Really bad days (RBDs) and porfolio performance

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slickwillbo
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Really bad days (RBDs) and porfolio performance

Post by slickwillbo » Fri Jul 01, 2016 9:56 am

livesoft and I were having a discussion on RBD (really bad day) strategy in another thread, and I thought I'd post my final thoughts there. To see how the RBD strategy might work in practice with a traditional balanced stock/bond portfolio, I made the following portfolios:

Continuous: 60% Vanguard 500 index (VFINX), 40% Vanguard total bond (VBMFX). Portfolio is rebalanced daily to maintain this allocation.
+5% stocks on livesoft-defined RBDs: Baseline of 60% VFINX, 40% VBMFX. VFINX allocation is increased by an absolute 5% after a livesoft-defined RBD, and maintained for 30 trading days. Rebalanced daily to maintain this allocation.
+5% stocks on all RBDs: Baseline of 60% VFINX, 40% VBMFX. VFINX allocation is increased by an absolute 5% after any RBD, and maintained there for 30 trading days. Rebalanced daily to maintain this allocation.

I chose VFINX and VBMFX due to their common use and long available history. The growth of $10,000 of these three portfolios is shown below:

Image


A livesoft-defined RBD meets all of these criteria:
1) VFINX drop of 2.5% or more
2) Drop greater than the 4th largest drop within the previous 150 days
3) Not a Friday

An RBD in 'all RBDs' meets only criteria (1) above.

The fine print:
Portfolio values are initialized on July 20, 1987, which is the first day that 150-day histories are available for both funds. Portfolio values are current as of June 30, 2016. Data are from Yahoo! Finance, using the adjusted closing price (adjusted for splits and dividends). All transactions are assumed to occur at the closing price of each day.
Last edited by slickwillbo on Fri Jul 01, 2016 10:23 am, edited 1 time in total.

rbaldini
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Re: The DL on RBDs

Post by rbaldini » Fri Jul 01, 2016 10:00 am

Good to see the "expected returns are not greater after short-term drops" argument demonstrated another way.

livesoft
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Re: The DL on RBDs

Post by livesoft » Fri Jul 01, 2016 10:04 am

Good stuff! It tells me that I don't want to hold for 30-days after an RBD. Also it tells me that I don't want to use the S&P500.

As for the continuous 60/40 daily-rebalanced, does the green line match Vanguard's VBIAX 60/40 balanced fund which presumably offers something close to daily rebalancing?
Last edited by livesoft on Fri Jul 01, 2016 10:12 am, edited 1 time in total.
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chx
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Re: The DL on RBDs

Post by chx » Fri Jul 01, 2016 10:11 am

slickwillbo wrote:livesoft and I were having a discussion on RBD strategy in another thread, and I thought I'd post my final thoughts there. To see how the RBD strategy might work in practice with a traditional balanced stock/bond portfolio, I made the following portfolios:

Continuous: 60% Vanguard 500 index (VFINX), 40% Vanguard total bond (VBMFX). Portfolio is rebalanced daily to maintain this allocation.
+5% stocks on livesoft-defined RBDs: Baseline of 60% VFINX, 40% VBMFX. VFINX allocation is increased by an absolute 5% after a livesoft-defined RBD, and maintained for 30 trading days. Rebalanced daily to maintain this allocation.
+5% stocks on all RBDs: Baseline of 60% VFINX, 40% VBMFX. VFINX allocation is increased by an absolute 5% after any RBD, and maintained there for 30 trading days. Rebalanced daily to maintain this allocation.

I chose VFINX and VBMFX due to their common use and long available history. The growth of $10,000 of these three portfolios is shown below:

Image


A livesoft-defined RBD meets all of these criteria:
1) VFINX drop of 2.5% or more
2) Drop greater than the 4th largest drop within the previous 150 days
3) Not a Friday

An RBD in 'all RBDs' meets only criteria (1) above.

The fine print:
Portfolio values are initialized on July 20, 1987, which is the first day that 150-day histories are available for both funds. Portfolio values are current as of June 30, 2016. Data are from Yahoo! Finance, using the adjusted closing price (adjusted for splits and dividends). All transactions are assumed to occur at the closing price of each day.
What do DL and RBD stand for?

slickwillbo
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Re: The DL on RBDs

Post by slickwillbo » Fri Jul 01, 2016 10:22 am

chx wrote:
What do DL and RBD stand for?
Hi chx,

I probably should've made that more clear :happy

RBD is "really bad day," a term thrown around here for days when investments perform poorly.
DL is a term for something that's a secret. I'll change the title to make it more clear.

