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Old 08-09-2013, 10:18 AM   #41
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Originally Posted by NW-Bound View Post
As typically computed, the numbers are with dividend reinvested and inflation-adjusted. For the 50/50 portfolio, the rebalancing is done on Jan 1st. I have checked the numbers between FIRECalc and another historical simulation, and while they do not agree to the last dollar, they come close. ....
OK, I realized there is a rough and tumble way to get some numbers from FIRECalc.

In the "Your Portfolio" Tab, I set fees to 0%, and to 1980 here:

Quote:
Total market, split between equities and fixed income. Include performance since [1980] (must be after 1870 and early enough to show a full cycle and preferably many cycles).
On "Start Here", $1M portfolio, $0 spend, 20 years. This gives 12 cycles, so starting years 1980-1991.

Then I ran with 100% stocks and again with 0% stocks. So with only one class, no rebalancing, right?

Then I ran 50/50, and it will auto-rebalance, right? Results:

Code:
100% FIXED 12 cycles 	- Average ending: $2,053,916

100% EQ 12 cycles 	- Average ending: $5,762,339

			- AVG of above:   $3,908,128


50/50 - so auto rebal  	- Average ending: $3,603,917
I'll look at some other time periods, but I found that interesting. I'm lazy, have not rebalanced in many years.

You also might incur some fees with rebal, and possible taxes if in a taxable account. While I do like the idea of maintaining an AA that matches your risk tolerance, I am thinking more and more that the whole idea is over-blown.

I'll be out much of the day, but plan to try some other time frames when I have time.

-ERD50
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Old 08-09-2013, 10:31 AM   #42
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Originally Posted by ERD50 View Post
While I do like the idea of maintaining an AA that matches your risk tolerance, I am thinking more and more that the whole idea is over-blown.
Rebalancing works better when stock prices and bond prices move in opposite directions, something that historically occurs when the 10-year Tbill yield is below 5% like it is now. During the 1980s and 1990s the 10-year was over 5%; as yields fell stock and bond prices both rose, negating much of the benefit of rebalancing.
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Old 08-09-2013, 11:33 AM   #43
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Three in particular that, if they were present today, would point to very favorable future expectations:

- High real interst rates. In 1981 the federal funds rate was at its all time high
- Age demographics skewed toward lower ages combined with increasing labor participation rate.
- End of a recession.

Actually, the US seems to be missing on all three.

There are other countries in the world where those are large enough to be "investable".
China has been the driver for growth. Its demand for raw materials has driven the economy of countries like Australia, and Brazil. But its population is aging already due to the "one child" policy, before this country reaches its full potential. India is so disorganized and not ready to take the lead. So, I am not sure where the next growth comes from.

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Originally Posted by REWahoo View Post
Real world examples of the "glass half empty/glass half full" theory of investing...
I miss the glass of 1980-2000. The one that refilled itself after every time one took a big gulp.

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Originally Posted by GrayHare View Post
Rebalancing works better when stock prices and bond prices move in opposite directions, something that historically occurs when the 10-year Tbill yield is below 5% like it is now. During the 1980s and 1990s the 10-year was over 5%; as yields fell stock and bond prices both rose, negating much of the benefit of rebalancing.
As it is not likely we will enter a secular bull market, I think rebalancing should be the way to go looking forward. And if it is a bull market, one does not lose but simply wins less with rebalancing. It is a good insurance policy.
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Old 08-09-2013, 05:02 PM   #44
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Rebalancing works better when stock prices and bond prices move in opposite directions, something that historically occurs when the 10-year Tbill yield is below 5% like it is now. During the 1980s and 1990s the 10-year was over 5%; as yields fell stock and bond prices both rose, negating much of the benefit of rebalancing.
OK, so I had a minute to take a look at 2000-2012 (I am using code tags to try to keep things aligned):

Code:
1980 - 20 years; 12 cycles

100% FIXED 12 cycles 	- Average ending: $2,053,916
100% EQ    12 cycles 	- Average ending: $5,762,339
			- AVG of above:   $3,908,128

50/50 - so auto rebal  	- Average ending: $3,603,917   92.22% with rebal

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so lets try since 2000 - 12 years; 2 cycles

100% FIXED 2 cycles 	- Average ending: $1,268,514
100% EQ    2 cycles 	- Average ending: $1,001,905
			- AVG of above:   $1,135,209

50/50 - so auto rebal  	- Average ending: $1,200,935  105.79% with rebal
So you are correct (if we can claim that from two samples), but the delta isn't that great, and rebal hurt by 7.78% through the 80's-90's. And that would take an 8.44% gain to recover. Maybe I'll do more trials, but I suspect it will vary from time period to time period, and mostly wash out?

-ERD50
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Old 08-09-2013, 06:44 PM   #45
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The purpose of rebalancing in not to attempt to increase gains by selling high and buying low. Rather, its purpose it to keep the portolio from straying beyond one's risk tolerance.
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Old 08-09-2013, 06:57 PM   #46
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ERD50, how do you get the numbers from FIRECalc for the years 2011, 2012? It only has data up to 2010, as I could see. I have problems duplicating your numbers.

And by the way, the numbers I presented earlier were not averages, but specific to the periods 1/1980-1/2000, and then 1/2000 to 1/2012. They are not averages of 20 years periods starting from 1980, 1981, 1982, etc...

