33% domestic stocks bias

masonic

itwasntme001 said:

masonic said:

I can't help but feel that this extreme definition of "free lunch" makes the term meaningless. Which is fine, because I didn't introduce it into the discussion and have no issue with dispensing with it, but I don't think anything in the real world has no cost at all under all scenarios. I suppose you could counter with, hence TANSTAAFL.

Do you not think that some of your comments or Alexland's and that Bowlhead thread you posted, might be misconstrued to believe rebalancing is actually a free lunch with a guaranteed bonus by some people reading it?

Hell, I suspect that a whole generation of academics working on portfolio theory, efficient frontier, rebalancing in the late 20th century might have resulted in a persistant risk premium of sorts in equities, which has in more recent years unravelled to produce above average returns.  At what cost to long term patient investors?  Or indeed benefit for more newer investors?

Can I remind you that you introduced the term "free lunch" and started using it in a manner contrary to its standard meaning in finance, which has led to some confusion. There is always a risk that technical discussions might be misconstrued by those who don't fully comprehend the nuances, but I don't think anyone reading my posts in good faith could reasonably misunderstand my point. I used phrases like "can give one an edge" and noted that while diversification is also widely described as a free lunch, "it too doesn't always work".

You mentioned a "cost" to long-term patient investors, but you are conflating opportunity cost (the result of not picking the single winning asset in hindsight) with actual cost (an increase in risk or loss of capital). In reality, patient investing and rebalancing are complementary. Rebalancing is the tool that enables patience - it ensures a portfolio doesn't drift into a risk profile the investor never agreed to. The true "cost" of not rebalancing is the uncompensated risk of becoming overweight in a single asset class that is overdue for mean reversion.

Your suggestion that rebalancing strategies have "unravelled" in more recent years treats them like a market fad or a crowded trade. That isn't the case. They exploit a mathematical property of non-correlated assets. That hasn't unravelled, it has simply been overshadowed by a historic, 15-year momentum run in US tech. Using a period of extreme pricing to perfection to argue against rebalancing is a classic case of recency bias.

The most dangerous thing anyone could take away from this exchange is that the notion that the recent trend will continue.

Alexland

itwasntme001 said:

Do you not think that some of your comments or Alexland's and that Bowlhead thread you posted, might be misconstrued to believe rebalancing is actually a free lunch with a guaranteed bonus by some people reading it?

I don't know how people might misconstrue things but maintaining a diversified portfolio means you usually get more return for the amount of risk (the cost of investing) you take because of the alchemy of blending low corelation assets together. That's the point of all the academic work.

itwasntme001 said:

Hell, I suspect that a whole generation of academics working on portfolio theory, efficient frontier, rebalancing in the late 20th century might have resulted in a persistant risk premium of sorts in equities, which has in more recent years unravelled to produce above average returns.  At what cost to long term patient investors?  Or indeed benefit for more newer investors?

Equities tend to be more volatile because their future outcomes are usually less certain than fixed income so are likely to move more wildly in price as the pendulum swings between unsustainable optimism and unjustified pessimism (according to Ben Graham) and that would be the same regardless of if those ideas had been developed or not. It's rebalancing that causes people to sell high and buy low arguably reducing market volatility.

itwasntme001

masonic said:

itwasntme001 said:

masonic said:

I can't help but feel that this extreme definition of "free lunch" makes the term meaningless. Which is fine, because I didn't introduce it into the discussion and have no issue with dispensing with it, but I don't think anything in the real world has no cost at all under all scenarios. I suppose you could counter with, hence TANSTAAFL.

Do you not think that some of your comments or Alexland's and that Bowlhead thread you posted, might be misconstrued to believe rebalancing is actually a free lunch with a guaranteed bonus by some people reading it?

Hell, I suspect that a whole generation of academics working on portfolio theory, efficient frontier, rebalancing in the late 20th century might have resulted in a persistant risk premium of sorts in equities, which has in more recent years unravelled to produce above average returns.  At what cost to long term patient investors?  Or indeed benefit for more newer investors?

Can I remind you that you introduced the term "free lunch" and started using it in a manner contrary to its standard meaning in finance, which has led to some confusion. There is always a risk that technical discussions might be misconstrued by those who don't fully comprehend the nuances, but I don't think anyone reading my posts in good faith could reasonably misunderstand my point. I used phrases like "can give one an edge" and noted that while diversification is also widely described as a free lunch, "it too doesn't always work".

