Really bad days (RBDs) and porfolio performance

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

Post by dknightd » Fri Jun 01, 2018 9:09 am

I don't see a problem buying on really bad days, and selling on really good days.
I would not do this every day, but if I had to move in and out of the market that is what I'd do.
By 3:30 pm you have a pretty good idea of what the market is doing that day.
Up and down 1% might not matter much, but what the heck, if you wanted to transact anyway, 1% is a good thing ;)

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Lieutenant.Columbo
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Re: Really bad days (RBDs) and porfolio performance

Post by Lieutenant.Columbo » Fri Jun 01, 2018 10:27 am

livesoft wrote:
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.
Thank you for explaining. I understand RN2 now.
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rbaldini
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Re: Really bad days (RBDs) and porfolio performance

Post by rbaldini » Fri Jun 01, 2018 10:57 am

Interesting to reread this thread from 2 years ago.

I'd be interested in replicating something like this if anyone would like to suggest more RBD-esque strategies. Let me know.

I'm actually surprised that many of the RBD strategies tested in this thread do not beat the baseline method. Here's why: take as our null hypothesis that the market is a random walk (or very nearly so). In that case, an RBD would provide no predictive power about returns in the next month. As such, the only effect of the RBD strategy is to temporarily increase the allocation to stock at random points, away from bonds. Now, since stock has greater return than bonds on average, one would *expect* under the null hypothesis that this would tend to lead to higher long-term returns, though the effect would be small. But since the effect is random, it wouldn't be expected to increase *risk-adjusted* return; it would be equivalent to just slightly increasing your stock allocation on the whole. Slightly higher return, slightly greater risk.

The fact that most of them didn't beat the baseline is presumably because the market isn't actually a random walk. If there is any day-over-day momentum in returns, then returns following a bad day would actually be ever so slightly worse, which would actually reduce risk-adjusted return. Of course it needn't be linear (bad days vs really bad day vs really really bad days might behave differently), or it might all just be statistical noise anyway.

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

Post by bradpevans » Fri Jun 01, 2018 2:52 pm

rbaldini wrote:
Fri Jun 01, 2018 10:57 am
Interesting to reread this thread from 2 years ago.

I'd be interested in replicating something like this if anyone would like to suggest more RBD-esque strategies. Let me know.

I'm actually surprised that many of the RBD strategies tested in this thread do not beat the baseline method. Here's why: take as our null hypothesis that the market is a random walk (or very nearly so). In that case, an RBD would provide no predictive power about returns in the next month. As such, the only effect of the RBD strategy is to temporarily increase the allocation to stock at random points, away from bonds. Now, since stock has greater return than bonds on average, one would *expect* under the null hypothesis that this would tend to lead to higher long-term returns, though the effect would be small. But since the effect is random, it wouldn't be expected to increase *risk-adjusted* return; it would be equivalent to just slightly increasing your stock allocation on the whole. Slightly higher return, slightly greater risk.

The fact that most of them didn't beat the baseline is presumably because the market isn't actually a random walk. If there is any day-over-day momentum in returns, then returns following a bad day would actually be ever so slightly worse, which would actually reduce risk-adjusted return. Of course it needn't be linear (bad days vs really bad day vs really really bad days might behave differently), or it might all just be statistical noise anyway.
Even if we assume random, we need to put in some upward long term trend.
If we could magically buy at "local minimums" that would beat buying "on average"

My biggest issue isn't so much with the theory but the reality:
how is it that I always have money to "buy on the dips?"
even if i somehow had the funds, similar to dollar cost averaging a lump sum over a *long* period,
i still lose out by NOT having my money in the market

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

Post by livesoft » Fri Jun 01, 2018 3:04 pm

I see that folks still don't read.

One should not wait in cash to buy on the dips.
One should invest as soon as they have the money for investing.
One can exchange from their fixed income (bonds) allocation into selected equity on an RBD.
One can even sell what they bought on an RBD later and go back into fixed income if they want to.
One can do any other kind of rebalancing while also implementing an RBD strategy. That is, RBD can be in addition to anything else one does.