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Re: The DL on RBDs

Post by rbaldini » Fri Jul 01, 2016 10:28 am

slickwillbo wrote:
chx wrote:
What do DL and RBD stand for?
Hi chx,

I probably should've made that more clear :happy

RBD is "really bad day," a term thrown around here for days when investments perform poorly.
DL is a term for something that's a secret. I'll change the title to make it more clear.
DL = the "down low"

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Re: Really bad days (RBDs) and porfolio performance

Post by ray.james » Fri Jul 01, 2016 12:06 pm

Thanks Willbo for the analysis. Interesting graph.

Looking at the graph carefully RBD did work until there is prolonged RBD or lets call it RBM - really bad month and a full blown recession?

What is the expectation if there is a second RBD before it was re balanced back? Does it add another 5% or keep the allocation for further 30 days?
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

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Re: Really bad days (RBDs) and porfolio performance

Post by edge » Fri Jul 01, 2016 12:23 pm

Yes. As I have said for years: it works when it doesn't matter. The rbd thing is just a way for a bored retiree to fiddle around.
ray.james wrote:Thanks Willbo for the analysis. Interesting graph.

Looking at the graph carefully RBD did work until there is prolonged RBD or lets call it RBM - really bad month and a full blown recession?

What is the expectation if there is a second RBD before it was re balanced back? Does it add another 5% or keep the allocation for further 30 days?
Last edited by edge on Fri Jul 01, 2016 7:56 pm, edited 1 time in total.

Dulocracy
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Re: Really bad days (RBDs) and porfolio performance

Post by Dulocracy » Fri Jul 01, 2016 12:26 pm

slickwillbo wrote:livesoft and I were having a discussion on RBD (really bad day) strategy in another thread....
Thank you for your analysis, but this is a discussion of apples and oranges. Because most of us do not rebalance our portfolios on a daily basis (nor does my 401k allow such a thing, to my knowledge), this is a bad comparison. An apples to apples comparison would be a portfolio rebalanced annually compared to one rebalanced after really bad days. Here, what we have is a comparison for a very active account changes based on daily changes in the markets vs. really bad day rebalancing.
rbaldini wrote:Good to see the "expected returns are not greater after short-term drops" argument demonstrated another way.
As pointed out above, that is not what we have here. What we do have here is a comparison between an active strategy of rebalancing on larger short term drops vs an even more active strategy of constant rebalancing based on every single short term drop in either bonds or stocks... taking advantage of even smaller dips. An apples to apples comparison would be either: consistently putting money into ones asset allocation and never rebalancing (to give you that continued investing you speak of) OR annual rebalancing on a set date regardless of the market conditions.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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Re: Really bad days (RBDs) and porfolio performance

Post by Da5id » Fri Jul 01, 2016 12:29 pm

Dulocracy wrote: Thank you for your analysis, but this is a discussion of apples and oranges. Because most of us do not rebalance our portfolios on a daily basis (nor does my 401k allow such a thing, to my knowledge), this is a bad comparison.
Many in fact continuously re-balance, by virtue of owning balanced or target date funds in their 401ks...

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Re: Really bad days (RBDs) and porfolio performance

Post by rbaldini » Fri Jul 01, 2016 12:30 pm

Dulocracy wrote:
rbaldini wrote:Good to see the "expected returns are not greater after short-term drops" argument demonstrated another way.
As pointed out above, that is not what we have here. What we do have here is a comparison between an active strategy of rebalancing on larger short term drops vs an even more active strategy of constant rebalancing based on every single short term drop in either bonds or stocks... taking advantage of even smaller dips. An apples to apples comparison would be either: consistently putting money into ones asset allocation and never rebalancing (to give you that continued investing you speak of) OR annual rebalancing on a set date regardless of the market conditions.
What we have is (1) a strategy that simply seeks to maintain a constant balance of 60/40 and (2) a strategy that is willing to go 65/35 (i.e. more stocks) for 30 days after bad days (well, two versions of this, but the motivation is the same). Strategy (2) would make sense if short-term returns to stocks after really bad days were greater than otherwise - you'd be putting more of your money into something with even-better return. They aren't, so it doesn't.