You mentioned a "cost" to long-term patient investors, but you are conflating opportunity cost (the result of not picking the single winning asset in hindsight) with actual cost (an increase in risk or loss of capital). In reality, patient investing and rebalancing are complementary. Rebalancing is the tool that enables patience - it ensures a portfolio doesn't drift into a risk profile the investor never agreed to. The true "cost" of not rebalancing is the uncompensated risk of becoming overweight in a single asset class that is overdue for mean reversion.

Your suggestion that rebalancing strategies have "unravelled" in more recent years treats them like a market fad or a crowded trade. That isn't the case. They exploit a mathematical property of non-correlated assets. That hasn't unravelled, it has simply been overshadowed by a historic, 15-year momentum run in US tech. Using a period of extreme pricing to perfection to argue against rebalancing is a classic case of recency bias.

The most dangerous thing anyone could take away from this exchange is that the notion that the recent trend will continue.

You mention earlier that "when rebalancing bonus happens, it is a free lunch".  You might not have introduced the term free lunch, but you are using it in a way that might be misleading to someone.

The same sentences can be intepreted differently by different people.  I might have misinterpreted yours.  But I think we are on the same page in that rebalancing is not a guarantee of out-performance.

We are talking about two strategies, rebalancing and drifting, and we need to be clear what we are measuring exactly.  Is it outright performance?  Is it risk adjusted performance?  Is it portoflio risk?  When some of the posts (not yours specifically) talk about rebalancing bonus or free lunches or "when rebalancing bomus happens, it is a free lunch", this to me suggests that the poster is talking about outright performance.

I am not suggesting rebalancing strategies have unravelled.  I am merely suggesting that I suspect the late 20th century and early 21st might have seen a period where academic work on portfolio theory and efficient frontiers and rebalancing have influeced real world investor portfolio strategies, resulting in a persistant high risk premium (until more recently).  Not suggesting that this or that is a fad.  Rebalancing might be more favourable going forward.  Who knows.  Believe me, I am not one to think recent trends continue indefinately.

While I agree that mathmatically, uncorrelated (or even negatively correlated) assets in a portfolio has lower price volatility risk than a portfolio full of correlated assets, this is based on history usually and these correlations can and do break down.  We see this in equities vs bonds for example.  You can only exploit something if the mathematical property you are taking advantage of holds true in the real world - and you will never know this with certainty unless with hindsight.  But what are you trying to exploit?  Better risk adjusted performance?  Better outright performance?  How do you specifically measure the former?  The latter is not something that is guaranteed so why is it an exploit?

itwasntme001

"When a rebalancing bonus happens, it is a free lunch" is not true because for you to partake on the rebalancing bonus, you had to risk under performance vs a drifting portfolio, thus nullifying the free lunch idea.

itwasntme001

Alexland said:

itwasntme001 said:

Do you not think that some of your comments or Alexland's and that Bowlhead thread you posted, might be misconstrued to believe rebalancing is actually a free lunch with a guaranteed bonus by some people reading it?

I don't know how people might misconstrue things but maintaining a diversified portfolio means you usually get more return for the amount of risk (the cost of investing) you take because of the alchemy of blending low corelation assets together. That's the point of all the academic work.

itwasntme001 said:

Hell, I suspect that a whole generation of academics working on portfolio theory, efficient frontier, rebalancing in the late 20th century might have resulted in a persistant risk premium of sorts in equities, which has in more recent years unravelled to produce above average returns.  At what cost to long term patient investors?  Or indeed benefit for more newer investors?

Equities tend to be more volatile because their future outcomes are usually less certain than fixed income so are likely to move more wildly in price as the pendulum swings between unsustainable optimism and unjustified pessimism (according to Ben Graham) and that would be the same regardless of if those ideas had been developed or not. It's rebalancing that causes people to sell high and buy low arguably reducing market volatility.

Constructing a portfolio of uncorrelated assets and rebalancing a portfolio, can reduce portfolio risk but there is no guarantee that you get better return per unit of risk.  Some people do think there is a guarantee or a free lunch in diversification, which is obviously not true.  Some of your comments seems to suggest so but then other comments suggests not, so you might not know the difference.

masonic

itwasntme001 said:

masonic said:

itwasntme001 said:

masonic said:

I can't help but feel that this extreme definition of "free lunch" makes the term meaningless. Which is fine, because I didn't introduce it into the discussion and have no issue with dispensing with it, but I don't think anything in the real world has no cost at all under all scenarios. I suppose you could counter with, hence TANSTAAFL.