Indeed, rebalancing and RBD stuff is secondary to investing in passively-managed, low-expense-ratio index ETFs and mutual funds in a tax-efficient manner without additional commissions, taxes, and fees. And without other behavioral errors often seen on this forum such as "Should I invest now or wait?" and "I'm buying high-dividend individual stocks" or "Tax-loss harvesting is too much work."

I always have money to buy equities since I have about 30% of my portfolio normally (not always, because I have a range!) in fixed income funds.
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rbaldini
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Re: Really bad days (RBDs) and porfolio performance

Post by rbaldini » Fri Jun 01, 2018 3:42 pm

bradpevans wrote:
Fri Jun 01, 2018 2:52 pm
Even if we assume random, we need to put in some upward long term trend.
Correct. What I wrote assumes that already.
bradpevans wrote:
Fri Jun 01, 2018 2:52 pm
If we could magically buy at "local minimums" that would beat buying "on average"
Buying after an RBD is not equivalent to buying at a local minimum (feel free to replace "buying" with "increasing allocation to stocks"). A local minimum is lower than both adjacent sides - past and future. To buy on local minimums requires knowing the future. Buying on an RBD just means the price is (substantially) lower than yesterday. But yesterday doesn't matter - the future does. I have never seen any evidence to suggest that the returns *after* a dip are larger than average, but maybe I'm just ignorant. But that would be pretty much the only way that shifting to greater stock allocation after an RBD could increase your risk-adjusted reward.

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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Fri Jun 01, 2018 4:05 pm

rbaldini is right: There is no free lunch. If one says that risk is proportional to percentage in equities, then the RBD strategy does not increase risk-adjusted returns.

But is portfolio risk proportional to percentage in equities? For instance, did a portfolio of 70% equities in October 2007 have the same risk as a portfolio of 70% equities on March 15, 2009? I believe the answer to that is no, the two portfolios did not have the same risk. I don't mind if others disagree with what I believe.
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rbaldini
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Re: Really bad days (RBDs) and porfolio performance

Post by rbaldini » Fri Jun 01, 2018 4:46 pm

livesoft wrote:
Fri Jun 01, 2018 4:05 pm
But is portfolio risk proportional to percentage in equities? For instance, did a portfolio of 70% equities in October 2007 have the same risk as a portfolio of 70% equities on March 15, 2009? I believe the answer to that is no, the two portfolios did not have the same risk. I don't mind if others disagree with what I believe.
Well, no, but I would argue that at any given time, stocks are riskier than bonds, no? (Someone school me if I'm wrong.) So if you are suddenly faced with the decision of allocating more to stocks, it seems that you are deciding to go for a higher expected return for necessarily greater risk. In other words, while volatility may change over time, it would be hard to imagine a case where allocating a greater amount to stocks (away from bonds) would actually reduce your risk.

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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Fri Jun 01, 2018 4:56 pm

No argument with that.

But many people are like a Deer in Headlights when it comes to rebalancing. Many people were proud that they did not sell equities in 2008-2009, but they also admitted to not buying equities. I like the RBD strategy because it essentially forces me to never be that Deer.

Many investors expect a method to always win 100% of the time and many others add that a method must win big 100% of the time. This is another behavioral problem. I also freely admit that not every single RBD trade makes money. And many people expect an easy way to make millions of dollars without effort. That won't happen with the RBD strategy.
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fortyofforty
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Re: Really bad days (RBDs) and porfolio performance

Post by fortyofforty » Fri Jun 01, 2018 8:51 pm

Meh. I'll just keep DCAing my way to wealth, and play around the edges with such experiments. Bon chance! :beer
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Re: Really bad days (RBDs) and porfolio performance

Post by Ready3Retire » Fri Jun 01, 2018 9:38 pm

When the total bond fund went up .71% this week, I really had to fight the urge to move all $450k from that fund into the s&p500 that was down that day significantly. Alas I did not do this and as a result the s&p500 went up 1.3% the next day while total bond went down .3%. :oops:

