more than rebalancing: keeping it mechanical

short_butt_sweet

AnotherJoe wrote: »

A simple question "define crash"

i don't need to define a crash.

perhaps you're responding to this: "when equities crash, you over-rebalance to slightly more than your original %".

that was just a gloss. more accurately, the target % for equities is increased marginally when equities fall a little; and increased more when they fall further. there is no "crash" boundary point.

A second simple question, referencing James post at 11, which I'll rephrase as "why do you think you're so clever you have spotted an algorithm that literally billions of dollars worth of computing power and ultra sophisticated algorithms haven't already worked out" ?

you seem to think i'm claiming far more for this "system" than i actually am.

it's just a variation on the simpler method of deciding your target is to hold X% of your portfolio in equities (and therefore rebalancing to keep close to X%), except that now X% is not fixed but variable (within limits). it's relevant (if it is at all relevant) for people who want to hold less than 100% but more than 0% in equities. it's isn't expected to beat just going 100% equities. there are going to be periods of some years in which it beats the simpler fixed X% method, but other periods of years in which it is beaten by the simpler method. what i'm not sure about is whether (for some people) it might make sense to go for this idea instead of the simpler method.

this is all so unspectacular at best that it won't be of any interest to the big money + big computing power people. they are interested in much faster gains, not in something that might beat VLS60 in one 10-year period, but be beaten by it in another 10-year period.

Or to paraphrase HL Mencken "for every complex problem there is a simple solution..... which is wrong"

well, the simpler solution is the fixed X% in equities. does that make it wrong?

short_butt_sweet

Tom99 wrote: »

[FONT=Verdana, sans-serif]I have put your alternative rebalancing options into a spreadsheet using the FTSE100 Index for the past 20yrs since 1998:[/FONT]

[FONT=Verdana, sans-serif]Option 1 : Invest £150,000 in shares £150,000 in cash and leave alone[/FONT]
[FONT=Verdana, sans-serif]Option 2 : Rebalance to 50% shares and 50% cash[/FONT]
[FONT=Verdana, sans-serif]Option 3 : Rebalance to 75%*£150k(linked to RPI+2%) plus 25% of remainder[/FONT]

[FONT=Verdana, sans-serif]I made the following additional assumptions:[/FONT]

[FONT=Verdana, sans-serif]Dividends reinvested: 3%pa (I can't find any actual data)[/FONT]
[FONT=Verdana, sans-serif]Cash Interest: Base Rate +1%[/FONT]
[FONT=Verdana, sans-serif]Trigger to rebalance: When share %age differs by more than 5% from target[/FONT]

[FONT=Verdana, sans-serif]The result are:[/FONT]

[FONT=Verdana, sans-serif]........................Option 1... Option 2... Option3[/FONT]
[FONT=Verdana, sans-serif]Start: .............. £300,000.. £300,000.. £300,000[/FONT]
[FONT=Verdana, sans-serif]Share Profit:...... £228,833.. £288,003.. £306,097[/FONT]
[FONT=Verdana, sans-serif]Cash Interest:... £186,398.. £176,940.. £186,561[/FONT]
[FONT=Verdana, sans-serif]End: ................ £715,231.. £764,943.. £792,658[/FONT]
[FONT=Verdana, sans-serif].........................+138%.......+155%.... +164%[/FONT]

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[FONT=Verdana, sans-serif]great work![/FONT]

[FONT=Verdana, sans-serif]well, the first thing to note is that equities only beat cash marginally over this period (assuming our data is accurate ).
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[FONT=Verdana, sans-serif]equities returned 4.7% a year (compounded), and cash 4.1% a year.[/FONT]

[FONT=Verdana, sans-serif]the unrebalanced portfolio (option 1) returned 4.4%, and at the end is only 53% in equities. if equities had outperformed cash more significantly, then this portfolio's % equities would have drifted up further, and it would probably have outperformed options 2 and 3, because it would end up taking on more risk (by increasing the % equities). in fact, it was beaten by both the rebalanced portfolios.
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[FONT=Verdana, sans-serif]the returns on all 3 portfolios are actually very similar, with 4.8% compounded for option 2, and 5.0% for option 3. each of them has achieved a higher return than 100% equities (and higher than cash). i wouldn't usually expect that to happen! rebalancing works well in choppy markets which overall barely beat cash.[/FONT]

[FONT=Verdana, sans-serif]the target % equities for option 3 ended up at (i think) something like 49%, because the RPI+2% link happened to be very close to the returns from the portfolio (RPI being something like 2.8% over the period?). so there was no significant overall upward or downward drift in the % equities held in option 3. that won't always be the case. if returns exceed RPI+2%, the % equities in option 3 would drift downwards; and if they were less than RPI+2%, the % equities would drift upwards.[/FONT]

[FONT=Verdana, sans-serif]without any significant overall drift in option 3, it is interesting that it's marginally beaten option 2. the question is: has it done so by taking on more risk?[/FONT]

[FONT=Verdana, sans-serif]one way to answer that could be to look at the minimum, maximum and average % equities option 3 held over the period (compared to options 1 and 2).[/FONT]

[FONT=Verdana, sans-serif]another would be to compare the maximum drawdowns for each option (i.e. the biggest falls in the value of the portfolio during the period, from peak to trough).
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The Buy/Sell deals:[/FONT]

