Author Topic: Risk-adjusted exposure to S&P 500  (Read 3574 times)

ILikeDividends

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Re: Risk-adjusted exposure to S&P 500
« Reply #50 on: October 04, 2018, 05:17:39 PM »
Risk-parity funds do use VIX as a measure of variance. That was the whole point of the risk-parity discussion. Tons of people use VIX for that purpose.

Which is why VIX futures are so enormously popular.
Rather than fabricating facts that fit into your misguided view of the universe, why not press the pause button and do a little rudimentary research?

VIX futures are "enormously popular" simply because they offer an extremely efficient and cost-effective way to hedge delta and vega risk (price and volatility risk) against unknown future price and volatility events.

Note my choice of the verb, "hedge," rather than "predict."  The two verbs mean two completely different things. 

You haven't suggested once that you are trying to hedge anything.  You're trying to use the VIX as a basis to predict the future, which is not a feature it was ever designed to deliver.  Predicting future volatility is decidedly not the reason it is enormously popular.
« Last Edit: October 04, 2018, 07:26:05 PM by ILikeDividends »

wheezle

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Re: Risk-adjusted exposure to S&P 500
« Reply #51 on: October 04, 2018, 05:26:31 PM »
Which is why VIX futures are so enormously popular.
Rather than fabricating facts that fit into your misguided view of the universe, why not press the pause button a do a little research?

VIX futures are "enormously popular" simply because they offer an extremely efficient and cost-effective way to hedge delta and vega risk (price and volatility risk) against unknown future price and volatility events.

Note my choice of the verb, "hedge," rather than "predict."  The two verbs mean two completely different things.
VIX futures trade and settle based on VIX, which is a variance figure derived from an interpolated series of SPX options, averaging 30 calendar days to expiration.

VIX futures are not VIX. People use VIX futures, which rely on the VIX computation, because they implicitly trust VIX to be an accurate gauge of volatility. If they did not trust VIX to be a reasonably accurate measure of volatility, they would not choose to trade an instrument that settles to the VIX value.

Please. Stop. Trolling.

ILikeDividends

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Re: Risk-adjusted exposure to S&P 500
« Reply #52 on: October 04, 2018, 05:28:30 PM »
VIX futures trade and settle based on VIX, which is a variance figure derived from an interpolated series of SPX options, averaging 30 calendar days to expiration.

VIX futures are not VIX. People use VIX futures, which rely on the VIX computation, because they implicitly trust VIX to be an accurate gauge of volatility. If they did not trust VIX to be a reasonably accurate measure of volatility, they would not choose to trade an instrument that settles to the VIX value.

Finally, some facts we can actually agree on.  So please explain how this is predictive of future volatility?

Please. Stop. Trolling.
You're kidding, right?  This entire thread is troll bait.
« Last Edit: October 04, 2018, 06:25:48 PM by ILikeDividends »

wheezle

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Re: Risk-adjusted exposure to S&P 500
« Reply #53 on: October 04, 2018, 05:31:32 PM »
Please. Stop. Trolling.
You're kidding, right?  This entire thread is troll bait.
Well then I urge you to not continue taking my "bait." I am legitimately trying to talk about this, even if you are not. Some people have taken it seriously, some have not -- I get that. But the reason I started this thread was to stop someone else's thread from turning into a garbage heap -- I was trying to be polite. You are not being polite. You are trashing this thread. That is not cool.

ILikeDividends

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Re: Risk-adjusted exposure to S&P 500
« Reply #54 on: October 04, 2018, 05:36:06 PM »
#1) I haven't read one response indicating anyone was taking your market timing approach seriously.
#2) Countering inaccurate assertions made by you does not constitute trolling or impolite behavior.  See point #1 for an example of what I mean.
#3) If you want to proselytize a market timing scheme without anyone else asking relevant questions, or raising relevant objections, then send yourself an email.  A public forum is not the place to do that.

You merely started this thread.  That doesn't mean you own it.

Taking your discussion off someone else's thread to avoid derailing it is an admirable motivation to create this thread.  Bravo.

My motivation for posting here is to offer new impressionable investors, who might be silently reading along, a counter argument to a market-timing methodology that could be hazardous to their portfolio's health and performance.