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Re: Really bad days (RBDs) and porfolio performance

Post by aj76er » Sat Jun 02, 2018 10:57 am

livesoft wrote:
Fri Jun 01, 2018 3:04 pm
I always have money to buy equities since I have about 30% of my portfolio normally (not always, because I have a range!) in fixed income funds.
Perhaps a bit of off-topic from the thread, but I would like to know your strategy for adjusting your stock/bond ratio. Does it depend on valuations (e.g P/E)?
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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Sat Jun 02, 2018 11:01 am

No, it doesn't depend on valuations. For the most part it depends on relatively large one-day drops in bonds or stocks when I decide to buy things that have dropped. I usually sell those positions within a few days or weeks to get back to a nominal stock:bond ratio.

For example, in mid-May, bond funds dropped a relatively large amount. The key word here is "relatively." Since then, bond funds went up more than 1% and I have sold my gains. A 1% gain in a bond fund in a week or two is a relatively large gain.

I believe these relatively large one-day drops are just behavioral mistakes by other investors --- whether retail or professional. They are reacting to news without thinking too much about the news.

And I don't have to do anything because if I do nothing, then my portfolio is just a buy, hold, and rebalance portfolio as advocated by many people on this forum.

Consider this: Suppose I shifted 10% of my portfolio into more bonds in mid-May, got a 1% gain and 2 weeks later sold. That would just add 0.1% to my portfolio gains for the year EXCEPT if I had shifted the 10% out of international equities since international equities as measured by VTIAX dropped 2.5% in those 2 weeks. If I had shifted 10% of my portfolio out of international equities into bonds in mid-May and reversed the trade after 2 week, then I would have gained 0.35% on something like Vanguard LifeStrategy Moderate Growth for the year. Would that be worth it? Not to many people, but those may the be same people who are invested in Vanguard Wellington or Wellesley who already trail LifeStrategy Moderate Growth by more than 1% YTD.

OTOH, suppose the bonds had lost more money and international stocks had gone up instead. In that case, my portfolio might be behind its benchmark, but not by much.

Then suppose I do such trade 3 times a year and 1 out of 3 doesn't work out. Or 6 times a year and 2 out of 6 doesn't work out. What then?
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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Sat Jun 02, 2018 11:17 am

And don't forget that if there are no RBDs, then so what? I am simply reinvesting dividends, making withdrawals for expenses, making contributions, and rebalancing all in ways that maintain my asset allocation without paying taxes, commissions, and fees which is what I hope everybody else is doing, too.
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Re: Really bad days (RBDs) and porfolio performance

Post by oldzey » Mon Jun 25, 2018 4:33 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

An RBD in 'all RBDs' meets only criteria (1) above.
Today was not a RBD or a livesoft-defined RBD, but there's still 4 days left in the week (3 for a bona fide Livesoft RBD™). :twisted:
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Re: Really bad days (RBDs) and porfolio performance

Post by livesoft » Mon Jun 25, 2018 4:41 pm

I see now that the definition by slickwillbo has "VFINX" in it. That would define an RBD for VFINX and only VFINX.
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stlutz
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Re: Really bad days (RBDs) and porfolio performance

Post by stlutz » Wed Oct 10, 2018 9:47 pm

RBDs were also comprehensively addressed in this thread:

viewtopic.php?t=149161

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Re: Really bad days (RBDs) and porfolio performance

Post by oldzey » Wed Oct 10, 2018 11:01 pm

livesoft wrote:
Mon Jun 25, 2018 4:41 pm
I see now that the definition by slickwillbo has "VFINX" in it. That would define an RBD for VFINX and only VFINX.
-------------------------------------------------------------------------------------------

A livesoft-defined RBD for VFINX 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.

A RBD in 'all RBDs' meets only criterion (1) above.

-------------------------------------------------------------------------------------------
"The broker said the stock was 'poised to move.' Silly me, I thought he meant up." ― Randy Thurman

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