Just to let you know, in case you see any discrepancies.
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Old 08-09-2013, 07:01 PM   #47
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The purpose of rebalancing in not to attempt to increase gains by selling high and buying low. Rather, its purpose it to keep the portolio from straying beyond one's risk tolerance.
Whatever the intention, a benefit of rebalancing in a cyclical market is that it provides extra gains. It may not be your initial goal, but that is still the end result. And we now know that, in hindsight of course.

And when the yield of bond is low and the stock return is also weak as we have experienced from 2000 till now, one needs that extra bit to get that 3.5% WR.
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Old 08-09-2013, 09:46 PM   #48
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ERD50, how do you get the numbers from FIRECalc for the years 2011, 2012? It only has data up to 2010, as I could see. I have problems duplicating your numbers.
Well, I told it to start the market data in 2000 ("Your Portfolio Tab"), and a portfolio length of 12 years. It spit out a graph with two sequences, 12 years each. Whether those numbers are accurate or not, I have not yet tried to validate. But at a glance, they don't look like they are missing data - no dead flat lines or jumps to zero.

FIRECalc: A different kind of retirement calculator

Quote:
And by the way, the numbers I presented earlier were not averages, but specific to the periods 1/1980-1/2000, and then 1/2000 to 1/2012. They are not averages of 20 years periods starting from 1980, 1981, 1982, etc...

Just to let you know, in case you see any discrepancies.
Right, I was just reporting what I could get from FIRECalc. It doesn't allow (AFAIK) me to enter a single year to get that data for a 20 year cycle, so this is a blend.

I think it's interesting, probably tells us something, but I don't expect the numbers to align perfectly with yours.

-ERD50
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Old 08-09-2013, 09:52 PM   #49
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The purpose of rebalancing in not to attempt to increase gains by selling high and buying low. Rather, its purpose it to keep the portfolio from straying beyond one's risk tolerance.
There is some emotional value to maintaining an AA in line with your risk tolerance. And that may have a real effect if it helps you 'stay the course'. But I think you will find that many investors do expect it to help boost returns a bit. They will say you are selling high and buying low.

You are, but sometimes you are also selling on the way up, and missing gains.

Personally, I'm fine with a pretty wide range of AA - sleep like a baby. So if rebalancing does not boost gains over the long haul, I'm inclined to not bother. Though if I need to sell anything, I'd probably look into selling in a manner to get back to some target AA. But I might not actively pursue that otherwise.

-ERD50
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Old 08-09-2013, 09:58 PM   #50
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Well, I told it to start the market data in 2000 ("Your Portfolio Tab"), and a portfolio length of 12 years. It spit out a graph with two sequences, 12 years each. Whether those numbers are accurate or not, I have not yet tried to validate. But at a glance, they don't look like they are missing data - no dead flat lines or jumps to zero.

FIRECalc: A different kind of retirement calculator

-ERD50
Wait a minute - I just told it to do a 30 year plan with data starting in 2000. And the graphs look like 'real' data. Either FIRECalc is predicting the future (shhhhhh!), or this is a bug, or I'm misunderstanding what this following excerpt means:

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Include performance since [ I entered "2000" ] (must be after 1870 and early enough to show a full cycle and preferably many cycles).
-ERD50
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Old 08-09-2013, 10:15 PM   #51
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ERD50, try the following.

Select the checkmark in the sentence "optionally provide data and formulas in a spreadsheet format, using 2000 as the starting retirement year".

Then, in the result page, click on "download spreadsheet". You will see that because FIRECalc data only goes to 2010, the latest 30-yr result it can give you is the cycle starting in 1980, and that's what it gives you. It's not the 2000 starting point that you ask for, which of course extends into the future.

Darn! We almost discovered a future machine to let us rule the stock exchanges between the two of us.
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Old 08-09-2013, 11:02 PM   #52
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I need to add that when I presented numbers that extend to Jan 2013, they were not from FIRECalc. For numbers up to 2010, FIRECalc agrees reasonably with other simulators.
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Old 08-11-2013, 02:23 PM   #53
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A poster sent me a PM, saying that I appeared to time the market well in the 2008-2009 stock rout. Perhaps I unintentionally gave that impression, but I did not think I was that good.

If I were smarter, in 2006-2007, I would have noticed that the profits of the finance sector were not sustainable, and that the S&P became too heavily weighted in this sector, not too different than it being overweighted in tech stocks in 2000. Around that time, Bogle mentioned this financial effect in a talk, but as he preached indexing, I guess he could not contradict himself to tell people to get out, at least of the finance sector. Oh, the dividends they were paying were so juicy too.

I read plenty of articles warning about CDO and CDS in late 2007, but the market seemed to hold up, and I would feel foolish to jump ship while people were still dancing on the deck.

Anyway, in 2008 when things started to unravel, as I owned individual stocks, I saw some internal things that were a lot worse than if one looked at just the S&P. While the S&P bottomed out at 55% of its peak in 2007, many sectors outside of finance tumbled pretty bad. The stocks that held up well were consumer staples, and nearly everything else got pummeled. In the 3rd quarter of 2008, copper price dropped hard, and as this metal is ubiquitous in housing and all industrial manufacturing, this was very bad. That was when I started to sell.

So, why did I start to load up in early 2009? Just a gamble, really. I saw some non-finance stocks that I sold earlier dropped to 1/10 of their earlier value. So I started to buy. Bargain hunting. Just luck and some guts, that's all.
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