do this! The question is, with all your purported financial "wisdom" could you?!!!)

 

[TPI]

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.

Yes, same as many of us here.

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.

It is a small part, what other similarly simple strategies do you think give investors an edge?

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?

This is fine if your focus is on total returns.

For people who invest to provide passive income to meet expenses, retire or follow other passions, the income component is more important.

Any matching asset brings risk of mismatch unless we can construct perfect matching streams on assets and liabilities.

It doesn't have to be perfect in practice though.

 

[craft]

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.

......

Interesting discussion going on here.

Retired Young - unless my probability math fails me there is only 184,756 unique 10 stock portfolios that can be drawn from the 20 stock universe covering the time frame stated, and of course only 1, 20 stock portfolio.

Using quartly returns as data points in the Monte Carlo simulation would give you the sort of permutations you are suggesting but it would also invalidate the validity of the Monte Carlo results because the data has serial correlation. Would it not?

Back testing validity aside - Interesting discussion on how much of the statistical academic research can be translated into retail investing. Similar excess return is academically indicated for value stocks, small caps etc.

Real question is if you can structure (financially, psychologically) to capture the returns as a retail sized investor.

I tend to differ in opinion to you on wether rebalancing can be cream on the cake under all circumstances. The advantage is only statistically defined under certain structures ie wide enough diversification, enough volatility, similarity in ultimate performance etc.

 

[Ves]

Interesting discussion going on here.

Retired Young - unless my probability math fails me there is only 184,756 unique 10 stock portfolios that can be drawn from the 20 stock universe covering the time frame stated, and of course only 1, 20 stock portfolio.

My memory is fairly bad when it needs to go back to something I haven't used since university.... so I looked it up.

Mainly for my own benefit, but someone else might be interested.

20! / (10! x (20! - 10!))
= 20! / (10! x 10!)

= 184,756.

! represents factorial. In long hand 4! is just 4 x 3 x 2 x 1

I even know how to do it in Excel now. The function is Fact(number).

It is amazing what you can figure out if you spend 10 minutes.

 

[KnowThePast]

Interesting discussion going on here.

Retired Young - unless my probability math fails me there is only 184,756 unique 10 stock portfolios that can be drawn from the 20 stock universe covering the time frame stated, and of course only 1, 20 stock portfolio.

Using quartly returns as data points in the Monte Carlo simulation would give you the sort of permutations you are suggesting but it would also invalidate the validity of the Monte Carlo results because the data has serial correlation. Would it not?

Back testing validity aside - Interesting discussion on how much of the statistical academic research can be translated into retail investing. Similar excess return is academically indicated for value stocks, small caps etc.

Real question is if you can structure (financially, psychologically) to capture the returns as a retail sized investor.

I tend to differ in opinion to you on wether rebalancing can be cream on the cake under all circumstances. The advantage is only statistically defined under certain structures ie wide enough diversification, enough volatility, similarity in ultimate performance etc.

I wasn't involved in the discussion, just wanted to say it's very nice to see you posting again, craft.

On the topic - why treat re-balancing as a simple yes/no?
Averaging up/down is also a form of rebalancing.
As is only averaging into losers/winners/other criteria.
An infinite number of combinations, some of which produce very interesting results when backtested.

I agree with brty that tax + transaction costs are a big hindrance. But it's mainly a problem when you scale positions down. If you only average up (buy), it's not an issue.

 

[DeepState]

1. Guess What? Unsurprisingly, you've conveniently misconstrued a perfectly valid argument against the case for rebalancing. Did you really think we wouldn't notice?

2. Many of us are already aware of how terribly easy it is to derive a living from managing billions of dollars of other peoples' money. Try doing it with your own funds and see how well your fanciful and idealistic investment theories work.

3. Do you think you could survive a whole year, solely reliant on investment returns from a sub six figure sum (i.e. <$100k) without diminishing your capital or drawing income from other sources?
(I believe that some of the posters challenging your rebalancing claims are able to do this! The question is, with all your purported financial "wisdom" could you?!!!)