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Re: Really bad days (RBDs) and porfolio performance

Post by Dulocracy » Fri Jul 01, 2016 1:13 pm

Da5id wrote:
Dulocracy wrote: Thank you for your analysis, but this is a discussion of apples and oranges. Because most of us do not rebalance our portfolios on a daily basis (nor does my 401k allow such a thing, to my knowledge), this is a bad comparison.
Many in fact continuously re-balance, by virtue of owning balanced or target date funds in their 401ks...
... and this is a great post for arguing that balanced and target date funds have an advantage over even the RBD strategy, but especially over annual rebalancing. For those of us without the option of owning a balanced or target date fund, it is quite misleading to say that this disproves the RBD strategy for rebalancing. Apples to apples comparison for THAT should be, as I described, an annual rebalancing vs. RBD rebalancing. One must look at it in the way of what a person would actually do. Unless you are suggesting that I rebalance my 401k on a daily basis (which I cannot and will not do), the above analysis is not an apples to apples comparison in determining whether the RBD strategy of rebalancing is a good one.
rbaldini wrote: What we have is (1) a strategy that simply seeks to maintain a constant balance of 60/40 and (2) a strategy that is willing to go 65/35 (i.e. more stocks) for 30 days after bad days (well, two versions of this, but the motivation is the same). Strategy (2) would make sense if short-term returns to stocks after really bad days were greater than otherwise - you'd be putting more of your money into something with even-better return. They aren't, so it doesn't.
Again, what we have is a BAD comparison, as it requires me to go into my 401k and rebalance daily. In the real world, people do not do this. Certainly, as the above poster pointed out, a balanced fund may get a better return than a RBD strategy, but that is not what we are discussing. We are discussing when an individual rebalances between funds, not a fund that automatically rebalances itself daily. That is not the discussion at hand.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.

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Re: Really bad days (RBDs) and porfolio performance

Post by Da5id » Fri Jul 01, 2016 1:16 pm

Is it possible to add other rebalancing strategies to the graph? In particular the relatively popular in boglehead threads 5/25% one (really just 5% here, as there are no small asset classes)?

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Re: The DL on RBDs

Post by jjface » Fri Jul 01, 2016 1:28 pm

livesoft wrote:Good stuff! It tells me that I don't want to hold for 30-days after an RBD. Also it tells me that I don't want to use the S&P500.

As for the continuous 60/40 daily-rebalanced, does the green line match Vanguard's VBIAX 60/40 balanced fund which presumably offers something close to daily rebalancing?
VBINX was started in 1992 and vbiax after that in 2000 unfortunately.

You should get more out of the rebalanced portfolio if you rebalance say annually or with bands. Portfoliovizualizer says so but you can't set precise dates so I just put in 1987 - 2016.

Rebalance
a) annually $121,337
b) monthly $118,774
c) bands 5/25 $125,492

There is no daily option

Why must you hold the extra equities for 30 days with the RBD strategy? Also you ignore the benefits of tax loss harvesting as presumably livesoft would be TLH on some RBDs. Also switching between funds (from one that is high to one that is low) rather than just increasing equities.

But it does highlight that you probably have to be as dedicated as livesoft to get any value out of it - I assume livesoft is making money off this so the theory above is a bit simplistic.
Last edited by jjface on Fri Jul 01, 2016 1:39 pm, edited 4 times in total.

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Re: Really bad days (RBDs) and porfolio performance

Post by greg24 » Fri Jul 01, 2016 1:32 pm

slickwillbo wrote:l+5% stocks on livesoft-defined RBDs: Baseline of 60% VFINX, 40% VBMFX. VFINX allocation is increased by an absolute 5% after a livesoft-defined RBD, and maintained for 30 trading days. Rebalanced daily to maintain this allocation.
Does livesoft recommend as part of his RBD strategy that you increase the VFINX allocation by an absolute 5% and maintained for 30 days?

If so, I missed it.

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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Fri Jul 01, 2016 1:38 pm

Dulocracy wrote:
Da5id wrote:
Dulocracy wrote: Thank you for your analysis, but this is a discussion of apples and oranges. Because most of us do not rebalance our portfolios on a daily basis (nor does my 401k allow such a thing, to my knowledge), this is a bad comparison.
Many in fact continuously re-balance, by virtue of owning balanced or target date funds in their 401ks...
... and this is a great post for arguing that balanced and target date funds have an advantage over even the RBD strategy, but especially over annual rebalancing.
I agree that the balanced, target date, and LifeStrategy funds which keep a steady asset allocation without behavioral issues are fantastic. They provide a valid benchmark to compare to. Many times when YTD or other performance returns are asked about many people say "What for? I have a 3-fund portfollio and don't need to compare." I think if they did compare, they might be surprised at how their portfolio does compared to an all-in-one fund similar to their portfolio.
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livesoft
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Re: The DL on RBDs

Post by livesoft » Fri Jul 01, 2016 1:42 pm

jjface wrote:Why must you hold the extra equities for 30 days with the RBD strategy? Also you ignore the benefits of tax loss harvesting as presumably livesoft would be TLH on some RBDs. Also switching between funds (from one that is high to one that is low) rather than just increasing equities.