Please. Stop. Trolling.
You're kidding, right?  This entire thread is troll bait.
Well then I urge you to not continue taking my "bait."
At this point, it doesn't surprise me at all that you consider someone who disagrees with you impolite for doing so.  After you just called me a troll, and after having you literally admitting that you are troll-baiting, I think my response to your personal insult is rather well tempered. Don't you agree?
« Last Edit: October 05, 2018, 06:52:27 AM by ILikeDividends »

Telecaster

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Re: Risk-adjusted exposure to S&P 500
« Reply #55 on: October 04, 2018, 06:07:09 PM »
Raises the question why their backtest is bullshit, though.  I mean, why not run a real backtest?  Not that much harder.  Unless you want to, I don't know, conceal  under performance from the public who doesn't read the fine print. 
You're saying it's bullshit because they're making the performance numbers look lower than they actually are?

I don't know that this is something I'd complain about, especially being that dividend payouts are highly variable and completely irrelevant to the strategy.

It makes the benchmark look lower that it actually is.   It is much easier to clear the bar if first you lower the bar.  As MDM points out, lowering the benchmark is a favorite ploy of annuity companies who are trying to sell people on what seems like a great deal, which isn't such a great deal when you peel back the layers.   

Now, if they want to undersell their own performance, that's perfectly fine with me.  But since they make money on their subscriptions, making their strategy seem less appealing doesn't make any sense.  Unless, of course the strategy doesn't beat the beat the benchmark.  Then it makes a ton of sense why they would do it this way.  As I mentioned above, you can have much, much better returns than they claim, with lower volatility than they claim, by simply by adding bonds.  As far as I can tell, this service provides negative value no matter what your investing goals are. 

The part in bold is a little puzzling too.   Dividends make up about 25% of the total return of the S&P 500.  That's a lot of return to simply ignore. 

wheezle

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Re: Risk-adjusted exposure to S&P 500
« Reply #56 on: October 04, 2018, 07:51:10 PM »
OK. So one of the bigger issues that has been brought up is that VIX is not actually predictive of future variance in the S&P 500. So I charted it out.

The data is from 1993 to present. You can get it here:
http://www.cboe.com/products/vix-index-volatility/vix-options-and-futures/vix-index/vix-historical-data
https://finance.yahoo.com/quote/SPY/history?p=SPY

I think that the chart pretty clearly shows that future variance/volatility goes up as VIX goes up. This is also what the study I linked to earlier said.


As for variance for each level of VIX (9, 10, 11), here's a list of the standard deviations of each level of VIX for which there are 100 data points or more.

9 2.216%
10 2.090%
11 2.174%
12 2.343%
13 2.434%
14 2.605%
15 2.703%
16 3.628%
17 3.925%
18 4.305%
19 4.733%
20 4.912%
21 4.825%
22 4.706%
23 4.686%
24 5.772%
25 5.581%
26 5.224%
27 5.533%
28 5.295%

Clearly, standard deviation goes up (future variance of returns) as VIX goes up.

This took a bit of time, but I'm very happy with the result. It confirms what my colleague, the earlier-cited study, and the email said.

I invite others to replicate.

ILikeDividends

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Re: Risk-adjusted exposure to S&P 500
« Reply #57 on: October 04, 2018, 08:21:39 PM »
@wheezle, I gather that you're not a big fan of my posts, so feel free to ignore me.  I don't want to be blamed for confusing you with facts.

For others who are interested, "2003 - The CBOE introduced a more detailed methodology for the VIX. Working with Goldman Sachs, the CBOE developed further computational methodologies, and changed the underlying index the CBOE S&P 100 Index (OEX) to the CBOE S&P 500 Index (SPX)."

See: https://en.wikipedia.org/wiki/VIX

Furthermore, before that, it relied on a Black Scholes model of implied volatility of the OEX. Since 2003, it uses a direct relationship between S&P 500 options price volatility of the SPX.