Hi Cynic! It's great to meet such positive people in this site. Nice of you to come out of your hole.

1. If you think item 6. from BRTY was an accurate depiction of portfolio activity then - guess what - you're off plantation. Under real world conditions, stocks don't go down in straight lines and stocks don't go up in straight lines. The fact that they behave like this produces rebal profits. In a diversified, equally weighted, portfolio of, let's say, 50 securities, 2% would be invested in the loser stock called Cynical-AU. As this drifts to zero, positive expectancy exceeds the loss of value in the stock in general - although this is a probabilistic statement. Nonetheless, as the stock moves down and rebal occurs, the portfolio is spread over the entire portfolio, not into the loser stock. The portfolio is never fully invested into Cynical-AU loser stock under BRTY's scenario. Think like this - all stocks start with 2% in them. Cynical-AU drops to zero. The portfolio takes a hit and the remaining 98% of the portfolio is rebalanced. At every stage of a gradual decline, it's just this step in smaller increments. At no stage is the portfolio fully invested in Cynical-AU under the conditions that BRTY laid out.

Check your maths before you hurl BS about. I hope people are noticing.

2. Yeah, work was fun. A Pina Colada a day keeps the Dr away. But sometimes, when the seas were rough and my yacht would roll, it made flipping coins for stock selection more challenging. As to private investing, I am. It's delicious. Thanks for asking. I'm quite private in real life but - since you asked - we are living large and are accumulating even if I'm retired. Crazy huh?

3. It was 2 generations ago that my family lived under those conditions. We did it. If it came to it, and survival was at stake, why wouldn't I eat cat food and go dumpster diving? I'd do that for my family without a doubt. Thus, if it came to it, I could and would. However, I applied my financial wisdom to get seriously f^&king rich so that we would not encounter this scenario for at least 3 generations. I want my grandkids to come to ASF and list themselves as "Retired_from_Birth" as they deal with this stuff for kicks. It's not all about cost-cutting you know. You can't cut your way to growth. How about that for financial wisdom?

Lighten up and put a chip in the other shoulder for symmetry.

 

[DeepState]

My memory is fairly bad when it needs to go back to something I haven't used since university.... so I looked it up.

Mainly for my own benefit, but someone else might be interested.

20! / (10! x (20! - 10!))
= 20! / (10! x 10!)

= 184,756.

! represents factorial. In long hand 4! is just 4 x 3 x 2 x 1

I even know how to do it in Excel now. The function is Fact(number).

It is amazing what you can figure out if you spend 10 minutes.

Way to go Ves!!

 

[cynic]

Hi Cynic! It's great to meet such positive people in this site. Nice of you to come out of your hole.

1. If you think item 6. from BRTY was an accurate depiction of portfolio activity then - guess what - you're off plantation. Under real world conditions, stocks don't go down in straight lines and stocks don't go up in straight lines. The fact that they behave like this produces rebal profits. In a diversified, equally weighted, portfolio of, let's say, 50 securities, 2% would be invested in the loser stock called Cynical-AU. As this drifts to zero, positive expectancy exceeds the loss of value in the stock in general - although this is a probabilistic statement. Nonetheless, as the stock moves down and rebal occurs, the portfolio is spread over the entire portfolio, not into the loser stock. The portfolio is never fully invested into Cynical-AU loser stock under BRTY's scenario. Think like this - all stocks start with 2% in them. Cynical-AU drops to zero. The portfolio takes a hit and the remaining 98% of the portfolio is rebalanced. At every stage of a gradual decline, it's just this step in smaller increments. At no stage is the portfolio fully invested in Cynical-AU under the conditions that BRTY laid out.

Check your maths before you hurl BS about. I hope people are noticing.