But it does highlight that you probably have to be as dedicated as livesoft to get any value out of it - I assume livesoft is making money off this so the theory above is a bit simplistic.
The 30 days is the way slickwillbo built their spreadsheet. I don't have this 30 day thing as part of what I do. Nevertheless, slickwillbo has provided a great contribution to bogleheads.org.
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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Fri Jul 01, 2016 1:44 pm

greg24 wrote:
slickwillbo wrote:l+5% stocks on livesoft-defined RBDs: Baseline of 60% VFINX, 40% VBMFX. VFINX allocation is increased by an absolute 5% after a livesoft-defined RBD, and maintained for 30 trading days. Rebalanced daily to maintain this allocation.
Does livesoft recommend as part of his RBD strategy that you increase the VFINX allocation by an absolute 5% and maintained for 30 days?

If so, I missed it.
No, I have not made those recommendations. I wonder though if as part of risk management whether the amount used in the purchases of equities might be variable such as less when the drop is small and more when the drop is large. The possiblities are endless. :)
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Re: The DL on RBDs

Post by jjface » Fri Jul 01, 2016 1:53 pm

livesoft wrote:
jjface wrote:Why must you hold the extra equities for 30 days with the RBD strategy? Also you ignore the benefits of tax loss harvesting as presumably livesoft would be TLH on some RBDs. Also switching between funds (from one that is high to one that is low) rather than just increasing equities.

But it does highlight that you probably have to be as dedicated as livesoft to get any value out of it - I assume livesoft is making money off this so the theory above is a bit simplistic.
The 30 days is the way slickwillbo built their spreadsheet. I don't have this 30 day thing as part of what I do. Nevertheless, slickwillbo has provided a great contribution to bogleheads.org.
This is an interesting thread for sure. I think that most people are not going to eek out the gains that some of the more skilled (lucky?) members are likely to achieve.
Last edited by jjface on Fri Jul 01, 2016 2:04 pm, edited 1 time in total.

slickwillbo
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Re: Really bad days (RBDs) and porfolio performance

Post by slickwillbo » Fri Jul 01, 2016 1:59 pm

To answer a few of the questions:

@greg24, @Dulocracy: I don't know exactly what livesoft does, but he has mentioned that he increases his stock allocation in response to RBDs. I'm using 5%/30 days just as a guideline because I like round numbers. You are welcome to play with the data yourself. I'm sure we could all find some data point to support our preconceived biases :D

@Dulocracy: As Da5id has mentioned, if you hold a lifestrategy or target retirement fund, you hold a daily-rebalancing portfolio.

@Dulocracy: Annual rebalancing would make a bad comparison, as whichever date I picked would inevitably skew the results for such a short dataset.

@jjface: I showed in another thread (viewtopic.php?f=10&t=194169), that livesoft's RBD definition is particularly bad from a historical perspective. You are much better off buying on any -2.5% dip than his particular definition of a RBD. I don't have any reason to assume he's lying to us about his gains, but his strategy backtests quite poorly (at least from the perspective I describe here).

Finally, by popular demand, I have added two rebalancing scenarios to the new graph: first, rebalancing to 60/40 when allocations are more than an absolute 5% off, and secondly, rebalancing (but not increasing stock allocation) on a livesoft RBD:

Image

Finally, I will point out that of course, no comparison is perfect. We could all probably find some data to support whatever we believe. I've tried to present as unbiased view of the data as is possible. My personal opinions are:

1) It doesn't really matter what method you use to rebalance.
2) Rebalancing on drops may provide a benefit; however, it's likely not statistically significant. For me personally, I ain't got time for that.
3) Increasing equity allocations on a RBD (particularly by livesoft's definition) will crush you during an extended market downturn.

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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Fri Jul 01, 2016 2:04 pm

Thanks for the new purple plot. :)
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Re: Really bad days (RBDs) and porfolio performance

Post by slickwillbo » Fri Jul 01, 2016 2:15 pm

livesoft wrote:Thanks for the new purple plot. :)
You didn't tell me your favorite color, so I had to guess :D

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Re: Really bad days (RBDs) and porfolio performance

Post by triceratop » Fri Jul 01, 2016 2:24 pm

This thread is awesome. I think the skepticism around livesoft's method is warranted, but I don't doubt that he does very well with it.

