Schlenkler’s investment principles

[Deleted User]

Secret2ndAccount said:

A thought regarding the 'efficient markets' assumption. Even if you believe that markets quickly achieve 100% efficiency in reflecting risk/reward, that efficiency is based on a different expenses basis available to the large players who dominate the market. It might be worthwhile for a large institution to hold a bond that pays 0.5% because it's costs are almost zero. To someone paying 1% per year in fees, the risk reward of a 0.5% bond is not the same as holding a higher risk/higher reward equity - you need some growth (and therefore some risk) to pay the fees.

Your personal definition of a 100% efficient market is not the same as the market's definition

Today paying 1% a year in fees for anything is just wrong. 

Bonds are particularly sensitive to ongoing charges... They can be purchased directly, if you have enough dosh. I wouldn’t pay more than 0.05% for an asset with expected return below inflation. 

Prism

Deleted_User said:

Secret2ndAccount said:

A thought regarding the 'efficient markets' assumption. Even if you believe that markets quickly achieve 100% efficiency in reflecting risk/reward, that efficiency is based on a different expenses basis available to the large players who dominate the market. It might be worthwhile for a large institution to hold a bond that pays 0.5% because it's costs are almost zero. To someone paying 1% per year in fees, the risk reward of a 0.5% bond is not the same as holding a higher risk/higher reward equity - you need some growth (and therefore some risk) to pay the fees.

Your personal definition of a 100% efficient market is not the same as the market's definition

Today paying 1% a year in fees for anything is just wrong. 

Bonds are particularly sensitive to ongoing charges... They can be purchased directly, if you have enough dosh. I wouldn’t pay more than 0.05% for an asset with expected return below inflation. 

I am ok with paying 1% for equity funds and hold a few around that mark. I try and stick to less than 0.2% for bond funds although to be fair I don't have any at the moment.

Secret2ndAccount

Deleted_User said:

Today paying 1% a year in fees for anything is just wrong. 

Bonds are particularly sensitive to ongoing charges... They can be purchased directly, if you have enough dosh. I wouldn’t pay more than 0.05% for an asset with expected return below inflation. 

Plenty of people with IFA's will be paying 1% in total charges. Even if you just hold VLS20 you are paying 0.22%

Yes, I'm at 0.05% for my equities and fixed income, though I hold some managed funds too which have extra charges.

itwasntme001

Deleted_User said:

itwasntme001 said:

Deleted_User said:

Diversification reduces the risk of major losses without reducing expected returns.  It is a good thing. 

It's important to realise diversification AND rebalancing is what gets you the superior expected returns for less risk.  If there is no rebalancing, its pretty much a coin toss whether or not diversification is of benefit.

If you have a bond and stock portfolio and do no rebalancing, if bonds do better than equities over the long term, your diversified portfolio will do better than 100% stocks but do worse than 100% bonds.  With rebalancing, you take away those coin toss odds such that it becomes less about chance.

Diversification and rebalancing are the only free lunches to a long term investor.

Not correct. Rebalancing reduces returns and certainty does not improve them. But it does keep your asset allocation on target. Without rebalancing your investment would drift to equity and expected returns would improve. You also benefit more from momentum. Bonds are not expected to outperform equity in the long term. 

Diversification within the equity portfolio reduces volatility without reducing expected returns. 

Just going back to this, if you are trying to diversify in order to reduce volatility without reducing expected return, it then does not make any sense to not rebalance.  Because otherwise you are just moving up the efficient frontier (or possibly even below which is obviously inefficient) over time which means you are actually becoming less diversified and introducing more volatility whilst increasing your expected return.  You have effectively become a momentum trader.  A market timer in other words.  You can't have it both ways.

[Deleted User]

I rebalance when its called for. Which is very rare, at least in my case.  Merely commented on your suggestion that  “rebalancing is what gets you the superior expected returns for less risk.” Rebalancing does not do that. It keeps your allocations where you want them, that is all. 

[Deleted User]

I have run some exercises on rebalancing investments over the last10/20 years and found a very limited number of cases where the net effect is positive. There may be some psychological benefit but the bottom line is harmed, from results so far.

MK62

In a rising equity market, rebalancing will generally reduce returns......but the equity market doesn't always rise.......
It's a bit of a blanket statement anyway, as it's also going to depend on how often any rebalancing is done, and exactly when (ie the trigger for doing it)...

It works the other way too though, if you'd rebalanced a typical 60:40 equity/bond portfolio following the big equity falls back in March, you'd have made much better returns since than if you'd left it alone.......

[Deleted User]

MK62 said:

In a rising equity market, rebalancing will generally reduce returns......but the equity market doesn't always rise.......

Surprisingly (for me at least) rebalancing will generally reduce returns in a falling market too.

[Deleted User]

ZingPowZing said:

MK62 said:

In a rising equity market, rebalancing will generally reduce returns......but the equity market doesn't always rise.......

Surprisingly (for me at least) rebalancing will generally reduce returns in a falling market too.

Momentum.  It all depends on how often you rebalance and if you monitor your short term returns. The key points are that:
- rebalancing should be rare by design to allow some benefits from momentum and
- rebalancing isn’t for enhancing returns. Has a different purpose.

Thrugelmir

MK62 said:

In a rising equity market, rebalancing will generally reduce returns......but the equity market doesn't always rise.......

Which equity market though. Often people speak as if there's only one.