2. Yeah, work was fun. A Pina Colada a day keeps the Dr away. But sometimes, when the seas were rough and my yacht would roll, it made flipping coins for stock selection more challenging. As to private investing, I am. It's delicious. Thanks for asking. I'm quite private in real life but - since you asked - we are living large and are accumulating even if I'm retired. Crazy huh?

3. It was 2 generations ago that my family lived under those conditions. We did it. If it came to it, and survival was at stake, why wouldn't I eat cat food and go dumpster diving? I'd do that for my family without a doubt. Thus, if it came to it, I could and would. However, I applied my financial wisdom to get seriously f^&king rich so that we would not encounter this scenario for at least 3 generations. I want my grandkids to come to ASF and list themselves as "Retired_from_Birth" as they deal with this stuff for kicks. It's not all about cost-cutting you know. You can't cut your way to growth. How about that for financial wisdom?

Lighten up and put a chip in the other shoulder for symmetry.

Thankyou for your cheerful response. I've been enjoying reading your contributions, however, I am still very much in agreement with several others that rebalancing exposes one's portfolio to significant risk from the corrosive effects of components suffering from chronic altitude sickness.

No amount of mathematical, statistical or verbal obfuscation will persuade me to dismiss the evidence of my own experience.

Whilst I've witnessed some opportune scenarios for rebalancing, I've also witnessed plenty where ardent rebalancing would likely have proved catastrophic!

Imagine twenty buckets placed in different locations for the purpose of catching as much rainfall as possible. Imagine what happens when just one bucket has a hole near its base. Do you think rebalancing will yield the greatest accumulation of rainfall in this scenario?

It doesn't take a rocket scientist to recognise the glaringly obvious flaw in the rebalancing philosophy!!!

 

[DeepState]

Interesting discussion going on here.

1. Retired Young - unless my probability math fails me there is only 184,756 unique 10 stock portfolios that can be drawn from the 20 stock universe covering the time frame stated, and of course only 1, 20 stock portfolio.

2. Using quartly returns as data points in the Monte Carlo simulation would give you the sort of permutations you are suggesting but it would also invalidate the validity of the Monte Carlo results because the data has serial correlation. Would it not?

3. Back testing validity aside - Interesting discussion on how much of the statistical academic research can be translated into retail investing. Similar excess return is academically indicated for value stocks, small caps etc.

4. Real question is if you can structure (financially, psychologically) to capture the returns as a retail sized investor.

5. I tend to differ in opinion to you on wether rebalancing can be cream on the cake under all circumstances. The advantage is only statistically defined under certain structures ie wide enough diversification, enough volatility, similarity in ultimate performance etc.

Welcome welcome welcome! Gosh it's nice to meet you Craft.

1. Your combinatorics is great. Perhaps my explanation of the simulation approach wasn't clear enough.

If I am pulling 10 stocks from a universe of 20 and equally weighting them by default (or using some other fixed weighting scheme), then the number of draws is 20-C-10 as you have produced.

But I was pushing harder. I did not want to restrict portfolios to be equally weighted. I wanted to allow for differential weights as would happen in reality. Now, we can get ridiculous and allow differentially weighted portfolios by increments of 0.0000000001% (you know what I mean). That would produce an insane number of portfolios that would blow Excel into the 12th dimension as you plug the figures in. But, when you are simulating for this purpose, it doesn't matter much at all. So, I chose to build a portfolio consisting of 10% blocks. So there are 10x blocks each representing 10% of the portfolio.

If you relax the constraint of equally weighting you can divide each stock into 10x 'stocklets'. Hence we now have 20 x 10 = 200 stocklets from which we can choose 10 of then to fill our portfolio building blocks. This means that the portfolio can have up to 10 names in it and individual stock weights can be anything in the range of 0-100%. This actually produces more concentrated portfolios than 10 equally weighted ones and disfavours the rebal process, but I thought I wouldn't mention that given the technical nature. Thanks goodness you are here.

