HEDGEFUNDIE's excellent adventure Part II: The next journey

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Busdrvr
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Busdrvr »

As I add to my positions in this strategy does it make sense to time the purchases and alternate the buys to whichever side(equity/fixed income) is down for the day. When the other side drops you then buy to bring the allocation back to what is desired. So today, for example, one would purchase tmf as it is down ~ 3%. Although it’s not every day it seems the two assets reliably move in opposite directions. Or is it direxions :D
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

pepys wrote: Mon Dec 16, 2019 2:08 pm
MotoTrojan wrote: Mon Dec 16, 2019 12:47 pm
pepys wrote: Mon Dec 16, 2019 11:51 am
MotoTrojan wrote: Mon Dec 16, 2019 11:29 am
butricksaid wrote: Mon Dec 16, 2019 11:22 am

I'm not...? I think it has a lot of merit but I can also be skeptical about my entrance timing and I was uncomfortable with the potential drawdown (below principal) after not getting some more gains built up.



It's not a binary option, privatefarmer. There's a spectrum of risk tolerance and portfolios with volatility to match like un-leveraged ETFs. I never said I could only handle investments that constantly go up. :confused

I decided that given the limited padding of gains early on plus the risk of early drawdown soon after entering the strategy, that risk was past my threshold.
Call it what you want but you clearly judged performance over a few months. Needing a cushion of gains to let a strategy ride will relegate you to CDs.
They never said they needed a cushion of gains to let any strategy ride, they specifically said "plus" after that, and then went on to talk about the risks at the current stage. You can't just cut off the "plus".
A cushion is only relevant if there’s a risk of drawdown to begin with. Nobody needs a cushion for CDs. I am not sure your point. The risk never changed. The potential reward may have (hence my exit).
The risk at the current stage was a fundamental part of their comment. You're assuming they meant a change to the actual risk (maybe interest rates being lower, stocks being higher, or whatever else), although it could also be partially or fully because of their understanding of the risks. You're free to disagree with that, but you can't just claim that they need a cushion of gains for any strategy when they specifically said otherwise. They gave two connected reasons. You took one of those reasons, ignored the other, and used it to say it implies they should only invest in CDs, when they specifically gave that second reason as a reason to not only invest in CDs.

This is like me saying you exited for no reason, you replying that your reason was because change in potential reward, and then me responding that the potential reward never changed. You can't remove reasoning just because you disagree with it.

Also, you being confident enough that potential rewards changed to move thousands of dollars around, and then being certain that max drawdown and/or chance of a drawdown didn't change is odd. So the potential rewards changed such that making only, say, 1% more likely, but making -1%? Why, that's exactly the same, and anyone who disagrees is wrong.
You are right, I do disagree. I changed my decision agnostic of returns. This other individual changed their decision solely because of returns.
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Steve Reading
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

Some fairly condescending comments. A poster got out because he didn’t like the performance. But everyone answers things like “well, if you can’t handle X, then this isn’t right for you”. Like yes, maybe but I feel like some of you don’t see how rude that sounds. As though the poster isn’t “good enough” for this strategy and hence shouldn’t be in it.

I’ve complained about its volatility decay and high fees but I’m also not coming out saying “well if you love to suffer from volatility decay and pay lots of fees, this is perfect for you”. That’s a little disrespectful IMO.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

305pelusa wrote: Mon Dec 16, 2019 3:46 pm Some fairly condescending comments. A poster got out because he didn’t like the performance. But everyone answers things like “well, if you can’t handle X, then this isn’t right for you”. Like yes, maybe but I feel like some of you don’t see how rude that sounds. As though the poster isn’t “good enough” for this strategy and hence shouldn’t be in it.

I’ve complained about its volatility decay and high fees but I’m also not coming out saying “well if you love to suffer from volatility decay and pay lots of fees, this is perfect for you”. That’s a little disrespectful IMO.
I can see that but I think it was not meant to be taken as such by all of us. More of a warning to others. Like when someone freaks out at a 1% drop and people say “that was nothing, be ready for much more”.

The internet can mask intent quite well. I’ll be more careful myself.
get_g0ing
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by get_g0ing »

305pelusa wrote: Mon Dec 16, 2019 3:46 pm Some fairly condescending comments. A poster got out because he didn’t like the performance. But everyone answers things like “well, if you can’t handle X, then this isn’t right for you”. Like yes, maybe but I feel like some of you don’t see how rude that sounds. As though the poster isn’t “good enough” for this strategy and hence shouldn’t be in it.

I’ve complained about its volatility decay and high fees but I’m also not coming out saying “well if you love to suffer from volatility decay and pay lots of fees, this is perfect for you”. That’s a little disrespectful IMO.
I agree with this post. I wanted to say something similar but didn't have the right words. This poster conveyed very well about trying to be considerate with each other. Of course sometimes its unintentional - I am sure we can assume that most of the time.
pepys
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by pepys »

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Last edited by pepys on Tue Feb 25, 2020 12:46 am, edited 1 time in total.
butricksaid
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by butricksaid »

langlands wrote: Mon Dec 16, 2019 1:23 pm butricksaid wasn't completely sure how he felt about the risk of the strategy in the beginning and wanted to test the waters, and has now decided it's not his cup of tea. Pretty reasonable considering how volatile the strategy is- you don't really know how you'll emotionally react to daily 5-10% swings until you've actually experienced it.
Pretty much this.
MotoTrojan wrote: Mon Dec 16, 2019 12:47 pm CDs.
Let's drop this whole CD notion because it is a complete tangent that privatefarmer created. There's a spectrum of assets for different levels of risk. We can all agree that this strategy is higher risk than vanilla Boglehead investing and has some degree of speculation. Speculation has some degree of timing involved.

While upcoming market conditions will always be unknown, I feel like it's gotten more volatile recently and I got skeptical. That is a big variable in my decision to exit, the same as you.
MotoTrojan wrote: Fri Dec 06, 2019 10:23 am
Lee_WSP wrote: Fri Dec 06, 2019 10:22 am
Gemini wrote: Fri Dec 06, 2019 9:48 am
MotoTrojan wrote: Tue Dec 03, 2019 11:48 am Officially out, have fun all!
What made you abandon?
Too much risk for not enough expected return.
Bingo. Decided to diversify my risk into some other classes like ISCV, and take a nice quick profit.
Given my perception that volatility has increased since earlier in 2019, I decided I was not willing to assume the risk associated with that (perceived) increase in volatility. I think it's understandable that increased risk is easier to tolerate when you have a lot of "house money" on top of principal (loss aversion).

I don't know how to clarify further. I tried it, the market shook beyond my tolerance, I exited and moved back to VTI/BND, at least I made a small profit.

Sorry for sharing.
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

butricksaid wrote: Mon Dec 16, 2019 6:07 pm
langlands wrote: Mon Dec 16, 2019 1:23 pm butricksaid wasn't completely sure how he felt about the risk of the strategy in the beginning and wanted to test the waters, and has now decided it's not his cup of tea. Pretty reasonable considering how volatile the strategy is- you don't really know how you'll emotionally react to daily 5-10% swings until you've actually experienced it.
Pretty much this.
MotoTrojan wrote: Mon Dec 16, 2019 12:47 pm CDs.
Let's drop this whole CD notion because it is a complete tangent that privatefarmer created. There's a spectrum of assets for different levels of risk. We can all agree that this strategy is higher risk than vanilla Boglehead investing and has some degree of speculation. Speculation has some degree of timing involved.