Do you not think that some of your comments or Alexland's and that Bowlhead thread you posted, might be misconstrued to believe rebalancing is actually a free lunch with a guaranteed bonus by some people reading it?

Hell, I suspect that a whole generation of academics working on portfolio theory, efficient frontier, rebalancing in the late 20th century might have resulted in a persistant risk premium of sorts in equities, which has in more recent years unravelled to produce above average returns.  At what cost to long term patient investors?  Or indeed benefit for more newer investors?

Can I remind you that you introduced the term "free lunch" and started using it in a manner contrary to its standard meaning in finance, which has led to some confusion. There is always a risk that technical discussions might be misconstrued by those who don't fully comprehend the nuances, but I don't think anyone reading my posts in good faith could reasonably misunderstand my point. I used phrases like "can give one an edge" and noted that while diversification is also widely described as a free lunch, "it too doesn't always work".

You mentioned a "cost" to long-term patient investors, but you are conflating opportunity cost (the result of not picking the single winning asset in hindsight) with actual cost (an increase in risk or loss of capital). In reality, patient investing and rebalancing are complementary. Rebalancing is the tool that enables patience - it ensures a portfolio doesn't drift into a risk profile the investor never agreed to. The true "cost" of not rebalancing is the uncompensated risk of becoming overweight in a single asset class that is overdue for mean reversion.

Your suggestion that rebalancing strategies have "unravelled" in more recent years treats them like a market fad or a crowded trade. That isn't the case. They exploit a mathematical property of non-correlated assets. That hasn't unravelled, it has simply been overshadowed by a historic, 15-year momentum run in US tech. Using a period of extreme pricing to perfection to argue against rebalancing is a classic case of recency bias.

The most dangerous thing anyone could take away from this exchange is that the notion that the recent trend will continue.

You mention earlier that "when rebalancing happens, it is a free lunch".  You might not have introduced the term free lunch, but you are using it in a way that might be misleading to someone.

I’m genuinely disappointed to see you resort to misquoting me to sustain your argument. I thought you were better than that. You’ve deleted the word "bonus" from my sentence. That word is the entire lynchpin of the statement.

A "rebalancing bonus" is a specific mathematical outcome, whereas "rebalancing" is merely the process. I never claimed the action is a guaranteed lunch, I stated that the bonus, when captured, constitutes a free lunch by the standard definition. Distorting my words to make them easier to attack - and then claiming I am the one being misleading - is a low blow.

Meanwhile, you are insisting on a definition of 'free lunch' and 'exploit' that requires 100% certainty of outperformance - a standard that exists nowhere in science or economics.

Engaging in a further line of questioning when the foundational terminology is being misquoted and redefined is pointless. I think it’s best we leave the discussion here. I'm out.

itwasntme001

masonic said:

itwasntme001 said:

masonic said:

itwasntme001 said:

masonic said:

I can't help but feel that this extreme definition of "free lunch" makes the term meaningless. Which is fine, because I didn't introduce it into the discussion and have no issue with dispensing with it, but I don't think anything in the real world has no cost at all under all scenarios. I suppose you could counter with, hence TANSTAAFL.

Do you not think that some of your comments or Alexland's and that Bowlhead thread you posted, might be misconstrued to believe rebalancing is actually a free lunch with a guaranteed bonus by some people reading it?

Hell, I suspect that a whole generation of academics working on portfolio theory, efficient frontier, rebalancing in the late 20th century might have resulted in a persistant risk premium of sorts in equities, which has in more recent years unravelled to produce above average returns.  At what cost to long term patient investors?  Or indeed benefit for more newer investors?

Can I remind you that you introduced the term "free lunch" and started using it in a manner contrary to its standard meaning in finance, which has led to some confusion. There is always a risk that technical discussions might be misconstrued by those who don't fully comprehend the nuances, but I don't think anyone reading my posts in good faith could reasonably misunderstand my point. I used phrases like "can give one an edge" and noted that while diversification is also widely described as a free lunch, "it too doesn't always work".

You mentioned a "cost" to long-term patient investors, but you are conflating opportunity cost (the result of not picking the single winning asset in hindsight) with actual cost (an increase in risk or loss of capital). In reality, patient investing and rebalancing are complementary. Rebalancing is the tool that enables patience - it ensures a portfolio doesn't drift into a risk profile the investor never agreed to. The true "cost" of not rebalancing is the uncompensated risk of becoming overweight in a single asset class that is overdue for mean reversion.