200-C-10 is the monster number I was referring to. Same deal for the 20 stock portfolio.


2. Excellent. OMG this is bliss. Give me oxygen.

Monte Carlo can be conducted in many ways and you are thinking of a situation where stock returns are divided by time slices, shuffled and drawn from with or without replacement. You are entirely correct that, in that circumstance, the time series qualities are completely dismantled. This method is used for VaR and other forms of scenarios.

In this process, I dumped the stock returns. Those returns remain unchanged and in the sequence that they were actually delivered to the market. The time series properties, including serial correlation are fully preserved. What we changed in the Monte Carlo was the stock weights. These were randomly generated per 1. and thus reproduces faithfully alternative draws from a very diversified set of forking paths. So long as the sampling is not biased, 10,000 draws is a large sample which will capture the test results. This only took 2 sec in my engine, but there was no point in pushing the point and I didn't have a second to waste.


3. Damn, where the heck have you been? I've made 100+ posts and you only turn up now? You've just been letting be dangle in the wind all this time? I hope you've got a damned good explanation for that mate...

Yes! The world is larger than re-bal and there are a stack of ways to make money. Re-bal is just a tidy-up.

The sorts of things you are talking about are drawn from the concept of 'Premium based investing' It's a way of being rewarded for taking risks that others can't. Not all risks are rewarded, but it is believed that value and small caps are amongst them. Value - for reasons of distress and mispricing. Small cap - for reasons of stock specific risk and liquidity. It is real, but you need to be patient to harvest it. Part of the reason why these opportunities exist is because professional funds management has a time horizon which is much shorter than you might have. There is money to be made by just going to the beach and doing nothing whilst us fundies go nuts worrying about monthly performance.

I invite RoE to outline his thoughts on retail investor advantages in the market. That guy (he writes like a guy) is sharp.

Retail can do the above. You don't need much. If it works in insto, it'll work in retail. Stocks don't know who is buying them. KnowThePast seems to have backtest results and is willing to share them. But backtests need to be joined up with economic intuition. There are heaps of backtests that look great, but very few go on to actually produce something other than noise. Backtests are very useful to test your economic intuition. You know that. I just type out of habit now.


4. I think that's for you to decide. If you have tiny account size, you are in a different situation. But if you can see yourself holding 20-40 stocks, all of the above is available. It's low turnover stuff and far less taxing than watching portfolio turnover each tick and hoping something crosses some line.


5. Rebal is a stochastic process. There is an element of chance in it. In the simulation, I mentioned that 40% of rebal portfolios did worse than their buy-hold counterparts and, obviously, 60% did better. So I sincerely hope that I have been consistent in saying this is probabilistic and the probability of success improves with the passage of time. No process other than pure arbitrage will deliver what you have indicated that I said. If I said it somewhere, I retract it with apologies.

The idea is then to add rebal on some other process which you think also has positive expectancy. All these edges add up to something closer to a smooth path to a yacht or whatever tickles you.


Thanks for your questions. They have been a great pleasure to receive. Good trading to you, Craft.

 

[brty]

Ok, time to look at some details. Despite RY changing opinion on a few matters, I'll go back to the portfolio I randomly started for the following reasons. This from RY in post 55.

The less forecast skill you have, the greater the relative importance of rebal and the less that changes in your view will affect the portfolio....hope that makes sense. In the absence of any stock selection skill, you just move straight to the pure rebal portfolio which tends to produce around 2% per annum outperformance in general over time and would be responsible for 100% of outperformance. On average, skill is zero. Hence, on average it is better for anyone to just hold a diverse portfolio and rebal and be done with it.

While any argument against the portfolio of 20 stocks chosen is probably accurate, it is a diverse portfolio, and one that with hindsight we can claim the holder had an "absence of stock selection skill" so it meets RYs parameter.

The claim is 2% per annum outperformance. After 2 years there is a 27% underperformance, before tax and transaction costs.