While upcoming market conditions will always be unknown, I feel like it's gotten more volatile recently and I got skeptical. That is a big variable in my decision to exit, the same as you.
MotoTrojan wrote: Fri Dec 06, 2019 10:23 am
Lee_WSP wrote: Fri Dec 06, 2019 10:22 am
Gemini wrote: Fri Dec 06, 2019 9:48 am
MotoTrojan wrote: Tue Dec 03, 2019 11:48 am Officially out, have fun all!
What made you abandon?
Too much risk for not enough expected return.
Bingo. Decided to diversify my risk into some other classes like ISCV, and take a nice quick profit.
Given my perception that volatility has increased since earlier in 2019, I decided I was not willing to assume the risk associated with that (perceived) increase in volatility. I think it's understandable that increased risk is easier to tolerate when you have a lot of "house money" on top of principal (loss aversion).

I don't know how to clarify further. I tried it, the market shook beyond my tolerance, I exited and moved back to VTI/BND, at least I made a small profit.

Sorry for sharing.
No apology for sharing needed. It wasn't for you (or me, for different reasons) and there is nothing wrong with that. We both learned something in the process and had some fun. Sounded like you made a double-digit return too, so all wins here. :sharebeer
Diego_Quant
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Diego_Quant »

willthrill81 wrote: Sun Dec 15, 2019 6:48 pm
Diego_Quant wrote: Sun Dec 15, 2019 6:46 pm
willthrill81 wrote: Fri Dec 13, 2019 10:53 pm
MotoTrojan wrote: Fri Dec 13, 2019 10:48 pm
guyinlaw wrote: Fri Dec 13, 2019 10:30 pm

Do you still think 43/57 UPRO/EDV is the right mix? From the last EDV peak in June-Aug 2012 ($135) - Portfolio Visualizer suggests 52/48 or even 65/35.
Suggests it for what criteria? Any optimization that only looks at an equity bull will skew towards equity. I liked it, but there are many options and justifications, but only looking at the last decade is a bad start.
That's why I opted to use a target volatility approach rather than a static AA. Rather than using distant historic data to determine the appropriate AA, it uses recent historic data (i.e. prior month's). Some may berate this method, but any decision regarding one's AA is largely driven by historic data.
How do you calculate the allocations for target volatility? Portfolio Visualizer has a 2-day data delay
PV updates their data after the last business day of every month, so I'm using the last month's data to determine the current month's allocation.
You can see intra monthly allocation in "Timing Periods" (go down and see "Signal Date"), it has a delay of 1-2 days.
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willthrill81
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by willthrill81 »

Diego_Quant wrote: Mon Dec 16, 2019 7:07 pm
willthrill81 wrote: Sun Dec 15, 2019 6:48 pm
Diego_Quant wrote: Sun Dec 15, 2019 6:46 pm
willthrill81 wrote: Fri Dec 13, 2019 10:53 pm
MotoTrojan wrote: Fri Dec 13, 2019 10:48 pm

Suggests it for what criteria? Any optimization that only looks at an equity bull will skew towards equity. I liked it, but there are many options and justifications, but only looking at the last decade is a bad start.
That's why I opted to use a target volatility approach rather than a static AA. Rather than using distant historic data to determine the appropriate AA, it uses recent historic data (i.e. prior month's). Some may berate this method, but any decision regarding one's AA is largely driven by historic data.
How do you calculate the allocations for target volatility? Portfolio Visualizer has a 2-day data delay
PV updates their data after the last business day of every month, so I'm using the last month's data to determine the current month's allocation.
You can see intra monthly allocation in "Timing Periods" (go down and see "Signal Date"), it has a delay of 1-2 days.
I don't do intra-monthly trading, so that doesn't impact me, but thanks for the info.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings
Diego_Quant
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Diego_Quant »

Crushtheturtle wrote: Mon Dec 16, 2019 12:01 pm
Diego_Quant wrote: Sun Dec 15, 2019 6:46 pm
How do you calculate the allocations for target volatility? Portfolio Visualizer has a 2-day data delay

I just Google search "UPRO Historical Volatility" and the first result is Alphaquery.com, which displays the 30-day (among others).

then,

(UPRO Target %) = (UPRO Target Volatility) / (UPRO 30-day Historical Volatility)
Thanks
tchoupitoulas
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tchoupitoulas »

I've been following this and the original thread since the beginning and am still an investor in the OG 60/40 version. My inception date is April 3 and I'm up 37% since then.

I have a question I don't believe I've seen addressed yet. Is there an inherent (as in, mathematical, law of physics type thing) relationship between yields on long bonds and volatility? This article from portfoliocharts about bond convexity (https://portfoliocharts.com/2019/05/27/ ... convexity/) suggests that the lower the interest rates, the higher the volatility of a long bond. If this is true, would it support reducing one's exposure to TLT as interest rates fall, NOT on the theory that "interest rates can only go up from here" or "it's the end of a 30 year bull market in bonds" but rather because the UPRO/TLT breakdown is supposed to be at risk parity and as the expected volatility of TLT goes up you need less of it to balance against UPRO?

*As a side note: I'm aware that Hedgefundie has to some extent backed away from the idea of this as a "risk parity" portfolio in the current 45/55 version, but I have never really made my peace with the arguments I've heard and so haven't followed suit. People were saying "rates can only go up" in response to his original idea back in January and he had (in my view) convincing reponses. The fact that the following 12 months proved him right didn't hurt. I don't see what makes this period so meaningfully different, unless you're going to say that exposure to TLT should always be adjusted based on interest rates.
fallingeggs
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by fallingeggs »

tchoupitoulas wrote: Tue Dec 17, 2019 2:05 pm I have a question I don't believe I've seen addressed yet. Is there an inherent (as in, mathematical, law of physics type thing) relationship between yields on long bonds and volatility? This article from portfoliocharts about bond convexity (https://portfoliocharts.com/2019/05/27/ ... convexity/) suggests that the lower the interest rates, the higher the volatility of a long bond. If this is true, would it support reducing one's exposure to TLT as interest rates fall, NOT on the theory that "interest rates can only go up from here" or "it's the end of a 30 year bull market in bonds" but rather because the UPRO/TLT breakdown is supposed to be at risk parity and as the expected volatility of TLT goes up you need less of it to balance against UPRO?
This sounds a bit like volatility targeting, as discussed at some length above; although, perhaps based on interest rate "bands" as a proxy for expected volatility. Don't think supporters of volatility targeting would disagree with your end goal. But calculating what the "banded" allocation factors should be sounds tricky.

And, I'm not sure your referenced material really says low interest rate environments are more volatile for bond values. Saying that a 1% yield change to a 3% bond has a bigger impact to value than it does to a 6% bond doesn't necessarily mean 1% yield changes are as common in a 3%-yield world than they are in a 6%-yield world. Maybe they are. That's the tricky data mining exercise to prove or disprove your theory.
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

fallingeggs wrote: Tue Dec 17, 2019 3:22 pm

And, I'm not sure your referenced material really says low interest rate environments are more volatile for bond values. Saying that a 1% yield change to a 3% bond has a bigger impact to value than it does to a 6% bond doesn't necessarily mean 1% yield changes are as common in a 3%-yield world than they are in a 6%-yield world. Maybe they are. That's the tricky data mining exercise to prove or disprove your theory.
Bingo. This is why I based my analysis on the long run (1955-2018) volatility instead, without looking at effective duration, convexity, etc. As rates get lower I think it’s a reasonable thought that rate changes will too.
langlands
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by langlands »

tchoupitoulas wrote: Tue Dec 17, 2019 2:05 pm I've been following this and the original thread since the beginning and am still an investor in the OG 60/40 version. My inception date is April 3 and I'm up 37% since then.

I have a question I don't believe I've seen addressed yet. Is there an inherent (as in, mathematical, law of physics type thing) relationship between yields on long bonds and volatility? This article from portfoliocharts about bond convexity (https://portfoliocharts.com/2019/05/27/ ... convexity/) suggests that the lower the interest rates, the higher the volatility of a long bond. If this is true, would it support reducing one's exposure to TLT as interest rates fall, NOT on the theory that "interest rates can only go up from here" or "it's the end of a 30 year bull market in bonds" but rather because the UPRO/TLT breakdown is supposed to be at risk parity and as the expected volatility of TLT goes up you need less of it to balance against UPRO?