Of course, livesoft is a well-known slice and dicer. I bet he has more success with the more volatile components like VBR, VSS, and VXUS than with the plain old S&P500.
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Re: Really bad days (RBDs) and porfolio performance

Post by Da5id » Fri Jul 01, 2016 2:29 pm

I'm a bit surprised that the 5% band does worse than continuous. The Vanguard paper on rebalancing (https://www.vanguard.com/pdf/icrpr.pdf) indicates that for 5% bands evaluated daily the average stock percentage is 61.7% for a 60/40 portfolio from 1989-2009 (not same period, I know). Because of the general upward trend of the market, you are more likely to drift to the higher end of the band before having to re-adjust. If I'm understanding the result in the graph, a 60% stock allocation has a higher return than a 61.7% allocation over the covered (long) period. Am I missing something? Is it really true?
Last edited by Da5id on Fri Jul 01, 2016 2:33 pm, edited 2 times in total.

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Re: Really bad days (RBDs) and porfolio performance

Post by Dulocracy » Fri Jul 01, 2016 2:31 pm

[quote="slickwillbo"]To answer a few of the questions:

@greg24, @Dulocracy: I don't know exactly what livesoft does, but he has mentioned that he increases his stock allocation in response to RBDs. I'm using 5%/30 days just as a guideline because I like round numbers. You are welcome to play with the data yourself. I'm sure we could all find some data point to support our preconceived biases :D

Now you can see with the purple plot. Apparently, Livesoft beats the daily rebalancing.

@Dulocracy: As Da5id has mentioned, if you hold a lifestrategy or target retirement fund, you hold a daily-rebalancing portfolio.

That is what I said. I agree. It is not a good example to use for someone who does not have access to an all-in-one fund who is trying to decide between Lifesoft's RBD strategy and annual rebalancing.

@Dulocracy: Annual rebalancing would make a bad comparison, as whichever date I picked would inevitably skew the results for such a short dataset.

But if an individual is making a choice between annual rebalancing and RBD strategy, they usually pick one day of the year. If you have money in taxable that has to be sold, you want to own it more than a year. 13 month rebalancing is common for those with larger taxable accounts (which brings up other issues for RBD, as well). The point is, if you are choosing between strategies, you have to use data that correlates with what the individuals would actually be doing.

I would not alter my asset allocation on a RBD in the way that livesoft does. Apparently, in a huge downturn, my not doing that would be advantageous. My point is not that every individual RBD strategy would work. My point is that there are ways of incorporating RBD in a way that benefits (though, as you point out, only marginally) a portfolio. I think that through discussion, we can see both the up and down sides of RBD so that people can better evaluate it. To discount the idea of RBD as a trigger for investing or rebalancing without exploring how it can be beneficial, however, is not productive.

Also, the @ sign does not notify people. If you want someone to be able to respond, quote them and respond to their quote. Or just quote a period they wrote. That is the way to notify them of a response. (Unless you are trying to respond without their being able to respond back.) :twisted:
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Re: Really bad days (RBDs) and porfolio performance

Post by PeteyDink » Fri Jul 01, 2016 2:46 pm

This "study" and the conclusions are trite because it's evaluating basically one strategy that enforces an arbitrary 30 day allocation plus daily rebalancing (who does that?).

Evaluate rebalancing on RBDs and then one time annually to get a better look at this question.

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Re: Really bad days (RBDs) and porfolio performance

Post by Da5id » Fri Jul 01, 2016 2:52 pm

PeteyDink wrote:This "study" and the conclusions are trite because it's evaluating basically one strategy that enforces an arbitrary 30 day allocation plus daily rebalancing (who does that?).
This study is a useful contribution IMHO, vastly more so than many posts... Thanks to OP.

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Re: Really bad days (RBDs) and porfolio performance

Post by slickwillbo » Fri Jul 01, 2016 3:02 pm

PeteyDink wrote:This "study" and the conclusions are trite because it's evaluating basically one strategy that enforces an arbitrary 30 day allocation plus daily rebalancing (who does that?).

Evaluate rebalancing on RBDs and then one time annually to get a better look at this question.
I included rebalancing bands and rebalancing on RBDs in the second graph, if you missed it. I also answered your question on annual rebalancing above. Over this short period, the results for rebalancing annually will dramatically depend on which day you choose.

And I have to enforce some allocation after a shift. Most posts on the internet helpfully explain that they buy on the dips and then sell when they go up. While that may or may not be true, I have to pick some time period.

Anyway, you are welcome to ignore the results if you like.