I just spent a couple of hours working out the taxable income along the way. It's unbelievable, on a quarter by quarter basis, the numbers for added taxable income for rebalancing are Q1 $4112 Q2 $3272 Q3 $10,115 Q4 $6209 Q5 $18070 Q6 $11463 Q7 $10224. A total of $57,885 or tax payable at the 30% tax rate of $18233 (including medicare). These numbers EXCLUDE dividends.

The 20 stock portfolio, from randomly drawn stocks, with rebalancing is even worse than first imagined. Out of the gain of $70,541 you would have to allow/deduct tax of $18233 leaving a stock portfolio with a gain of $52,307 against the buy and hold portfolio with a gain of $89,714.

So for this portfolio rebalancing quarterly, there is an outperformance of over 71% for B+H over rebalancing.

The portfolio started as ... and finished the same with $48886 in dividends for B+H


STO 1,779
BSA 102,040
OKN 20,242
GAP 100,000
NBL 40,983
MND 1,106
AGK 1,753
BHP 672
CAB 5,144
NWH 7,763
GUD 3,180
SHV 13,513
ROC 68,493
CYG 10,416
TGR 19,920
RDM 142,857
AGO 7,575
MGX 17,857
NCM 746
NST 25,773

Rebalanced finished with...

STO 1844
BSA 211030
OKN 15632
GAP 94598
NBL 45722
MND 1565
AGK 1787
BHP 722
CAB 7238
NWH 22085
GUD 5006
SHV 6332
ROC 58996
CYG 9458
TGR 8547
RDM 211932
AGO 23856
MGX 27994
NCM 2785
NST 34078

Transaction fees have not been taken into consideration, they would however reduce the taxable income as they are tax deductable. Doesn't matter, rebalancing clearly did not work with this portfolio over the 2 year period. This is totally contrary to the claimed outperformance of 2% for someone without any skill selection in stock performance.

RY, it doesn't matter how you try to slice and dice the results, in the real world this portfolio showed massive underperformance for re-balancing. In fact it highlighted the weaknesses, and it was random, not deliberately done.

 

[DeepState]

Thankyou for your cheerful response. I've been enjoying reading your contributions, however, I am still very much in agreement with several others that rebalancing exposes one's portfolio to significant risk from the corrosive effects of components suffering from chronic altitude sickness.

No amount of mathematical, statistical or verbal obfuscation will persuade me to dismiss the evidence of my own experience.

Whilst I've witnessed some opportune scenarios for rebalancing, I've also witnessed plenty where ardent rebalancing would likely have proved catastrophic!

Imagine twenty buckets placed in different locations for the purpose of catching as much rainfall as possible. Imagine what happens when just one bucket has a hole near its base. Do you think rebalancing will yield the greatest accumulation of rainfall in this scenario?

It doesn't take a rocket scientist to recognise the glaringly obvious flaw in the rebalancing philosophy!!!

You are welcome. Thankyou for your somewhat more reasoned tone.

You are pointing out a valid scenario which, as per BRTY's single scenario, led to the underperformance of re-bal vs buy-hold. In the extensive simulation, I mentioned that fully 40% failed. Amongst these will be exactly the scenarios you and BRTY have encountered, experienced or imagine might occur.

Re-bal does not claim to be pure arbitrage. I have not claimed it is. The equations, if you were to translate them, don't indicate that either. There is risk of failure as with any strategy you could name other than printing money.

So, given that we have risk of failure, why do it? Because it has positive expectancy and the edge is not trivial even after tax and comm.

Each of the scenarios you have mentioned are real. They can happen. As are a range of great scenarios that favour re-bal. What is missing from this debate is the assignment of probability to these scenarios. I know it sounds vague and all, but perhaps I can explain this via a casino.