Your suggestion that rebalancing strategies have "unravelled" in more recent years treats them like a market fad or a crowded trade. That isn't the case. They exploit a mathematical property of non-correlated assets. That hasn't unravelled, it has simply been overshadowed by a historic, 15-year momentum run in US tech. Using a period of extreme pricing to perfection to argue against rebalancing is a classic case of recency bias.

The most dangerous thing anyone could take away from this exchange is that the notion that the recent trend will continue.

You mention earlier that "when rebalancing happens, it is a free lunch".  You might not have introduced the term free lunch, but you are using it in a way that might be misleading to someone.

I’m genuinely disappointed to see you resort to misquoting me to sustain your argument. I thought you were better than that. You’ve deleted the word "bonus" from my sentence. That word is the entire lynchpin of the statement.

A "rebalancing bonus" is a specific mathematical outcome, whereas "rebalancing" is merely the process. I never claimed the action is a guaranteed lunch, I stated that the bonus, when captured, constitutes a free lunch by the standard definition. Distorting my words to make them easier to attack - and then claiming I am the one being misleading - is a low blow.

Meanwhile, you are insisting on a definition of 'free lunch' and 'exploit' that requires 100% certainty of outperformance - a standard that exists nowhere in science or economics.

Engaging in a further line of questioning when the foundational terminology is being misquoted and redefined is pointless. I think it’s best we leave the discussion here. I'm out.

I actually realised I misquoted you and corrected it, as you will see if you go back to my post.

But that is besides the point as my point still stands as far as I am concerned.

Free lunches do exist in finance in the form of arbitrage opporutnities.  But they are infrequent, especially now given more efficient markets supposively.  A rebalancing bonus is not an example of a free lunch though.

eskbanker

Anyone else feeling peckish?

itwasntme001

masonic said:

itwasntme001 said:

masonic said:

itwasntme001 said:

masonic said:

I can't help but feel that this extreme definition of "free lunch" makes the term meaningless. Which is fine, because I didn't introduce it into the discussion and have no issue with dispensing with it, but I don't think anything in the real world has no cost at all under all scenarios. I suppose you could counter with, hence TANSTAAFL.

Do you not think that some of your comments or Alexland's and that Bowlhead thread you posted, might be misconstrued to believe rebalancing is actually a free lunch with a guaranteed bonus by some people reading it?

Hell, I suspect that a whole generation of academics working on portfolio theory, efficient frontier, rebalancing in the late 20th century might have resulted in a persistant risk premium of sorts in equities, which has in more recent years unravelled to produce above average returns.  At what cost to long term patient investors?  Or indeed benefit for more newer investors?

Can I remind you that you introduced the term "free lunch" and started using it in a manner contrary to its standard meaning in finance, which has led to some confusion. There is always a risk that technical discussions might be misconstrued by those who don't fully comprehend the nuances, but I don't think anyone reading my posts in good faith could reasonably misunderstand my point. I used phrases like "can give one an edge" and noted that while diversification is also widely described as a free lunch, "it too doesn't always work".

You mentioned a "cost" to long-term patient investors, but you are conflating opportunity cost (the result of not picking the single winning asset in hindsight) with actual cost (an increase in risk or loss of capital). In reality, patient investing and rebalancing are complementary. Rebalancing is the tool that enables patience - it ensures a portfolio doesn't drift into a risk profile the investor never agreed to. The true "cost" of not rebalancing is the uncompensated risk of becoming overweight in a single asset class that is overdue for mean reversion.

Your suggestion that rebalancing strategies have "unravelled" in more recent years treats them like a market fad or a crowded trade. That isn't the case. They exploit a mathematical property of non-correlated assets. That hasn't unravelled, it has simply been overshadowed by a historic, 15-year momentum run in US tech. Using a period of extreme pricing to perfection to argue against rebalancing is a classic case of recency bias.

The most dangerous thing anyone could take away from this exchange is that the notion that the recent trend will continue.

You mention earlier that "when rebalancing happens, it is a free lunch".  You might not have introduced the term free lunch, but you are using it in a way that might be misleading to someone.

Engaging in a further line of questioning when the foundational terminology is being misquoted and redefined is pointless. I think it’s best we leave the discussion here. I'm out.

That is fair enough, I had hoped we would engage more.  As mentioned I did misquote you by accident and I did correct it, prior to your post as you will see in the time stamp for edits.

