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Old 04-10-2014, 06:47 PM   #61
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Originally Posted by ERD50 View Post
Maybe not. I've seen some studies that show re-balancing has as much or greater negative effect overall by selling off into a rising bull market.

I think it makes psychological sense if maintaining an AA you are comfortable with makes you feel better. But it could hurt in actual $$$ in the long run.

-ERD50
That "rising bull market" is a pretty major caveat. We haven't been in a rising bull market for a pretty long time now.

Sure - running full throttle will outperform in a two decade bull like the 80s and 90s, but we haven't been in that environment since 2000.

Note that rebalancing is NOT about maximizing long term gain. It's about managing short-term volatility and targeting a specific risk-adjusted return.

from http://www.retailinvestor.org/risk.html
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Old 04-10-2014, 06:57 PM   #62
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By Decade 1960s through 2000s

from The Good, Bad, and Ugly of Strategic Asset Allocation | Investment Advice Done Differently
or
http://www.afcgllc.com/sites/afcgllc...0Revisited.pdf This one has a graph that includes 2002-2011
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Old 04-10-2014, 07:10 PM   #63
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Nice!

The linked Web site actually labels this graph "The Inefficient Frontier?".

The decade of 2000-2010 has not been kind to equity investors, except for those who bought low sold high, er, rebalanced, or those who were still in accumulation phase.

In the longer run, equity investors may get rewarded again, but in that longer run, some of us geezers may be dead towards the end.
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Old 04-10-2014, 07:14 PM   #64
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I note that this is the first decade since the 1960s where the expected return from a 100% bond portfolio is under 5%.
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Old 04-10-2014, 07:16 PM   #65
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Nice!

The linked Web site actually labels this graph "The Inefficient Frontier?".

The decade of 2000-2010 has not been kind to equity investors, except for those who bought low sold high, er, rebalanced, or those who were still in accumulation phase.

In the longer run, equity investors may get rewarded again, but in that longer run, some of us geezers may be dead towards the end.
Yeah - all it means is that in a decade where stocks are severely underperforming other asset classes not only do you get more volatility but also worse performance - yikes!!!!!! The second link under that graph is more informative IMO, but I didn't have a way to share the graph embedded in the PDF.

The whole "efficient" term tends to confuse people anyway. I understand why Bernstein originally used the term since the curve shows you can get relatively more gain for less volatility when combining multiple asset classes. In other words - it's not a straight line but a curve. But then people naturally start confusing it with other terms like "efficient markets" and a whole host of stuff that is unrelated.
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Old 04-10-2014, 07:26 PM   #66
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The term "Efficient Frontier" was coined by Markowitz. People are accustomed to seeing the curve in your post #61, but the decade of 2000-2010 shows that it does not always hold.

A few months ago, I posted an article from Bernstein who lamented that getting the "optimal mix" of portfolio AA from actual market performance was a numerical process highly susceptible to minute variations in the data. In other words, people were fitting curves to noise!
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Old 04-10-2014, 07:33 PM   #67
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The term "Efficient Frontier" was coined by Markowitz. People are accustomed to seeing the curve in your post #61, but the decade of 2000-2010 shows that it does not always hold.

A few months ago, I posted an article from Bernstein who lamented that getting the "optimal mix" of portfolio AA from actual market performance was a numerical process highly susceptible to minute variations in the data. In other words, people were fitting curves to noise!
Yeah - fortunately over multiple decades it does tend to more like post 61. I'd love to see that curve that included through 2013.

This one has the 1960-2011 curve: http://www.afcgllc.com/sites/afcgllc...0Revisited.pdf
and it's almost flat in performance between 70% and 100% equities - in other words, once you got above 70% equities, you just got more volatility with no additional gain.

Right - it was Markowitz. I just remember reading Bernstein's site. Yeah - people must have gone silly trying to "optimize" things by backtesting. I always pretty much took it as somewhere in the general 50/50 area probably would give a better performance versus volatility tradeoff.
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Old 04-10-2014, 07:43 PM   #68
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Yeah - fortunately over multiple decades it does tend to more like post 61...
Probably. However, I do not think I have too many decades left in me. It might be only 1.

Anyway, I am still holding 70% equity because I like the daily excitement.
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Old 04-10-2014, 09:17 PM   #69
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That "rising bull market" is a pretty major caveat. We haven't been in a rising bull market for a pretty long time now.

Sure - running full throttle will outperform in a two decade bull like the 80s and 90s, but we haven't been in that environment since 2000.

...
We've had two years of big gains. Even an annual rebal would have you missing some of the recent gains. Why does it require a decade long bull to outperform?

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Note that rebalancing is NOT about maximizing long term gain. It's about managing short-term volatility and targeting a specific risk-adjusted return. ...
I think there are quite a few people who do think it will maximizing long term gain (buy low, sell high). Maybe I misinterpreted, but in your post, you referred to the dips as 'opportunities' - I took that as 'buying opportunities to improve your long term results', not 'opportunities to reduce volatility'?

-ERD50
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Old 04-10-2014, 11:10 PM   #70
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Yeah - fortunately over multiple decades it does tend to more like post 61. I'd love to see that curve that included through 2013.

This one has the 1960-2011 curve: http://www.afcgllc.com/sites/afcgllc...0Revisited.pdf
and it's almost flat in performance between 70% and 100% equities - in other words, once you got above 70% equities, you just got more volatility with no additional gain.

Right - it was Markowitz. I just remember reading Bernstein's site. Yeah - people must have gone silly trying to "optimize" things by backtesting. I always pretty much took it as somewhere in the general 50/50 area probably would give a better performance versus volatility tradeoff.
An interesting way to look at the various decades. Now if we could only tell what curve the next decade will have like a "financial professional" can then we would be much better off.

Their conclusion:

"A static portfolio may not be right
for changing market conditions.
Call your financial professional today
to re-evaluate your portfolio for
today’s markets—and ensure that it
still meets your risk/return expectations."
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