Welcome to Cynic-ville Sentosa, a bloody awesome marble walled casino with lights and glamour. You, in your hood with digits running over your face are the Roulette dealer. You have odds stacked in your favour. Now, the kinds of scenarios you are mentioning are like drawing 5x 32s in a row with some punter re-staking that slot each time. The Casino loses. It's a really bad day. But the chances of that are the same as drawing 5x 0 in a row. Or some mix of all the numbers. They are all equally likely. Bad and good scenarios. But when you add it all up, the odds in your favour (re-bal profits) make the casino money through time. You need to assign probability to each scenario and weight it accordingly. At the moment, what you are doing is pointing out the possibility of a bad outcome. No argument from me. They exist. But go on to weight that and all the other ones and you come up with positive expectancy. It's just unnatural to think it terms of these distributions, so I appreciate this is going to be a bit tough. People more naturally think in terms of scenarios as you have done. And, by internal wiring from our ancestors from caveman time, focus more on bad scenarios than good.

There is a note/thesis to So_Cynical (oh, the irony) in the thread "Does Rebalancing Work?" which explains how you can prove it to yourself. It just requires a spreadsheet and a tiny bit of work.

It doesn't need a rocket scientist to see the massive flaw in rebal. They wouldn't see it because they understand this stuff. In fact, I have a friend who actually is a rocket scientist managing portfolio this way. They are in Australia, manage $8bn and are growing like a weed. It just needs a spreadsheet that a high school student could put together in an hour to see that this stuff works in the real world. I hope you have achieved a HS level education and can pull it off. It's no skin of my nose if you don't do this and can't find the truth of it or can't be convinced of it by display of facts, theory or verbal/written obfuscation. Actually, why bother even raising this if you are self-declared closed minded and nailed shut?

Chillax dude.

 

[brty]

RY,

In the simulation, I mentioned that 40% of rebal portfolios did worse than their buy-hold counterparts and, obviously, 60% did better.

This was not a simulation, it was a real world example, it was what happened. All your simulation stuff makes you sound like a university student that has learned a lot from academics that teach. You need to understand that the rebal into losing stocks can and does underperform, plain and simple.

Thanks for making me do the exercise. I have come across others who started funds with similar types of theories, of course they called it something different, dollar cost "something" or dollar avaraging "something" I believe. The GFC brought them undone with the fund folding and the spruiker going bankrupt.

Of course there is nothing wrong with the theory, it works beautifully on the top stocks in hindsight.

 

[craft]

Those returns remain unchanged and in the sequence that they were actually delivered to the market. The time series properties, including serial correlation are fully preserved. What we changed in the Monte Carlo was the stock weights..

Nice to see somebody understands the implication of correlation of time series when using MC - I've seen it abused so often I now expect it. I didn't twig you were varying the stock weights to get the permutations and feared the worse. Its interesting that the results still hold up. Gut instinct would have me think a fair bit of rebalance performance over indexes has to do with initial equal weight effect.

Damn, where the heck have you been? I've made 100+ posts and you only turn up now? You've just been letting be dangle in the wind all this time? I hope you've got a damned good explanation for that mate...

Sometimes you just need a break - you may find that also in time..

5. Rebal is a stochastic process. There is an element of chance in it. In the simulation, I mentioned that 40% of rebal portfolios did worse than their buy-hold counterparts and, obviously, 60% did better. So I sincerely hope that I have been consistent in saying this is probabilistic and the probability of success improves with the passage of time. No process other than pure arbitrage will deliver what you have indicated that I said. If I said it somewhere, I retract it with apologies.

The idea is then to add rebal on some other process which you think also has positive expectancy. All these edges add up to something closer to a smooth path to a yacht or whatever tickles you.

What it takes to harvest one edge doesn't necessarily add to another - and in fact trying to do so can cause damage to the original edge. That's not a discussion for 12:30am but a mighty good topic for one rainy day and could probably go a long way to reconcile the different angles you and BRTY might be coming from.


Care to detail your data source(total return by quarters -nice) and back testing engines? They appear pretty impressive.