Any back test spanning 1993 to present is testing on two different methods of gauging implied volatility.  Maybe not quite as bad as an apples to oranges comparison, but certainly a Granny Smith to Fuji apples comparison, at the very least.
« Last Edit: October 04, 2018, 08:52:31 PM by ILikeDividends »

Radagast

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Re: Risk-adjusted exposure to S&P 500
« Reply #58 on: October 04, 2018, 08:46:26 PM »
https://www.portfoliovisualizer.com/test-market-timing-model?s=y&coreSatellite=false&timingModel=7&startYear=1985&endYear=2018&initialAmount=10000&singleAbsoluteMomentum=false&volatilityTarget=8&downsideVolatility=false&outOfMarketAssetType=1&movingAverageSignal=1&movingAverageType=1&multipleTimingPeriods=false&periodWeighting=2&normalizeReturns=false&windowSize=1&windowSizeInDays=105&movingAverageType2=1&windowSize2=10&windowSizeInDays2=105&volatilityWindowSize=0&volatilityWindowSizeInDays=0&assetsToHold=1&allocationWeights=1&riskControl=false&riskWindowSize=10&riskWindowSizeInDays=0&rebalancePeriod=1&separateSignalAsset=false&tradeExecution=0&benchmark=-1&benchmarkSymbol=VBINX&timingPeriods%5B0%5D=5&timingUnits%5B0%5D=2&timingWeights%5B0%5D=100&timingUnits%5B1%5D=2&timingWeights%5B1%5D=0&timingUnits%5B2%5D=2&timingWeights%5B2%5D=0&timingUnits%5B3%5D=2&timingWeights%5B3%5D=0&timingUnits%5B4%5D=2&timingWeights%5B4%5D=0&volatilityPeriodUnit=2&volatilityPeriodWeight=0&symbol1=VFINX&allocation1_1=100

This reminded me of you.

What are you hoping to gain from this thread? Nobody here uses or would consider this method. I think it is especially bad when you are investing lots of new money on a regular basis. When I look at high VIX days most look a lot like what I would call "good buying days." Periodic investing of new money gains extra impetus from high volatility (higher returns on money invested than if it was in a low or no volatility market with the same annualized return). You are climbing a bigger hill than you think.

wheezle

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Re: Risk-adjusted exposure to S&P 500
« Reply #59 on: October 04, 2018, 08:54:19 PM »
Take your money to the sideline, you either make or lose less, hence less volatility of returns.
Exactly! That's what I'm going for: Less volatility of returns.

For others who are interested, "2003 - The CBOE introduced a more detailed methodology for the VIX. Working with Goldman Sachs, the CBOE developed further computational methodologies, and changed the underlying index the CBOE S&P 100 Index (OEX) to the CBOE S&P 500 Index (SPX)."

Furthermore, before that, it relied on a Black Scholes model of implied volatility. Since 2003, it uses a direct relationship between S&P 500 options price volatility.

Any back test spanning 1993 to present is testing two different methods of gauging implied volatility.
There's an asterisk on the page I linked to that addresses this. Take a peek.

Quote
* After September 22, 2003, the volatility index prices using the new methodology are stated as "VIX" and the volatility index prices using the old methodology are stated as VXO".
VXO is the old methodology. VIX and VXO are both available from 1990. I used the VIX data.

What are you hoping to gain from this thread? Nobody here uses or would consider this method.
Responses like the one from @Systems101 are excellent. He had a very good, well-formed criticism. I hope for more of that.

ILikeDividends

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Re: Risk-adjusted exposure to S&P 500
« Reply #60 on: October 04, 2018, 09:36:14 PM »
There's an asterisk on the page I linked to that addresses this. Take a peek.
You already knew that, and yet you still thought running a fundamentally flawed back-test was worthwhile?  That defies logic.  I'm stunned that someone as logically oriented as you would waste your time doing that.

Thanks, but I'll pass on taking a peek.  I'll go ahead and just take your word for the asterisk. *

Here, take a peek at what us programmers call, "garbage in, garbage out."

https://en.wikipedia.org/wiki/Garbage_in,_garbage_out

* You can't make a crap analysis any less crappy with an asterisk.
« Last Edit: October 05, 2018, 03:41:16 AM by ILikeDividends »

Systems101

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Re: Risk-adjusted exposure to S&P 500
« Reply #61 on: October 05, 2018, 08:51:18 PM »
What are you hoping to gain from this thread? Nobody here uses or would consider this method.
Responses like the one from @Systems101 are excellent. He had a very good, well-formed criticism. I hope for more of that.

Yet your response is to:
  • Put words in my mouth (I neither called you stupid, nor did I accuse you of thinking the world is flat)
  • Set up a 100% strawman to then tear it down?

Unfortunately, I need to do one more post to support this concern:

My motivation for posting here is to offer new impressionable investors, who might be silently reading along, a counter argument to a market-timing methodology that could be hazardous to their portfolio's health and performance.