[FONT=Verdana, sans-serif]............................Option 2... Option3[/FONT]
[FONT=Verdana, sans-serif]Buy deals: ................. 6 ............ 17[/FONT]
[FONT=Verdana, sans-serif]Sell deals:.................. 7 .............20[/FONT]
[FONT=Verdana, sans-serif]Min Buy: ............... £18,023.....£15,865[/FONT]
[FONT=Verdana, sans-serif]Max Buy: .............. £28,975.....£41,254[/FONT]
[FONT=Verdana, sans-serif]Buy Avge:.............. £23,010.... £26,043 [/FONT]
[FONT=Verdana, sans-serif]Min Sell:............... -£19,535... -£16,571[/FONT]
[FONT=Verdana, sans-serif]Max Sell:.............. -£37,642... -£40,921[/FONT]
[FONT=Verdana, sans-serif]Sell Avge:............. -£27,173... -£26,553[/FONT]

[FONT=Verdana, sans-serif]A lot of the extra Option 3 deals are in 2008 (10 deals in 2008)[/FONT]

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[FONT=Verdana, sans-serif]it would certainly have been psychologically difficult to keep keep buying more equities in 2008, as they fell and then fell again. whatever this may be, it's not an easy strategy to follow.[/FONT]

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I would add the following cautions:[/FONT]

[FONT=Verdana, sans-serif]1 – My maths, are they correct? Anyone care to check?[/FONT]
[FONT=Verdana, sans-serif]2 – The future will not replicate the past.[/FONT]
[FONT=Verdana, sans-serif]3 – A different time frame or index would produce a different result/..[/FONT]

[FONT=Verdana, sans-serif]
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[FONT=Verdana, sans-serif]one thing that would be interesting would be to use a global index instead of the FTSE 100, over the same period. that would beat cash by a much larger margin.[/FONT]

[FONT=Verdana, sans-serif]i imagine that the percentage equities in option 1 would drift up so far that it would give the highest returns (by taking on more risk). which of options 2 or 3 would give higher returns, and which would be taking on more risk?
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[FONT=Verdana, sans-serif]4 – No Fund, Platform or dealing costs allowed for.[/FONT]

[FONT=Verdana, sans-serif]5 – The 3% Div and cash interest at Base +1% may be flaky estimates.[/FONT]

even if cash at base rate + 1% is about right for retail savings accounts, you wouldn't have got that with cash on a platform. so it doesn't work if you need to be ready to rebalance at any time (though i suppose you could keep only part of your cash on the platform).

another alternative would be to use bonds instead of cash.

Tom99

[FONT=Verdana, sans-serif]The period was from 2 Jan 1998 to 18th Oct 2018 so a little longer than 20 yrs.[/FONT]
[FONT=Verdana, sans-serif]The compound returns were:[/FONT]

[FONT=Verdana, sans-serif]FTSE Index + Div = 4.56%[/FONT]
[FONT=Verdana, sans-serif]Cash Index at BR+1% = 3.96%[/FONT]
[FONT=Verdana, sans-serif]Option 1 on £300k = 4.27%[/FONT]
[FONT=Verdana, sans-serif]Option 2 on £300k = 4.60%[/FONT]
[FONT=Verdana, sans-serif]Option 3 on £300k = 4.78%[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]The percentage in equities:[/FONT]
…[FONT=Verdana, sans-serif]................Option 1 …...Option 2....... Option 3[/FONT]
[FONT=Verdana, sans-serif]Start:............ 50.0%...... 50.0%........ 50.0%[/FONT]
[FONT=Verdana, sans-serif]Min:.............. 32.7%...... 44.0%........ 41.7%[/FONT]
[FONT=Verdana, sans-serif]Max:.............. 55.7% .... 55.7%........ 57.1%[/FONT]
[FONT=Verdana, sans-serif]End:............. 53.0%...... 50.4%........ 46.4%[/FONT]

[FONT=Verdana, sans-serif]The min figure of 32.7% for Option 1 was on 3rd Mar 2009 when the Index had dropped to 3,512. On that same day Option 2 had 44.6% and Option 3 53.0%.[/FONT]
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short_butt_sweet wrote: »

[FONT=Verdana, sans-serif]
it would certainly have been psychologically difficult to keep keep buying more equities in 2008, as they fell and then fell again. whatever this may be, it's not an easy strategy to follow.[/FONT]

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[FONT=Verdana, sans-serif]Its not just buy deals Option 3 triggered in 2008. In Oct 2008 over a 9 days period there were 4 deals:[/FONT]

[FONT=Verdana, sans-serif]Buy £41,254[/FONT]
[FONT=Verdana, sans-serif]Sell £26,025[/FONT]
[FONT=Verdana, sans-serif]Buy £28,681[/FONT]
[FONT=Verdana, sans-serif]Sell £25,059[/FONT]
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[/FONT][FONT=Verdana, sans-serif]You would need a strong stomach to follow that through.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]I have assumed you would be invested in a fund so a deal triggered on one day would get actioned the next, but even that can catch you out.[/FONT]

[FONT=Verdana, sans-serif]The Index fell by 8.85% on 10th Oct 2008 triggering a buy but the next business day, when the buy was actioned the index had risen by 8.26%!

short_butt_sweet wrote: »

[FONT=Verdana, sans-serif]one thing that would be interesting would be to use a global index instead of the FTSE 100, over the same period. that would beat cash by a much larger margin.[/FONT]

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[FONT=Verdana, sans-serif]Yes that would be interesting but I don't think the data is available. You would need daily prices for a world ACC fund.

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