 

[Zylatis]

Monte Carlo in excel? Ew....

</tangent>

 

[craft]

RY,



This was not a simulation, it was a real world example, it was what happened. All your simulation stuff makes you sound like a university student that has learned a lot from academics that teach. You need to understand that the rebal into losing stocks can and does underperform, plain and simple.

Thanks for making me do the exercise. I have come across others who started funds with similar types of theories, of course they called it something different, dollar cost "something" or dollar avaraging "something" I believe. The GFC brought them undone with the fund folding and the spruiker going bankrupt.

Of course there is nothing wrong with the theory, it works beautifully on the top stocks in hindsight.

Understand dollar cost averaging fully and have the disposition to implement it consistently, then GFC type volatility is actually the sort of event you hope for.

 

[DeepState]

Ok, time to look at some details. Despite RY changing opinion on a few matters, I'll go back to the portfolio I randomly started for the following reasons. This from RY in post 55.



While any argument against the portfolio of 20 stocks chosen is probably accurate, it is a diverse portfolio, and one that with hindsight we can claim the holder had an "absence of stock selection skill" so it meets RYs parameter.

The claim is 2% per annum outperformance. After 2 years there is a 27% underperformance, before tax and transaction costs.

I just spent a couple of hours working out the taxable income along the way. It's unbelievable, on a quarter by quarter basis, the numbers for added taxable income for rebalancing are Q1 $4112 Q2 $3272 Q3 $10,115 Q4 $6209 Q5 $18070 Q6 $11463 Q7 $10224. A total of $57,885 or tax payable at the 30% tax rate of $18233 (including medicare). These numbers EXCLUDE dividends.

The 20 stock portfolio, from randomly drawn stocks, with rebalancing is even worse than first imagined. Out of the gain of $70,541 you would have to allow/deduct tax of $18233 leaving a stock portfolio with a gain of $52,307 against the buy and hold portfolio with a gain of $89,714.

So for this portfolio rebalancing quarterly, there is an outperformance of over 71% for B+H over rebalancing.

The portfolio started as ... and finished the same with $48886 in dividends for B+H


STO 1,779
BSA 102,040
OKN 20,242
GAP 100,000
NBL 40,983
MND 1,106
AGK 1,753
BHP 672
CAB 5,144
NWH 7,763
GUD 3,180
SHV 13,513
ROC 68,493
CYG 10,416
TGR 19,920
RDM 142,857
AGO 7,575
MGX 17,857
NCM 746
NST 25,773

Rebalanced finished with...

STO 1844
BSA 211030
OKN 15632
GAP 94598
NBL 45722
MND 1565
AGK 1787
BHP 722
CAB 7238
NWH 22085
GUD 5006
SHV 6332
ROC 58996
CYG 9458
TGR 8547
RDM 211932
AGO 23856
MGX 27994
NCM 2785
NST 34078

Transaction fees have not been taken into consideration, they would however reduce the taxable income as they are tax deductable. Doesn't matter, rebalancing clearly did not work with this portfolio over the 2 year period. This is totally contrary to the claimed outperformance of 2% for someone without any skill selection in stock performance.

RY, it doesn't matter how you try to slice and dice the results, in the real world this portfolio showed massive underperformance for re-balancing. In fact it highlighted the weaknesses, and it was random, not deliberately done.

What a power of work BRTY!

So, I've changed my opinion? Please outline for verification. I'm curious. I've changed my opinion on a few things, but I'm not quite sure what's behind the slur. Are we still going on about Post #66 and #67? Will someone please explain that an equation can be watertight and yet uncertainty or risk exists? Please!!!!

So, I've said "pure rebal portfolio which tends to produce around 2% per annum outperformance in general over time " and you translate that to "The claim is 2% per annum outperformance" and present a single two year scenario for the purposes of inference. Please call your daughter right now. If you disguised your name and told her what you've done to form this inference....well, I'd love to be there. Further, you might need a refresher on comprehension. This kind of comprehension distortion might be behind my change of opinions above. You might have changed them for me without my consent.