*As a side note: I'm aware that Hedgefundie has to some extent backed away from the idea of this as a "risk parity" portfolio in the current 45/55 version, but I have never really made my peace with the arguments I've heard and so haven't followed suit. People were saying "rates can only go up" in response to his original idea back in January and he had (in my view) convincing reponses. The fact that the following 12 months proved him right didn't hurt. I don't see what makes this period so meaningfully different, unless you're going to say that exposure to TLT should always be adjusted based on interest rates.
Thanks for the linked article! I found it an excellent summary of how to think about bond price movements. As the article made very clear, buying long-maturity bonds at low interest rates is largely speculating on the interest rate, and the coupon makes up a much smaller fraction of your return. It's not clear whether bonds are actually more volatile though at low yields since as fallingeggs alluded to, a 1% change on a 3% yield is probably less likely than a 1% change on a 6% yield. I suspect that they are though because of certain nominal effects. For instance the Fed seems to like moving in increments of at least 0.25% even though 0.25% means a lot more to a yield of 0% than 3%.
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privatefarmer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by privatefarmer »

The idea of risk parity is diversifying across different risks. Equity, commodity, interest rate risks etc. we focus so much attention on what interest rates will do but it’s only a percentage of portfolio that is exposed to this specific risk. We know equities fall by >50% and obviously gold/commodities do the same, why all the focus on interest rates? The idea is to broaden exposure to different risks that are uncorrelated which in turn lowers your overall volatility and allows you to apply leverage.

Another reality is that institutional investors would not have trillions invested in LTTs, knowing their implied volatility and downside risk, if they did not expect a reasonable return. The reason WHY rates are so low is because investors have DRIVEN them that low and are willing to invest at these rates.

In the end, a risk parity investor is not betting which asset will perform best or worst rather is exposing himself to a variety of risk premiums and applying leverage to hopefully achieve a much higher risk adjusted return.
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

privatefarmer wrote: Tue Dec 17, 2019 3:56 pm The idea of risk parity is diversifying across different risks. Equity, commodity, interest rate risks etc. we focus so much attention on what interest rates will do but it’s only a percentage of portfolio that is exposed to this specific risk. We know equities fall by >50% and obviously gold/commodities do the same, why all the focus on interest rates? The idea is to broaden exposure to different risks that are uncorrelated which in turn lowers your overall volatility and allows you to apply leverage.

Another reality is that institutional investors would not have trillions invested in LTTs, knowing their implied volatility and downside risk, if they did not expect a reasonable return. The reason WHY rates are so low is because investors have DRIVEN them that low and are willing to invest at these rates.

In the end, a risk parity investor is not betting which asset will perform best or worst rather is exposing himself to a variety of risk premiums and applying leverage to hopefully achieve a much higher risk adjusted return.
Investors also drove the Nasdaq up in 2000.
tchoupitoulas
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by tchoupitoulas »

fallingeggs wrote: Tue Dec 17, 2019 3:22 pm And, I'm not sure your referenced material really says low interest rate environments are more volatile for bond values. Saying that a 1% yield change to a 3% bond has a bigger impact to value than it does to a 6% bond doesn't necessarily mean 1% yield changes are as common in a 3%-yield world than they are in a 6%-yield world. Maybe they are. That's the tricky data mining exercise to prove or disprove your theory.
This is a great point that I had overlooked. Thanks!! I think in light of what you point out here I will just stick to the stable allocation, since I think tweaking in response to changing events is more likely to introduce behavioral risk.
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firebirdparts
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

Busdrvr wrote: Mon Dec 16, 2019 3:11 pm As I add to my positions in this strategy does it make sense to time the purchases and alternate the buys to whichever side(equity/fixed income) is down for the day. When the other side drops you then buy to bring the allocation back to what is desired. So today, for example, one would purchase tmf as it is down ~ 3%. Although it’s not every day it seems the two assets reliably move in opposite directions. Or is it direxions :D
I don't know if timing the purchases is really possible, but buying whichever one needs a boost is the right thing to do if you are adding. That is definitely okay.

Timing is a whole other ball of wax which has been studied quite a lot. However, these funds were not around during the many decades of study. As you get more and more volatile investments, timing purchases might actually make sense. There is a future PhD dissertation there that somebody can write.
A fool and your money are soon partners
Lee_WSP
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Lee_WSP »

Busdrvr wrote: Mon Dec 16, 2019 3:11 pm As I add to my positions in this strategy does it make sense to time the purchases and alternate the buys to whichever side(equity/fixed income) is down for the day. When the other side drops you then buy to bring the allocation back to what is desired. So today, for example, one would purchase tmf as it is down ~ 3%. Although it’s not every day it seems the two assets reliably move in opposite directions. Or is it direxions :D
I can assure you that such a strategy does not make a difference over the last few months. Eventually you'll have to buy the one you've been neglecting and they aren't negatively correlated so about half the time they're both up or down together.
Busdrvr
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Busdrvr »

firebirdparts wrote: Tue Dec 17, 2019 5:16 pm
Busdrvr wrote: Mon Dec 16, 2019 3:11 pm As I add to my positions in this strategy does it make sense to time the purchases and alternate the buys to whichever side(equity/fixed income) is down for the day. When the other side drops you then buy to bring the allocation back to what is desired. So today, for example, one would purchase tmf as it is down ~ 3%. Although it’s not every day it seems the two assets reliably move in opposite directions. Or is it direxions :D
I don't know if timing the purchases is really possible, but buying whichever one needs a boost is the right thing to do if you are adding. That is definitely okay.

Timing is a whole other ball of wax which has been studied quite a lot. However, these funds were not around during the many decades of study. As you get more and more volatile investments, timing purchases might actually make sense. There is a future PhD dissertation there that somebody can write.
Thanks for the reply!
Busdrvr
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Busdrvr »

Lee_WSP wrote: Tue Dec 17, 2019 5:34 pm
Busdrvr wrote: Mon Dec 16, 2019 3:11 pm As I add to my positions in this strategy does it make sense to time the purchases and alternate the buys to whichever side(equity/fixed income) is down for the day. When the other side drops you then buy to bring the allocation back to what is desired. So today, for example, one would purchase tmf as it is down ~ 3%. Although it’s not every day it seems the two assets reliably move in opposite directions. Or is it direxions :D
I can assure you that such a strategy does not make a difference over the last few months. Eventually you'll have to buy the one you've been neglecting and they aren't negatively correlated so about half the time they're both up or down together.
Thanks for the reply!
Busdrvr
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Busdrvr »

tchoupitoulas wrote: Tue Dec 17, 2019 2:05 pm I've been following this and the original thread since the beginning and am still an investor in the OG 60/40 version. My inception date is April 3 and I'm up 37% since then.

I have a question I don't believe I've seen addressed yet. Is there an inherent (as in, mathematical, law of physics type thing) relationship between yields on long bonds and volatility? This article from portfoliocharts about bond convexity (https://portfoliocharts.com/2019/05/27/ ... convexity/) suggests that the lower the interest rates, the higher the volatility of a long bond. If this is true, would it support reducing one's exposure to TLT as interest rates fall, NOT on the theory that "interest rates can only go up from here" or "it's the end of a 30 year bull market in bonds" but rather because the UPRO/TLT breakdown is supposed to be at risk parity and as the expected volatility of TLT goes up you need less of it to balance against UPRO?
That’s a great article. Seems like the increase in volatility is offset somewhat by the fact that the long bond total return distributions are skewed more to the upside, especially at very low or negative rates.
Neolo
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Neolo »

I am just wondering if using 2x interactive brokers margin loans to purchase NTSX etf would be a good idea? My aim is to replicate hedgefundie risk parity portfolio cagr, but without the hassle of rebalancing. It seems that NTSX also has a 5% rebalancing rule which maintains the ratio effectively. Any thoughts on this setup? Or the optimum leverage of NTSX if i subscribe to lifecycle investing?
RayKeynes
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RayKeynes »

@ HedgeFundie

There is LTT data available since 1928 (on a yearly basis by SIAMOND), which don't you try to simulate TMF from 1929? I would be very interested to see the backtesting results for TMF since 1929.