My example about the world being flat is that all the logic in the world can't help you if the starting assumptions are wrong.  I believe good research involves challenging your own assumptions, which means looking for contrary information.  Most of what the OP is doing is looking for information that validates that the methodology reduces volatility.  This is a very narrow perspective.  The graph the OP posted (which I also produced but didn't post - if you convert the return values to absolute values and then fit a line you will get the R-squared I talked about), as well as various articles will show the implied volatility of the VIX, to a limited degree, predicts realized volatility.  The OP is therefore declaring success. 

Unfortunately, I will maintain my point that the OP has not done enough research... It is this leap of "Since the VIX predicts volatility, my investment process works!" that I think is deeply flawed.

“If you do not know how to ask the right question, you discover nothing.” – W. Edwards Deming

Simply put, the OP is asking the wrong questions.

Let's start here:

But this is exactly what I'm hoping to achieve. Less start-date sensitively, less liquidation/draw timing sensitivity, less worry.

There are a ton of questions here that are important to ask.
  • What is the best methodology of lowering volatility and maintaining as much return as possible?

The problem is you are running a test that says "Is my methodology better than 100% pure investment?"  You have set it up as a False Dilemma.  If we assume MPT is valid, the proper question is: "For the lowering of volatility, did I take an appropriate lowering of return to stay on the efficient frontier?"  If we do an alternative test, we can formulate the question to show what I believe @ILikeDividends was getting at: "Does having a variable rate of investment in the market to reduce volatility outperform having a fixed rate of investment (at some value that provides the desired volatility)?".  Since you have provided NO data on other methodologies to reduce volatility, you didn't answer this critical question.

  • Why are you sensitive to draw timing? or perhaps... Why are you concerned about a future risk in the present?  or perhaps... Why are you assuming you have one investment methodology before, approaching, and after retirement?

Let's be clear: You are raising a real risk (volatility risk) - this is good.  But volatility is a meaningful risk only when you are forced to liquidate.  This becomes important below.

Secondly, you are attempting to use a measure of that risk factor (VIX, which measures implied volatility) to alter your investments.  I will address this below, but need to make one other point first.

You never asked "Am I sensitive to volatility risk?".  It's like the Hurricane in Idaho example earlier: Can you imagine State Farm representative's response if you asked to get a hurricane addendum on insurance in Idaho?  The risk is real while you are in the draw-down phase.  It is also real right now, but you basically aren't exposed to it.  It's why in corporate risk management, there are two columns: Impact and Probability. In both cases, the probability of a volatility event could be high, but in the accumulation phase, the impact (the probability of it being a problem) is almost precisely zero.  Because we shouldn't assume we have to have one methodology, this then compounds onto the first question.  You are paying for insurance (lower return) on a risk factor (volatility) that you may experience - but basically won't impact you - while you are in the accumulation phase.  Why are you setting an investment methodology now when the probability of it being a problem is high mainly in the first 10 years after retirement?  There is no reason to take on that opportunity cost of lower returns now.*

*This assumes your investment horizon is, in fact, retirement.  Different rules may apply if you are saving for a house down payment, for example.

  • Is this the best method for dealing with draw-down risk?

Also, there are already documented methods for dealing with the initial sensitivity to a market crash right after retirement: Rising Equity Glide Path.  You don't need to prove the variable model better than the S&P500, you need to prove it better than the known alternatives.  Again, you have brought NO data to the table.

Risk-parity funds do use VIX as a measure of variance.

Yikes. 

Even if I take this as correct (I lack knowledge of how exactly they measure risk, so make no opinion on it), it is extremely scary to jump from "Risk parity funds use VIX" to "I should take my *entire portfolio* and treat it like a risk parity fund".  Even if you someone believes in using Risk Parity, I suspect they believe it should be *one part* of an overall portfolio, not *the entire* portfolio.

Here's the implied question in your behavior:

  • Why should your entire portfolio be treated as a Risk Parity fund, rather than risk parity being one factor in a multi-factor portfolio?

Again, no data.

OK. So one of the bigger issues that has been brought up is that VIX is not actually predictive of future variance in the S&P 500. So I charted it out.