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Re: Really bad days (RBDs) and porfolio performance

Post by boglephreak » Fri Jul 01, 2016 3:03 pm

i read this as meaning if you buy on a RBD, and it goes up within the next week, you CANNOT sell to rebalance because of the arbitrary 30 day allotment.

on the other end, do you have to sell at 30 days, or can you wait 35/50/365 days?

for the former, i though livesoft sold a day or two after the Brexit RBD to lock in the gains, not held.

for the latter, i would assume that someone who is paying attention enough to buy on RBD would sell when its beneficial, not on some arbitrary timeline. in which case, the 30 day puts a lot of limitations on how returns should be measured.

seems a litlle unfair to "call out" livesoft's method, but not address what he actually does. he doesnt seem upset in the least bit by this thread though so i wont be upset for him.

very interesting discussion both in this thread and the others i have seen you two discuss.

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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Fri Jul 01, 2016 3:11 pm

boglephreak wrote:seems a litlle unfair to "call out" livesoft's method, but not address what he actually does. he doesnt seem upset in the least bit by this thread though so i wont be upset for him.
I'm definitely not upset at all. slickwillbo has done a great job on this and I appreciate it.

Besides, I haven't revealed everything that I actually do.
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Re: Really bad days (RBDs) and porfolio performance

Post by slickwillbo » Fri Jul 01, 2016 3:36 pm

I guess I've kind of called out livesoft, but he's the guy with the RBD criteria I see the most on this board. I'm also just using the term "livesoft RBD" to define his criteria as opposed to any drop of 2.5% or more for clarity.

Anyway, I've got to run for a bit, but I'm going to stir the pot a bit more before I go. The return for buying on livesoft RBDs is highly dependent on the time period held. For the same chart as above, the results would look like this:

5 days: $108,381
6 days: $105,887
7 days: $107,819
15 days: $104,795
30 days: $96,908
60 days: $93,359
90 days: $91,410

The results for using any drop of 2.5% or more (rather than the livesoft criteria) would be higher ($114,548 for 7 days, for example). A few notes:

The set of RBDs here is dominated by the Great Recession, so I'm still not convinced this period is long enough for meaningful conclusions. Thus, the shape of the U from 2007-2009 is the main determinant of what trailing time period backtests the best. Using the S&P would let us go back to 1950, but I'm not sure what I would use for bond returns.

Also, if you look at these previous charts I made (viewtopic.php?f=10&t=194169&start=100), the future return is higher after -2.5% drops, but the standard deviation increases significantly as well. The risk-adjusted returns (avg return/standard deviation) are nearly identical. So the excess return is likely from taking on additional risk at extremely volatile time points in the market.

I don't have time at the moment to put up the charts for the above numbers, but I will try if I get time later.

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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Fri Jul 01, 2016 4:26 pm

Allow me to point out an exception to think about. In slickwillbo's spreadsheet, Brexit did not trigger a livesoft RBD because VFINX dropped on Friday by -3.6% and Monday it dropped by -1.81% before marching upwards for the next 4 days. So this latest market dip (and it was a dip) is not included in some of the lines and numbers in this thread. Nevertheless, many people took some action during the post-Brexit dip.

And VSS dropped by -2.56% on Monday after a -6.83% drop on Friday.
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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Fri Jul 01, 2016 4:40 pm

I will also point out a triviality: Over the long term, the higher the allocation to equities, then so far the higher the end result. Rebalancing on RBDs assures that one's portfolio has a higher average allocation to equities, doesn't it?

Think about it: Can someone who desires a 60/40 asset allocation actually change to 70% or 75% equities in the face of large market drops and all the gloom & doom that will be spewing from standard media outlets? My observations are "No, they can't."
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Re: Really bad days (RBDs) and porfolio performance

Post by triceratop » Fri Jul 01, 2016 4:53 pm

livesoft wrote:I will also point out a triviality: Over the long term, the higher the allocation to equities, then so far the higher the end result. Rebalancing on RBDs assures that one's portfolio has a higher average allocation to equities, doesn't it?

Think about it: Can someone who desires a 60/40 asset allocation actually change to 70% or 75% equities in the face of large market drops and all the gloom & doom that will be spewing from standard media outlets? My observations are "No, they can't."
Shouldn't the answer to whether you should do this depend on the intended purpose of your 60/40 asset allocation? If it is to:

(1) dampen portfolio volatility, then no you should not pursue this strategy

(2) reduce absolute risk of loss of capital, then yes you may want to consider this (I consider the risk in equities to have decreased significantly after a large market drop)

Regardless, I would argue that relying on the generally increasing market to decide an investment strategy is a poor idea. There may be good justifications, but having a higher-than-intended equity allocation shouldn't be one of them. I assume you meant this all in tongue-in-cheek.
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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Fri Jul 01, 2016 4:59 pm

triceratop wrote: (I consider the risk in equities to have decreased significantly after a large market drop)
Be careful with that thought since momentum is supposed to work in the negative direction, too. Also the "hold for 30 days" idea in this thread shows a lower end result than shorter time periods which might suggest that risk is not decreased significantly except perhaps in the dead-cat-bounce period.
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Re: Really bad days (RBDs) and porfolio performance