I know that there is no LIBOR data available since 1929, but you may take the average spread for UPRO (around 0.48%) and add it to the effective federal funds rate to simulate the borrowing costs?!
typical.investor
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by typical.investor »

RayKeynes wrote: Wed Dec 18, 2019 2:44 am @ HedgeFundie

There is LTT data available since 1928 (on a yearly basis by SIAMOND), which don't you try to simulate TMF from 1929? I would be very interested to see the backtesting results for TMF since 1929.

I know that there is no LIBOR data available since 1929, but you may take the average spread for UPRO (around 0.48%) and add it to the effective federal funds rate to simulate the borrowing costs?!
Honestly, what’s the point?

LTT did what they did for various historical reasons, but much of that time wasn’t in a period of true globalization which significantly impacts inflation.

Sure, we could have a globalization roll-back in addition to a global warming related supply crisis and inflation could re-appear. Sure, but going back to 1928 will model those cases exactly zero times.

I’m at 50/50 and don’t really think back testing is going to reveal which allocation (including the possibility that 0% leveraged wins) going forward is best.

Maybe it calms your nerves and gives you courage, but honestly I don’t see rates from prior to globalization as being able to forecast the future.

If inflation, higher rates and huge LLT losses are in the cards, I think it will be for reasons other than what determined rates in the past.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by RayKeynes »

typical.investor wrote: Wed Dec 18, 2019 7:46 am
RayKeynes wrote: Wed Dec 18, 2019 2:44 am @ HedgeFundie

There is LTT data available since 1928 (on a yearly basis by SIAMOND), which don't you try to simulate TMF from 1929? I would be very interested to see the backtesting results for TMF since 1929.

I know that there is no LIBOR data available since 1929, but you may take the average spread for UPRO (around 0.48%) and add it to the effective federal funds rate to simulate the borrowing costs?!
Honestly, what’s the point?
If you argue like that - then whats the point in performing any back tests AT ALL?

1. It can show you how LTT / TMF performed in an environment that was not very bond-friendly (1950s - 1980s). It can show you the maximum loss you would have realized if you did that strategy back then. If, for whatever reason, TMF did also perform well during the 1950s to 1980s, I would not see any reason which not to pursue such a strategy.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

Neolo wrote: Wed Dec 18, 2019 12:34 am I am just wondering if using 2x interactive brokers margin loans to purchase NTSX etf would be a good idea? My aim is to replicate hedgefundie risk parity portfolio cagr, but without the hassle of rebalancing. It seems that NTSX also has a 5% rebalancing rule which maintains the ratio effectively. Any thoughts on this setup? Or the optimum leverage of NTSX if i subscribe to lifecycle investing?
NTSX is 90% S&P500, so I don’t think it is unreasonable to expect it to have the potential for a 50% drawdown. Would that not wipe this position out entirely? Also if you held enough margin cash to not need to rebalance then wouldn’t you have a substantial drag on returns there?
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Steve Reading
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

MotoTrojan wrote: Wed Dec 18, 2019 8:18 am
Neolo wrote: Wed Dec 18, 2019 12:34 am I am just wondering if using 2x interactive brokers margin loans to purchase NTSX etf would be a good idea? My aim is to replicate hedgefundie risk parity portfolio cagr, but without the hassle of rebalancing. It seems that NTSX also has a 5% rebalancing rule which maintains the ratio effectively. Any thoughts on this setup? Or the optimum leverage of NTSX if i subscribe to lifecycle investing?
NTSX is 90% S&P500, so I don’t think it is unreasonable to expect it to have the potential for a 50% drawdown. Would that not wipe this position out entirely? Also if you held enough margin cash to not need to rebalance then wouldn’t you have a substantial drag on returns there?
The wipeout is true. Options imply ~4% possibility of a market downturn of ~50% last I checked. These might be reasonable-enough odds for some, especially if they’re still contributing/saving.

I really like his suggestion btw. It’s a solid, tax efficient, way to apply Lifecycle Investing.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

305pelusa wrote: Wed Dec 18, 2019 9:24 am
MotoTrojan wrote: Wed Dec 18, 2019 8:18 am
Neolo wrote: Wed Dec 18, 2019 12:34 am I am just wondering if using 2x interactive brokers margin loans to purchase NTSX etf would be a good idea? My aim is to replicate hedgefundie risk parity portfolio cagr, but without the hassle of rebalancing. It seems that NTSX also has a 5% rebalancing rule which maintains the ratio effectively. Any thoughts on this setup? Or the optimum leverage of NTSX if i subscribe to lifecycle investing?
NTSX is 90% S&P500, so I don’t think it is unreasonable to expect it to have the potential for a 50% drawdown. Would that not wipe this position out entirely? Also if you held enough margin cash to not need to rebalance then wouldn’t you have a substantial drag on returns there?
The wipeout is true. Options imply ~4% possibility of a market downturn of ~50% last I checked. These might be reasonable-enough odds for some, especially if they’re still contributing/saving.

I really like his suggestion btw. It’s a solid, tax efficient, way to apply Lifecycle Investing.
How much margin cash would one need to hold right after setting up this 2x position? How much would be necessary as a drawdown of NTSX approached 50%?

The Lifecycle Investing is interesting but don't most people do this, just with less leverage, by drifting from 100/0 or 90/10 down to 50/50 realm?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

MotoTrojan wrote: Wed Dec 18, 2019 9:44 am
How much margin cash would one need to hold right after setting up this 2x position? How much would be necessary as a drawdown of NTSX approached 50%?
I'm not totally certain you understand how this margin is working. You might be confusing this with the completely different (but equally named) margin of futures. You can't lever up 2:1 and then hold cash as backup. The cash gets sweeped to pay for the margin balance automatically. So the question isn't "how much cash should you hold?" or "how much cash for a certain drawdown?". It's "how much margin debt can you take out such that you don't get liquidated after a 50% drop". I estimate that if you have 70% equity in the account, 30% on margin, you should be able to withstand a 50% drop. If you go all the way to 2:1, you can withstand a ~28% drop.
MotoTrojan wrote: Wed Dec 18, 2019 9:44 am
The Lifecycle Investing is interesting but don't most people do this, just with less leverage, by drifting from 100/0 or 90/10 down to 50/50 realm?
I didn't really understand this question, sorry.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

305pelusa wrote: Wed Dec 18, 2019 11:30 am
MotoTrojan wrote: Wed Dec 18, 2019 9:44 am
How much margin cash would one need to hold right after setting up this 2x position? How much would be necessary as a drawdown of NTSX approached 50%?
I'm not totally certain you understand how this margin is working. You might be confusing this with the completely different (but equally named) margin of futures. You can't lever up 2:1 and then hold cash as backup. The cash gets sweeped to pay for the margin balance automatically. So the question isn't "how much cash should you hold?" or "how much cash for a certain drawdown?". It's "how much margin debt can you take out such that you don't get liquidated after a 50% drop". I estimate that if you have 70% equity in the account, 30% on margin, you should be able to withstand a 50% drop. If you go all the way to 2:1, you can withstand a ~28% drop.
MotoTrojan wrote: Wed Dec 18, 2019 9:44 am
The Lifecycle Investing is interesting but don't most people do this, just with less leverage, by drifting from 100/0 or 90/10 down to 50/50 realm?
I didn't really understand this question, sorry.
Thanks that makes sense. I guess my point is you’d need to have cash ready to avoid a margin call so that would induce a further drag which the LETF is immune to.