So, you have created a perfectly random portfolio of 20 stocks.

From post #69:

"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", Yup...totally random selection. What's your idea of non-random?

Even more: "it is a diverse portfolio, and one that with hindsight we can claim the holder had an "absence of stock selection skill" " Does that imply you have no skill? Which is it? Given you traded this randomly selected portfolio, you either do not have skill or this test is flawed from the outset?

So, you have run some tax calculations and gotten yourself hot and heavy on the tax realisations. BRTY, you incorrectly called on me for my tax understanding in "Does rebalancing work?" and were found wanting. You've now gone for strike two in one evening by thinking that by not selling you don't incur any tax. You have, you just haven't paid it. And given you are such a skilled investor, will be trading the market and realizing parcels along the way. This chicanery has a name. It's called accounting fraud. Publish that for a portfolio and you go to jail. Check out Accounting Standard AAS25 for how it's done in the real world with real money with real people who actually understand this stuff. RoE can send you a link in a heartbeat.

"rebalancing clearly did not work with this portfolio over the 2 year period. This is totally contrary to the claimed outperformance of 2% for someone without any skill selection in stock performance." This is absolutely hilarious. Your comprehension of a simple statement "2% per annum outperformance in general over time " to make a certainty statement/inference like that is atrocious in the presence of uncertainty. Please CALL YOUR DAUGHTER PhD (Forthcoming). Puhleeeeez. You really are that desparate to find a flaw in the space-time continuum Dr Emmett. You might need to avail yourself of a Flux Capacitor and a Delorian.

"rebalancing clearly did not work with this portfolio over the 2 year period". Great. Now do it 9,999 times more and let's see what happens before you present any more of this single scenario conclusions in a stochastic, probabilistic process stuff. What is so hard to understand about "This is a probabilistic process whose likelihood of success improves with time"? Who the heck claimed certainty of profit over any single scenario? The simulations provide displayed a 40% likelihood of failure. Wow. It actually includes some failures. 4,000 of them. Tell me, has your portfolio outperformed against all possible randomly selected portfolios? No? Wow. Amazing.

"post 55" just for the rocket scientists out there. Post #55 also included further formulations that traded off expected rebal profits vs tax costs, frictions and other risk matters. Of course, this wasn't listed in the pre-amble and neither was it considered in the single scenario. The starting portfolio weights for this type of analysis would commence from cash and move to the portfolio settings. In a like for like study that this purports to be, the initial weights would begin at the optimal weights as determined by this formulation. Naturally this wasn't done in this effort. Instead, a sort of random portfolio was chosen which thus disfavours rebal as per author intentions.

This is research?

 

[DeepState]

RY,



This was not a simulation, it was a real world example, it was what happened. All your simulation stuff makes you sound like a university student that has learned a lot from academics that teach. You need to understand that the rebal into losing stocks can and does underperform, plain and simple.

Thanks for making me do the exercise. I have come across others who started funds with similar types of theories, of course they called it something different, dollar cost "something" or dollar avaraging "something" I believe. The GFC brought them undone with the fund folding and the spruiker going bankrupt.

Of course there is nothing wrong with the theory, it works beautifully on the top stocks in hindsight.

I sound like a university student for two reasons:

1. I went to one. Actually, I went to two. No..three. Heck I forgot.

2. This stuff is so simple that a university student would eat it. So I don't need to go any further.

Despite numerous exchanges which others clearly comprehend, it is clear you still don't grasp the basic theory when you say "it works beautifully on the top stocks in hindsight" inferring that hindsight bias is important or that rebal of portfolios of stocks which go down will never succeed. So, perhaps you might want to sound more like a university student?

It would also be unwise to tar all strategies whose names you can't quite remember with the same brush when some spruiker some time and some place screws others for money. That's what my real world experience tells me.