Post by triceratop » Fri Jul 01, 2016 5:01 pm

Short term momentum may indeed, but it's hard to argue that long-term returns are in serious jeopardy (assuming, of course, that equities are generally on an upward trajectory).

edit: never mind: I realize now this is addressing a different point; momentum will still hurt your original 60/40 goal.
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Re: Really bad days (RBDs) and porfolio performance

Post by Vision » Thu Aug 18, 2016 5:57 am

So is summary of this that you have to rebalance very often to maximise the gains?

Only problem I see with it are the commission fees you generate from trading.

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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Thu Aug 18, 2016 6:02 am

Vision wrote:So is summary of this that you have to rebalance very often to maximise the gains?

Only problem I see with it are the commission fees you generate from trading.
1. There is no maximizing gains. "Maximizing" implies always winning and being 100% correct. That does not happen.

2. In the USA, there are many no-commission brokers, so there are no reasons to pay commission fees.

3. "very often" ??? There is no "very often". By definition, RBDs do not occur very often.
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Re: Really bad days (RBDs) and porfolio performance

Post by Vision » Thu Aug 18, 2016 6:14 am

livesoft wrote:
Vision wrote:So is summary of this that you have to rebalance very often to maximise the gains?

Only problem I see with it are the commission fees you generate from trading.
1. There is no maximizing gains. "Maximizing" implies always winning and being 100% correct. That does not happen.

2. In the USA, there are many no-commission brokers, so there are no reasons to pay commission fees.

3. "very often" ??? There is no "very often". By definition, RBDs do not occur very often.
I'm not from USA, so I don't have access to the no commission brokers, this is why I think it won't work for me.

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Re: Really bad days (RBDs) and porfolio performance

Post by Rodc » Thu Aug 18, 2016 6:19 am

Repeating from another thread:

Other studies show the opposite.

viewtopic.php?f=10&t=193997&p=2955234#p2954293

In both cases (though only noted in the second link), the differences in CAGR is super tiny.

This is entirely consistent with all rebalancing studies. Which method works best depends on how you define best (most define it by return, but since the point is to help contain risk this seems a poor measure) and which period you choose. That is to say, they all are so close that the winner is determined by the random noise in the particular dataset - noise that is not repeatable.

In this new study the difference in CAGR is about 0.2% - very minor differences in stock and bond returns can turn this around.

Indeed a more careful look at the data will almost certainly show this clearly. In the second study this was done. While in that study RBD rebalancing did a shade worse over the full period, there were subperiods where it did better.

One can use any more or less non-crazy rebalancing scheme and be fine. If they get pleasure out of it, or it makes them feel sophisticated, or even if it helps relieve boredom they should go ahead and do that. But it would be a mistake to think it was going to actually be useful. Of course if thinking it would be useful helps one of those other reasons I guess that is ok too. :)
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Re: Really bad days (RBDs) and porfolio performance

Post by Lieutenant.Columbo » Wed May 30, 2018 9:40 pm

slickwillbo wrote:
Fri Jul 01, 2016 9:56 am
A livesoft-defined RBD meets all of these criteria:
1) VFINX drop of 2.5% or more
2) Drop greater than the 4th largest drop within the previous 150 days
3) Not a Friday
methodological/philosophical questions:

1. It isn't until after Market closes at 4pm EST that one can learn if MUTUAL.FUND.X has dropped 2.5% or more. Does this mean one can only act on a RBD when the RBD is over? If so, might one take even more advantage of the RBD by intraday-watching (or setting instant alerts for) an Index or an ETF similar enough to MUTUAL.FUND.X, so that one can buy MUTUAL.FUND.X before 4 pm on RBD?

2. Should the "required day's drop" that makes it a RBD be different (or the same) for different market capitalization funds?
I understand a 2.5%-or-more drop is a RBD for VFINX (US Large Blend). Will a RBD for, say, IJS (US Small Value) still be 2.5%-or-more? or 2%? 1.5%? Other?

3. In practical terms, how does one keep 150-Days-Ago-To-Date data on the 4 largest drops in MUTUAL.FUND.X :?

Thank you.
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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Thu May 31, 2018 6:17 am

1. One can use ETF prices to determine this and apply the idea to their mutual fund trades if they want.

2. Maybe, but that criteria (2) takes care of this for the most part. One can do the experiment and backtesting themselves, too.