As to the other point. A Lifecycle investor may hold 2x leverage early on, and eventually back off as they get closer to decumulation where they’ll be entirely unleveraged. My point is that this isn’t very different than a more typical “age in bonds” approach where someone holds nearly 100% equity early in life and moves towards bonds later on. Both investors follow a similar glide path but the lifecycle investor just leveraged that glidepath. Basically I’m saying most of us use or suggest a detuned lifecycle process, it’s not an uncommon method.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

MotoTrojan wrote: Wed Dec 18, 2019 11:35 am
Thanks that makes sense. I guess my point is you’d need to have cash ready to avoid a margin call so that would induce a further drag which the LETF is immune to.
Well you could always do exactly what LETFs do to avoid this issue. Once your leverage rises past whatever you're comfortable due to a market drop, then liquidate positions accordingly to get the leverage back down. You get to at least save the ER fees.
MotoTrojan wrote: Wed Dec 18, 2019 11:35 am
As to the other point. A Lifecycle investor may hold 2x leverage early on, and eventually back off as they get closer to decumulation where they’ll be entirely unleveraged. My point is that this isn’t very different than a more typical “age in bonds” approach where someone holds nearly 100% equity early in life and moves towards bonds later on. Both investors follow a similar glide path but the lifecycle investor just leveraged that glidepath. Basically I’m saying most of us use or suggest a detuned lifecycle process, it’s not an uncommon method.
Actually, it is a very different allocation, and it leads to very different results. Historically, people who use true Lifecycle Investing manage to produce ~1.6 times final wealth than those who use conventional TDFs, with the same risk (uncertainty in final wealth). It's like getting paid the same, but in Euros (back when the Euro was 1.6 to the dollar). Every retirement cohort in the US since 1871 would've come out ahead. Same for studies in Britain and Japan. Lifecycle Investing is massively supported by theory and historical results. And it's a free lunch.

In fact, results from correct temporal diversification dwarf results from asset diversification.

IMO, it makes little sense to get into complicated Multi-factor investing and tilting, which might or might not produce benefits, when you could apply Lifecycle Investing, which is widely supported by literature, theory and practice.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by caklim00 »

Lifecyle Investing... Didn't market timer already try this and how did that turn out (at least in the short term).

I'm not sure why everyone is trying to blow past 100% on equity, 2x NTSX, etc. wouldn't it just be better to hold S&P500 and treasury future(s) and call it a day.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

305pelusa wrote: Wed Dec 18, 2019 11:50 am
MotoTrojan wrote: Wed Dec 18, 2019 11:35 am
Thanks that makes sense. I guess my point is you’d need to have cash ready to avoid a margin call so that would induce a further drag which the LETF is immune to.
Well you could always do exactly what LETFs do to avoid this issue. Once your leverage rises past whatever you're comfortable due to a market drop, then liquidate positions accordingly to get the leverage back down. You get to at least save the ER fees.
MotoTrojan wrote: Wed Dec 18, 2019 11:35 am
As to the other point. A Lifecycle investor may hold 2x leverage early on, and eventually back off as they get closer to decumulation where they’ll be entirely unleveraged. My point is that this isn’t very different than a more typical “age in bonds” approach where someone holds nearly 100% equity early in life and moves towards bonds later on. Both investors follow a similar glide path but the lifecycle investor just leveraged that glidepath. Basically I’m saying most of us use or suggest a detuned lifecycle process, it’s not an uncommon method.
Actually, it is a very different allocation, and it leads to very different results. Historically, people who use true Lifecycle Investing manage to produce ~1.6 times final wealth than those who use conventional TDFs, with the same risk (uncertainty in final wealth). It's like getting paid the same, but in Euros (back when the Euro was 1.6 to the dollar). Every retirement cohort in the US since 1871 would've come out ahead. Same for studies in Britain and Japan. Lifecycle Investing is massively supported by theory and historical results. And it's a free lunch.

In fact, results from correct temporal diversification dwarf results from asset diversification.

IMO, it makes little sense to get into complicated Multi-factor investing and tilting, which might or might not produce benefits, when you could apply Lifecycle Investing, which is widely supported by literature, theory and practice.
I quite enjoy learning about and implementing some factor tilts :twisted: . What are the best reads/sources to learn more about lifecycle investing?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

MotoTrojan wrote: Wed Dec 18, 2019 12:36 pm
305pelusa wrote: Wed Dec 18, 2019 11:50 am
MotoTrojan wrote: Wed Dec 18, 2019 11:35 am
Thanks that makes sense. I guess my point is you’d need to have cash ready to avoid a margin call so that would induce a further drag which the LETF is immune to.
Well you could always do exactly what LETFs do to avoid this issue. Once your leverage rises past whatever you're comfortable due to a market drop, then liquidate positions accordingly to get the leverage back down. You get to at least save the ER fees.
MotoTrojan wrote: Wed Dec 18, 2019 11:35 am
As to the other point. A Lifecycle investor may hold 2x leverage early on, and eventually back off as they get closer to decumulation where they’ll be entirely unleveraged. My point is that this isn’t very different than a more typical “age in bonds” approach where someone holds nearly 100% equity early in life and moves towards bonds later on. Both investors follow a similar glide path but the lifecycle investor just leveraged that glidepath. Basically I’m saying most of us use or suggest a detuned lifecycle process, it’s not an uncommon method.
Actually, it is a very different allocation, and it leads to very different results. Historically, people who use true Lifecycle Investing manage to produce ~1.6 times final wealth than those who use conventional TDFs, with the same risk (uncertainty in final wealth). It's like getting paid the same, but in Euros (back when the Euro was 1.6 to the dollar). Every retirement cohort in the US since 1871 would've come out ahead. Same for studies in Britain and Japan. Lifecycle Investing is massively supported by theory and historical results. And it's a free lunch.

In fact, results from correct temporal diversification dwarf results from asset diversification.

IMO, it makes little sense to get into complicated Multi-factor investing and tilting, which might or might not produce benefits, when you could apply Lifecycle Investing, which is widely supported by literature, theory and practice.
I quite enjoy learning about and implementing some factor tilts :twisted: . What are the best reads/sources to learn more about lifecycle investing?
I would probably start with the paper:
https://papers.ssrn.com/sol3/papers.cfm ... id=1149340

I was sold just on the theory and logic of it. It's nice to see the backtest overwhelmingly favor it too.

The thread I started to document the process is (I hope) a good resource:
viewtopic.php?f=10&t=274390

Finally, they came out with a book. It's on Amazon:
https://www.amazon.com/Lifecycle-Invest ... 449&sr=8-3

If you sign up for Audible, you can use the credit to get the audio book for free. I liked it so much, I bought the book so they'd get some royalties. It has completely changed my investing mindset.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

caklim00 wrote: Wed Dec 18, 2019 12:01 pm Lifecyle Investing... Didn't market timer already try this and how did that turn out (at least in the short term).

I'm not sure why everyone is trying to blow past 100% on equity, 2x NTSX, etc. wouldn't it just be better to hold S&P500 and treasury future(s) and call it a day.
He did try it but I think he broke a lot of rules he probably should've followed.

The reason why I do this over holding treasury futures is that temporal diversification should lead to far better outcomes. There's no correlation between the year 2020 and 2060 so why would I mostly invest in 2060 (once I've fully saved) and not today? Leverage allows one to expose our 2060's savings to today. And there's dozens of years between now and my death just like that. Temporal diversification is like more evenly splitting my investments amongst dozens of uncorrolated sources of return (different years). It's a far bigger bang for my leverage buck than squeezing asset diversification.