You do seem too overly emotional though, over a genuine mistake, that does not even detract from my point at all.

masonic

itwasntme001 said:

masonic said:

itwasntme001 said:

masonic said:

itwasntme001 said:

masonic said:

I can't help but feel that this extreme definition of "free lunch" makes the term meaningless. Which is fine, because I didn't introduce it into the discussion and have no issue with dispensing with it, but I don't think anything in the real world has no cost at all under all scenarios. I suppose you could counter with, hence TANSTAAFL.

Do you not think that some of your comments or Alexland's and that Bowlhead thread you posted, might be misconstrued to believe rebalancing is actually a free lunch with a guaranteed bonus by some people reading it?

Hell, I suspect that a whole generation of academics working on portfolio theory, efficient frontier, rebalancing in the late 20th century might have resulted in a persistant risk premium of sorts in equities, which has in more recent years unravelled to produce above average returns.  At what cost to long term patient investors?  Or indeed benefit for more newer investors?

Can I remind you that you introduced the term "free lunch" and started using it in a manner contrary to its standard meaning in finance, which has led to some confusion. There is always a risk that technical discussions might be misconstrued by those who don't fully comprehend the nuances, but I don't think anyone reading my posts in good faith could reasonably misunderstand my point. I used phrases like "can give one an edge" and noted that while diversification is also widely described as a free lunch, "it too doesn't always work".

You mentioned a "cost" to long-term patient investors, but you are conflating opportunity cost (the result of not picking the single winning asset in hindsight) with actual cost (an increase in risk or loss of capital). In reality, patient investing and rebalancing are complementary. Rebalancing is the tool that enables patience - it ensures a portfolio doesn't drift into a risk profile the investor never agreed to. The true "cost" of not rebalancing is the uncompensated risk of becoming overweight in a single asset class that is overdue for mean reversion.

Your suggestion that rebalancing strategies have "unravelled" in more recent years treats them like a market fad or a crowded trade. That isn't the case. They exploit a mathematical property of non-correlated assets. That hasn't unravelled, it has simply been overshadowed by a historic, 15-year momentum run in US tech. Using a period of extreme pricing to perfection to argue against rebalancing is a classic case of recency bias.

The most dangerous thing anyone could take away from this exchange is that the notion that the recent trend will continue.

You mention earlier that "when rebalancing happens, it is a free lunch".  You might not have introduced the term free lunch, but you are using it in a way that might be misleading to someone.

I’m genuinely disappointed to see you resort to misquoting me to sustain your argument. I thought you were better than that. You’ve deleted the word "bonus" from my sentence. That word is the entire lynchpin of the statement.

A "rebalancing bonus" is a specific mathematical outcome, whereas "rebalancing" is merely the process. I never claimed the action is a guaranteed lunch, I stated that the bonus, when captured, constitutes a free lunch by the standard definition. Distorting my words to make them easier to attack - and then claiming I am the one being misleading - is a low blow.

Meanwhile, you are insisting on a definition of 'free lunch' and 'exploit' that requires 100% certainty of outperformance - a standard that exists nowhere in science or economics.

Engaging in a further line of questioning when the foundational terminology is being misquoted and redefined is pointless. I think it’s best we leave the discussion here. I'm out.

I actually realised I misquoted you and corrected it, as you will see if you go back to my post.

But that is besides the point as my point still stands as far as I am concerned.

Free lunches do exist in finance in the form of arbitrage opporutnities.  But they are infrequent, especially now given more efficient markets supposively.  A rebalancing bonus is not an example of a free lunch though.

Ok, I see you were editing as I was composing my response. However, now that my quote has been corrected, it is clear that it is not misleading. The inclusion of the word "bonus" is critical. This is clearly not a blanket guarantee that the act of rebalancing will lead to any specific outcome. I stated that the bonus - the extra return harvested from volatility - is a free lunch when it happens.

You are now attempting to narrow the definition of a "free lunch" strictly to arbitrage. While arbitrage is a free lunch in theory, even that would fail your strict definition in practice. Real-world arbitrage is subject to execution, liquidity, and counterparty risks, meaning it is rarely guaranteed under all scenarios. When Markowitz called diversification "the only free lunch in finance", he wasn't talking about riskless arbitrage, he was talking about the structural improvement of risk-adjusted returns. A rebalancing bonus falls into that same category of structural efficiency.

itwasntme001 said:

That is fair enough, I had hoped we would engage more.  As mentioned I did misquote you by accident and I did correct it, prior to your post as you will see in the time stamp for edits.

You do seem too overly emotional though, over a genuine mistake, that does not even detract from my point at all.

My response wasn't emotional, it was a firm correction based on the fact that your point relied on the misquote. The distinction absolutely detracts from your point, as I have set out above.