3. finance.yahoo.com has historical prices and since one wrote a computer program to do the analysis, one doesn't keep data as the data used changes,
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Re: The DL on RBDs

Post by mikestorm » Thu May 31, 2018 8:11 am

slickwillbo wrote:
Fri Jul 01, 2016 10:22 am
DL is a term for something that's a secret.
Then why even bring it up? :confused

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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Thu May 31, 2018 8:22 am

And looking again at the results of slickwillbo's original post, has anybody done the following?

On a livesoft RBD, sell 5% of VFINX and buy it back after 30 days. :twisted:
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Re: Really bad days (RBDs) and porfolio performance

Post by Lieutenant.Columbo » Thu May 31, 2018 9:32 am

livesoft wrote:
Thu May 31, 2018 8:22 am
And looking again at the results of slickwillbo's original post, has anybody done the following?

On a livesoft RBD, sell 5% of VFINX and buy it back after 30 days. :twisted:
TLH, I presume?
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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Thu May 31, 2018 10:05 am

Probably not TLH, but it is possible. RBDs are good days to check to see if one has TLH opportunities.
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Re: Really bad days (RBDs) and porfolio performance

Post by Lieutenant.Columbo » Thu May 31, 2018 10:16 am

Lieutenant.Columbo wrote:
Wed May 30, 2018 9:40 pm
methodological/philosophical questions:

1. It isn't until after Market closes at 4pm EST that one can learn if MUTUAL.FUND.X has dropped 2.5% or more. Does this mean one can only act on a RBD when the RBD is over? If so, might one take even more advantage of the RBD by intraday-watching (or setting instant alerts for) an Index or an ETF similar enough to MUTUAL.FUND.X, so that one can buy MUTUAL.FUND.X before 4 pm on RBD?
livesoft wrote:
Thu May 31, 2018 6:17 am
1. One can use ETF prices to determine this and apply the idea to their mutual fund trades if they want.
Does this mean that placing the trade on the RBD itself isn't the goal, that placing the trade on the RBD isn't more often significantly more beneficial than doing so on RBD+1? Thanks.
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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Thu May 31, 2018 10:28 am

^I don't know the answer to the "more often" question. I can say that sometimes the intraday price to buy is much lower than the closing price and sometimes the closing price is lower.

And sometimes a lower price occurs later, but there is no way to predict the future, so you have to make a decision on the current facts.

Consider MTUM in 2018 with the first RBD on February 5. You did not know on February 5 that also February 8th was going to be an RBD. If you had known, then after the buy on Feb 5, you would have sold for a nice gain on Feb 6 in order to buy again on Feb 8. But if you could predict the future like that reliably, then you would be doing a lot things wouldn't you? :twisted:
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Re: Really bad days (RBDs) and porfolio performance

Post by Lieutenant.Columbo » Thu May 31, 2018 8:58 pm

livesoft wrote:
Thu May 31, 2018 10:28 am
^I don't know the answer to the "more often" question. I can say that sometimes the intraday price to buy is much lower than the closing price and sometimes the closing price is lower.

And sometimes a lower price occurs later, but there is no way to predict the future, so you have to make a decision on the current facts.

Consider MTUM in 2018 with the first RBD on February 5. You did not know on February 5 that also February 8th was going to be an RBD. If you had known, then after the buy on Feb 5, you would have sold for a nice gain on Feb 6 in order to buy again on Feb 8. But if you could predict the future like that reliably, then you would be doing a lot things wouldn't you? :twisted:
Good points. Understood. Now, regarding your Rule Number 2 (RN2).
slickwillbo wrote:
Fri Jul 01, 2016 9:56 am
A livesoft-defined RBD meets all of these criteria:
1) VFINX drop of 2.5% or more
2) Drop greater than the 4th largest drop within the previous 150 days
3) Not a Friday
Would you mind sharing why you don't find a 2.5%-or-more drop in one day enough justification to call it a livesoft-RBD? What does your RN2 add? Does it mean that if VFINX drops 2.5% and such drop doesn't meet RN2, you pass on buying? Or you buy less than you would if RN2 had been met?
slickwillbo wrote:
Fri Jul 01, 2016 10:22 am
DL is a term for something that's a secret.
easy! DL = Dear Livesoft
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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Fri Jun 01, 2018 8:30 am

Rule number 2 adds the "Really" part to Really Bad Day. Without it, the criteria would just be a "Bad Day" strategy or a "Normal Bad Day" strategy which we all know doesn't work or which regular rebalancing will deal with. Go and test things for yourself and report back on that.
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