IMO, if you're going to go through the trouble of adding leverage, I would diversify temporally first, and then see what you can do from an asset standpoint. You'll probably have to leverage so much to diversify temporally properly that you might choose to forego treasuries completely like myself.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

305pelusa wrote: Wed Dec 18, 2019 1:08 pm
MotoTrojan wrote: Wed Dec 18, 2019 12:36 pm
305pelusa wrote: Wed Dec 18, 2019 11:50 am
MotoTrojan wrote: Wed Dec 18, 2019 11:35 am
Thanks that makes sense. I guess my point is you’d need to have cash ready to avoid a margin call so that would induce a further drag which the LETF is immune to.
Well you could always do exactly what LETFs do to avoid this issue. Once your leverage rises past whatever you're comfortable due to a market drop, then liquidate positions accordingly to get the leverage back down. You get to at least save the ER fees.
MotoTrojan wrote: Wed Dec 18, 2019 11:35 am
As to the other point. A Lifecycle investor may hold 2x leverage early on, and eventually back off as they get closer to decumulation where they’ll be entirely unleveraged. My point is that this isn’t very different than a more typical “age in bonds” approach where someone holds nearly 100% equity early in life and moves towards bonds later on. Both investors follow a similar glide path but the lifecycle investor just leveraged that glidepath. Basically I’m saying most of us use or suggest a detuned lifecycle process, it’s not an uncommon method.
Actually, it is a very different allocation, and it leads to very different results. Historically, people who use true Lifecycle Investing manage to produce ~1.6 times final wealth than those who use conventional TDFs, with the same risk (uncertainty in final wealth). It's like getting paid the same, but in Euros (back when the Euro was 1.6 to the dollar). Every retirement cohort in the US since 1871 would've come out ahead. Same for studies in Britain and Japan. Lifecycle Investing is massively supported by theory and historical results. And it's a free lunch.

In fact, results from correct temporal diversification dwarf results from asset diversification.

IMO, it makes little sense to get into complicated Multi-factor investing and tilting, which might or might not produce benefits, when you could apply Lifecycle Investing, which is widely supported by literature, theory and practice.
I quite enjoy learning about and implementing some factor tilts :twisted: . What are the best reads/sources to learn more about lifecycle investing?
I would probably start with the paper:
https://papers.ssrn.com/sol3/papers.cfm ... id=1149340

I was sold just on the theory and logic of it. It's nice to see the backtest overwhelmingly favor it too.

The thread I started to document the process is (I hope) a good resource:
viewtopic.php?f=10&t=274390

Finally, they came out with a book. It's on Amazon:
https://www.amazon.com/Lifecycle-Invest ... 449&sr=8-3

If you sign up for Audible, you can use the credit to get the audio book for free. I liked it so much, I bought the book so they'd get some royalties. It has completely changed my investing mindset.
Thanks. I could consider the Audible book, may be a fun way to do my morning commute. Also some reasonably priced used copies. I think I will give this a go after I complete the Fundamental Indexing book. I'll have to read your post a bit more to see how you went about implementing it exactly. Thanks for the nudge to learn more.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by caklim00 »

305pelusa wrote: Wed Dec 18, 2019 1:21 pm
caklim00 wrote: Wed Dec 18, 2019 12:01 pm Lifecyle Investing... Didn't market timer already try this and how did that turn out (at least in the short term).

I'm not sure why everyone is trying to blow past 100% on equity, 2x NTSX, etc. wouldn't it just be better to hold S&P500 and treasury future(s) and call it a day.
He did try it but I think he broke a lot of rules he probably should've followed.

The reason why I do this over holding treasury futures is that temporal diversification should lead to far better outcomes. There's no correlation between the year 2020 and 2060 so why would I mostly invest in 2060 (once I've fully saved) and not today? Leverage allows one to expose our 2060's savings to today. And there's dozens of years between now and my death just like that. Temporal diversification is like more evenly splitting my investments amongst dozens of uncorrolated sources of return (different years). It's a far bigger bang for my leverage buck than squeezing asset diversification.

IMO, if you're going to go through the trouble of adding leverage, I would diversify temporally first, and then see what you can do from an asset standpoint. You'll probably have to leverage so much to diversify temporally properly that you might choose to forego treasuries completely like myself.
What are your holdings if I might ask?
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

caklim00 wrote: Wed Dec 18, 2019 2:12 pm
305pelusa wrote: Wed Dec 18, 2019 1:21 pm
caklim00 wrote: Wed Dec 18, 2019 12:01 pm Lifecyle Investing... Didn't market timer already try this and how did that turn out (at least in the short term).

I'm not sure why everyone is trying to blow past 100% on equity, 2x NTSX, etc. wouldn't it just be better to hold S&P500 and treasury future(s) and call it a day.
He did try it but I think he broke a lot of rules he probably should've followed.

The reason why I do this over holding treasury futures is that temporal diversification should lead to far better outcomes. There's no correlation between the year 2020 and 2060 so why would I mostly invest in 2060 (once I've fully saved) and not today? Leverage allows one to expose our 2060's savings to today. And there's dozens of years between now and my death just like that. Temporal diversification is like more evenly splitting my investments amongst dozens of uncorrolated sources of return (different years). It's a far bigger bang for my leverage buck than squeezing asset diversification.

IMO, if you're going to go through the trouble of adding leverage, I would diversify temporally first, and then see what you can do from an asset standpoint. You'll probably have to leverage so much to diversify temporally properly that you might choose to forego treasuries completely like myself.
What are your holdings if I might ask?
It’s all stock ETFs (VTI, VWO, etc) as well as 4 SPY calls and I’m short another 4 SPY puts. Those are the ones that give me leverage for the strategy.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by caklim00 »

305pelusa wrote: Wed Dec 18, 2019 2:20 pm
caklim00 wrote: Wed Dec 18, 2019 2:12 pm
305pelusa wrote: Wed Dec 18, 2019 1:21 pm
caklim00 wrote: Wed Dec 18, 2019 12:01 pm Lifecyle Investing... Didn't market timer already try this and how did that turn out (at least in the short term).

I'm not sure why everyone is trying to blow past 100% on equity, 2x NTSX, etc. wouldn't it just be better to hold S&P500 and treasury future(s) and call it a day.
He did try it but I think he broke a lot of rules he probably should've followed.

The reason why I do this over holding treasury futures is that temporal diversification should lead to far better outcomes. There's no correlation between the year 2020 and 2060 so why would I mostly invest in 2060 (once I've fully saved) and not today? Leverage allows one to expose our 2060's savings to today. And there's dozens of years between now and my death just like that. Temporal diversification is like more evenly splitting my investments amongst dozens of uncorrolated sources of return (different years). It's a far bigger bang for my leverage buck than squeezing asset diversification.

IMO, if you're going to go through the trouble of adding leverage, I would diversify temporally first, and then see what you can do from an asset standpoint. You'll probably have to leverage so much to diversify temporally properly that you might choose to forego treasuries completely like myself.
What are your holdings if I might ask?
It’s all stock ETFs (VTI, VWO, etc) as well as 4 SPY calls and I’m short another 4 SPY puts. Those are the ones that give me leverage for the strategy.
Got it. Yeah, thats too much for me. I'm going to stick with my boring treasury futures and continue to keep my equity allocation < 100%.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

305pelusa wrote: Wed Dec 18, 2019 2:20 pm
caklim00 wrote: Wed Dec 18, 2019 2:12 pm
305pelusa wrote: Wed Dec 18, 2019 1:21 pm
caklim00 wrote: Wed Dec 18, 2019 12:01 pm Lifecyle Investing... Didn't market timer already try this and how did that turn out (at least in the short term).

I'm not sure why everyone is trying to blow past 100% on equity, 2x NTSX, etc. wouldn't it just be better to hold S&P500 and treasury future(s) and call it a day.
He did try it but I think he broke a lot of rules he probably should've followed.

The reason why I do this over holding treasury futures is that temporal diversification should lead to far better outcomes. There's no correlation between the year 2020 and 2060 so why would I mostly invest in 2060 (once I've fully saved) and not today? Leverage allows one to expose our 2060's savings to today. And there's dozens of years between now and my death just like that. Temporal diversification is like more evenly splitting my investments amongst dozens of uncorrolated sources of return (different years). It's a far bigger bang for my leverage buck than squeezing asset diversification.

IMO, if you're going to go through the trouble of adding leverage, I would diversify temporally first, and then see what you can do from an asset standpoint. You'll probably have to leverage so much to diversify temporally properly that you might choose to forego treasuries completely like myself.
What are your holdings if I might ask?
It’s all stock ETFs (VTI, VWO, etc) as well as 4 SPY calls and I’m short another 4 SPY puts. Those are the ones that give me leverage for the strategy.
I thought you also held multi-factor tilts. Did you abandon that or just not mentioning here? Leverage is on options only, no margin? Why puts and calls, does that offset some risk/cost? Cool stuff but I think I’ll also stick to my 100/0 with strong tilts.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

MotoTrojan wrote: Wed Dec 18, 2019 2:48 pm
305pelusa wrote: Wed Dec 18, 2019 2:20 pm
caklim00 wrote: Wed Dec 18, 2019 2:12 pm
305pelusa wrote: Wed Dec 18, 2019 1:21 pm
caklim00 wrote: Wed Dec 18, 2019 12:01 pm Lifecyle Investing... Didn't market timer already try this and how did that turn out (at least in the short term).

I'm not sure why everyone is trying to blow past 100% on equity, 2x NTSX, etc. wouldn't it just be better to hold S&P500 and treasury future(s) and call it a day.
He did try it but I think he broke a lot of rules he probably should've followed.

The reason why I do this over holding treasury futures is that temporal diversification should lead to far better outcomes. There's no correlation between the year 2020 and 2060 so why would I mostly invest in 2060 (once I've fully saved) and not today? Leverage allows one to expose our 2060's savings to today. And there's dozens of years between now and my death just like that. Temporal diversification is like more evenly splitting my investments amongst dozens of uncorrolated sources of return (different years). It's a far bigger bang for my leverage buck than squeezing asset diversification.

IMO, if you're going to go through the trouble of adding leverage, I would diversify temporally first, and then see what you can do from an asset standpoint. You'll probably have to leverage so much to diversify temporally properly that you might choose to forego treasuries completely like myself.
What are your holdings if I might ask?
It’s all stock ETFs (VTI, VWO, etc) as well as 4 SPY calls and I’m short another 4 SPY puts. Those are the ones that give me leverage for the strategy.
I thought you also held multi-factor tilts. Did you abandon that or just not mentioning here? Leverage is on options only, no margin? Why puts and calls, does that offset some risk/cost? Cool stuff but I think I’ll also stick to my 100/0 with strong tilts.
I do have tilts yes. I just didn't mention it there. I've leveraged with a small family acquaintance loan, a CC that I will balance transfer for another 18 months, and those options. The naked puts require margin (collateral), but my own ETFs serve as that collateral. I'm not paying any margin interest in other words. Going long a call and short a put creates a synthetic long stock position; it's like a futures contract. Except the collateral can be in the form of stock ETFs, no cash drag.

I would think you'd be very interested; every time you see a poster complain that their cash transfer is taking a while to clear and invest, you tell them they could've just invested more in stocks now and invest that cash transfer into bonds when it does arrive. Money is fungible after all. Lifecycle Investing is taking that idea to its logical conclusion: why wait decades for your savings to arrive and invest if you can over-invest now to make up for it? It's the same concept, applied through your lifecycle.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
MotoTrojan
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MotoTrojan »

305pelusa wrote: Wed Dec 18, 2019 2:57 pm
MotoTrojan wrote: Wed Dec 18, 2019 2:48 pm
305pelusa wrote: Wed Dec 18, 2019 2:20 pm
caklim00 wrote: Wed Dec 18, 2019 2:12 pm
305pelusa wrote: Wed Dec 18, 2019 1:21 pm

He did try it but I think he broke a lot of rules he probably should've followed.

The reason why I do this over holding treasury futures is that temporal diversification should lead to far better outcomes. There's no correlation between the year 2020 and 2060 so why would I mostly invest in 2060 (once I've fully saved) and not today? Leverage allows one to expose our 2060's savings to today. And there's dozens of years between now and my death just like that. Temporal diversification is like more evenly splitting my investments amongst dozens of uncorrolated sources of return (different years). It's a far bigger bang for my leverage buck than squeezing asset diversification.

IMO, if you're going to go through the trouble of adding leverage, I would diversify temporally first, and then see what you can do from an asset standpoint. You'll probably have to leverage so much to diversify temporally properly that you might choose to forego treasuries completely like myself.
What are your holdings if I might ask?
It’s all stock ETFs (VTI, VWO, etc) as well as 4 SPY calls and I’m short another 4 SPY puts. Those are the ones that give me leverage for the strategy.
I thought you also held multi-factor tilts. Did you abandon that or just not mentioning here? Leverage is on options only, no margin? Why puts and calls, does that offset some risk/cost? Cool stuff but I think I’ll also stick to my 100/0 with strong tilts.
I do have tilts yes. I just didn't mention it there. I've leveraged with a small family acquaintance loan, a CC that I will balance transfer for another 18 months, and those options. The naked puts require margin (collateral), but my own ETFs serve as that collateral. I'm not paying any margin interest in other words. Going long a call and short a put creates a synthetic long stock position; it's like a futures contract. Except the collateral can be in the form of stock ETFs, no cash drag.

I would think you'd be very interested; every time you see a poster complain that their cash transfer is taking a while to clear and invest, you tell them they could've just invested more in stocks now and invest that cash transfer into bonds when it does arrive. Money is fungible after all. Lifecycle Investing is taking that idea to its logical conclusion: why wait decades for your savings to arrive and invest if you can over-invest now to make up for it? It's the same concept, applied through your lifecycle.
Does the book stick to theory or go over some of these means of implementation? A CC isn't going to make much of a dent in terms of leverage, and I am not taking any loans, so I would be looking at the options position if not traditional margin.
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Steve Reading
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

MotoTrojan wrote: Wed Dec 18, 2019 3:15 pm
305pelusa wrote: Wed Dec 18, 2019 2:57 pm
MotoTrojan wrote: Wed Dec 18, 2019 2:48 pm
305pelusa wrote: Wed Dec 18, 2019 2:20 pm
caklim00 wrote: Wed Dec 18, 2019 2:12 pm
What are your holdings if I might ask?
It’s all stock ETFs (VTI, VWO, etc) as well as 4 SPY calls and I’m short another 4 SPY puts. Those are the ones that give me leverage for the strategy.
I thought you also held multi-factor tilts. Did you abandon that or just not mentioning here? Leverage is on options only, no margin? Why puts and calls, does that offset some risk/cost? Cool stuff but I think I’ll also stick to my 100/0 with strong tilts.
I do have tilts yes. I just didn't mention it there. I've leveraged with a small family acquaintance loan, a CC that I will balance transfer for another 18 months, and those options. The naked puts require margin (collateral), but my own ETFs serve as that collateral. I'm not paying any margin interest in other words. Going long a call and short a put creates a synthetic long stock position; it's like a futures contract. Except the collateral can be in the form of stock ETFs, no cash drag.

I would think you'd be very interested; every time you see a poster complain that their cash transfer is taking a while to clear and invest, you tell them they could've just invested more in stocks now and invest that cash transfer into bonds when it does arrive. Money is fungible after all. Lifecycle Investing is taking that idea to its logical conclusion: why wait decades for your savings to arrive and invest if you can over-invest now to make up for it? It's the same concept, applied through your lifecycle.
Does the book stick to theory or go over some of these means of implementation? A CC isn't going to make much of a dent in terms of leverage, and I am not taking any loans, so I would be looking at the options position if not traditional margin.
I'd say the paper is more theoretical and the book is more about historical results, the logic behind it and implementation. You can implement with options, LETFs and margin. They also mention futures but at the time, gaining exposure with E-Minis would still be too large. Since then, E-Micros have come out, making futures a possibility. These all have pros and cons of course.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
typical.investor
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by typical.investor »

RayKeynes wrote: Wed Dec 18, 2019 7:49 am
typical.investor wrote: Wed Dec 18, 2019 7:46 am
RayKeynes wrote: Wed Dec 18, 2019 2:44 am @ HedgeFundie

There is LTT data available since 1928 (on a yearly basis by SIAMOND), which don't you try to simulate TMF from 1929? I would be very interested to see the backtesting results for TMF since 1929.

I know that there is no LIBOR data available since 1929, but you may take the average spread for UPRO (around 0.48%) and add it to the effective federal funds rate to simulate the borrowing costs?!
Honestly, what’s the point?
If you argue like that - then whats the point in performing any back tests AT ALL?

1. It can show you how LTT / TMF performed in an environment that was not very bond-friendly (1950s - 1980s). It can show you the maximum loss you would have realized if you did that strategy back then. If, for whatever reason, TMF did also perform well during the 1950s to 1980s, I would not see any reason which not to pursue such a strategy.
Hadn't you seen 3X LTT since the mid-1950s?

viewtopic.php?f=10&t=272007&start=1050#p4426366

It's worrisome, but again rates were set differently back then.

Let me ask you this, in 2007 with Real Estate backtesting so well, how would you have used than information? Would it justify a large cash out refinance? Would you have borrowed more to invest in real estate because it was doing so well.

Anyway, extending the analysis back from the mid 1950s to 1929 won't really be that informative I think as that 25 years of rate data doesn't seem particularly relevant to what we will experience going forward.
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siamond
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by siamond »

RayKeynes wrote: Wed Dec 18, 2019 2:44 am @ HedgeFundie

There is LTT data available since 1928 (on a yearly basis by SIAMOND), which don't you try to simulate TMF from 1929? I would be very interested to see the backtesting results for TMF since 1929.

I know that there is no LIBOR data available since 1929, but you may take the average spread for UPRO (around 0.48%) and add it to the effective federal funds rate to simulate the borrowing costs?!
Actually, the LTT data in Simba before 1942 is VERY CRUDE. The trouble is there are no long-term rates from FRED until then (nor from other sources). So we had to solely rely on 10yrs rates to derive bond returns, which some view as somewhat long-term, but most would not agree. TMF is based on a 20+ years treasury index, as a case in point. Plus we only have annual data and no decent proxy for daily volatility by then.

Also the EFFR only goes back to 1955, this is why we started the simulated model at this point in time. One could use T-Bills as a proxy, but we know this is a rather poor proxy and this would be adding even more noise to the model. Finally we know that during WW-II, the government played all sorts of games with treasuries, which lead to a dramatic drop in value of treasuries in real terms.

Frankly, I'd be happy to go farther back in time than 1955, there is always a lot to learn from history, but in this case, it definitely sounds like garbage in, garbage out...
typical.investor
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by typical.investor »

siamond wrote: Wed Dec 18, 2019 5:23 pm
Frankly, I'd be happy to go farther back in time than 1955, there is always a lot to learn from history, but in this case, it definitely sounds like garbage in, garbage out...
Siamond!

Thanks for all your really great work in clarifying past results! Anything you come up with, I will read with interest. I just don’t think it’s completely necessary to keep going back further and further in time to have a good idea of how this strategy will perform in various environments. You have established that with the returns since the 50s. No telling from the past what rates will do in the next 30 years or so which is what we’d need to know. Anyway, I think you have done enough and there shouldn’t be an expectation to keep going back further.

Happy holidays and have a great new year.
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HEDGEFUNDIE
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by HEDGEFUNDIE »

305pelusa wrote: Wed Dec 18, 2019 11:50 am
MotoTrojan wrote: Wed Dec 18, 2019 11:35 am
As to the other point. A Lifecycle investor may hold 2x leverage early on, and eventually back off as they get closer to decumulation where they’ll be entirely unleveraged. My point is that this isn’t very different than a more typical “age in bonds” approach where someone holds nearly 100% equity early in life and moves towards bonds later on. Both investors follow a similar glide path but the lifecycle investor just leveraged that glidepath. Basically I’m saying most of us use or suggest a detuned lifecycle process, it’s not an uncommon method.
Actually, it is a very different allocation, and it leads to very different results. Historically, people who use true Lifecycle Investing manage to produce ~1.6 times final wealth than those who use conventional TDFs, with the same risk (uncertainty in final wealth). It's like getting paid the same, but in Euros (back when the Euro was 1.6 to the dollar). Every retirement cohort in the US since 1871 would've come out ahead. Same for studies in Britain and Japan. Lifecycle Investing is massively supported by theory and historical results. And it's a free lunch.

In fact, results from correct temporal diversification dwarf results from asset diversification.

IMO, it makes little sense to get into complicated Multi-factor investing and tilting, which might or might not produce benefits, when you could apply Lifecycle Investing, which is widely supported by literature, theory and practice.
Would it still be a very different allocation if you include a mid-six figure mortgage in the asset calculation for the "normal AA"-holding young person?
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Steve Reading
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Steve Reading »

HEDGEFUNDIE wrote: Wed Dec 18, 2019 7:17 pm
305pelusa wrote: Wed Dec 18, 2019 11:50 am
MotoTrojan wrote: Wed Dec 18, 2019 11:35 am
As to the other point. A Lifecycle investor may hold 2x leverage early on, and eventually back off as they get closer to decumulation where they’ll be entirely unleveraged. My point is that this isn’t very different than a more typical “age in bonds” approach where someone holds nearly 100% equity early in life and moves towards bonds later on. Both investors follow a similar glide path but the lifecycle investor just leveraged that glidepath. Basically I’m saying most of us use or suggest a detuned lifecycle process, it’s not an uncommon method.
Actually, it is a very different allocation, and it leads to very different results. Historically, people who use true Lifecycle Investing manage to produce ~1.6 times final wealth than those who use conventional TDFs, with the same risk (uncertainty in final wealth). It's like getting paid the same, but in Euros (back when the Euro was 1.6 to the dollar). Every retirement cohort in the US since 1871 would've come out ahead. Same for studies in Britain and Japan. Lifecycle Investing is massively supported by theory and historical results. And it's a free lunch.

In fact, results from correct temporal diversification dwarf results from asset diversification.

IMO, it makes little sense to get into complicated Multi-factor investing and tilting, which might or might not produce benefits, when you could apply Lifecycle Investing, which is widely supported by literature, theory and practice.
Would it still be a very different allocation if you include a mid-six figure mortgage in the asset calculation for the "normal AA"-holding young person?
I believe so. Provided your cash flow is good, someone with a mortgage and a house, given all other finances equal, should probably invest similarly to someone who rents for his whole life. Your "rent money" could either go into rent, or a house purchase.

That's just a fancy way of saying that the "negative bond" of a large mortgage is more or less offset by the "positive bond" from a house that pays you dividends (in the form of not paying rent).

That's how I see it any ways.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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