This is another one of those things that should raise red flags for those following along at home.  Folks have pointed out that the VIX doesn't predict market *performance*, but did anyone actually make that claim that it wasn't predictive of future variance?  I even stated the R-squared was around 0.2, so I actually supported the same claim you are making.  The problem is: So what?  What is the logic chain that makes that information valuable? (and remember, it has to be *relatively valuable* to other strategies, not just *absolutely valuable* vs the S&P 500). I just happen to think the claim (about implied volatility predicting future volatility) is useless in the face of known alternatives and the questions listed above.

That's why I picked the 50% loss limit. The system optimizes for that level of risk tolerance.

Ah, the wonders of marketing.  There is little to no basis for their 50% claim, especially if it is backtested only into the 1990s.  Keep in mind the losses in '29-'32 were WAY bigger than 2008.  What they have done is provided you a slider to choose a loss limit.  There are some statistics around this to give it an air of legitimacy, but in reality, it's part of an oft-used marketing scheme called (among other things) "Fake Precision".  This gives you a precise value to give you an air of comfort that they know what they are doing.  This is designed to lower your stress level and validate that the service you are buying is performing a useful function for you... while actually providing no guarantee of accuracy in return.  I can query 10 people and average their answers as to the height of the Statue of Liberty to the nearest millimeter, but Wikipedia is likely to give me a much more accurate answer (albeit with less precision).  You should want an accurate answer, not a precise one.

Said another way: You are giving up returns in exchange for a false sense of security.  If this helps you sleep at night, then perhaps that false sense does have real economic value for you.  Some people are willing to pay prices for things like that (you can find threads here about robo-advisors and the comfort of those services).  I actually don't have any problem with people doing that as long as they understand they are not reducing their risk, they are merely paying for their emotional comfort with lower returns.  If you both go in with eyes open, and make sure to educate others you are encouraging to follow you with the truth, then it's all good.

Since folks here are maximizing return and accepting the volatility, I don't know why anyone here would be interested in using the VIX as you describe.
If everyone here literally has 100% of their liquid assets in stock indexes all the time, then sure, you're right.

As noted earlier, this is setting up and tearing down a strawman.  To be more clear: Each individual should pick a portfolio that is appropriate for their risk tolerance.  Within that, we accept the volatility as appropriate for the risk we have chosen.  Again, I am not using volatility as risk here, as that simplification for economics papers has some nasty logic holes.

Also, let's be clear on one more concern: Why are they selling the methodology $8 at a time?  If it's really "that good", then they should keep it a secret.  Once a secret is out, the market prices in that information, and the edge goes away.

Overall, you are spending a lot of effort to prove you are correct, but you have not yet taken on the effort to really tear down your own assumptions or identify where you are making leaps of logic that don't hold water. It really feels like you are "shifting the burden" (Getting lots of practice with my logical fallacies today!) to have us prove your methodology wrong.  As I've pointed out, there is a LOT of evidence that passive investing is the way to go... so the obligation is on *you* to prove that the VIX is not, as you put it, "useless garbage".  The data shows implied volatility predicts real volatility... assume we accept that... but you haven't connected that point to any action that is more useful than other already known options.

Not sure there is much more for me to add here.  Hopefully that post is sufficient warning to others to at least do a lot more of their own research before buying into an active methodology.

ILikeDividends

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Re: Risk-adjusted exposure to S&P 500
« Reply #62 on: October 05, 2018, 10:24:44 PM »
@Systems101, I couldn't have said it better myself; obviously, otherwise, I would have.

I had resolved not to post on this thread anymore, but on behalf of any new investors who might stumble into this thread, I just wanted to say thanks for doing that.
« Last Edit: October 05, 2018, 10:39:22 PM by ILikeDividends »

PizzaSteve

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Re: Risk-adjusted exposure to S&P 500
« Reply #63 on: October 06, 2018, 10:51:44 AM »
@Systems101, I couldn't have said it better myself; obviously, otherwise, I would have.

I had resolved not to post on this thread anymore, but on behalf of any new investors who might stumble into this thread, I just wanted to say thanks for doing that.
Plus One.  Thanks for an excellent, and educational post.  I wish I had the patience and writing skills to post such well reasoned, logical and kind words for the OP to learn from.  He should read it multiple times, slowly and thoughtfully, as it is a really good example of how to conduct oneself professionally in a online debate type situation.

DreamFIRE

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Re: Risk-adjusted exposure to S&P 500
« Reply #64 on: October 06, 2018, 11:18:10 AM »
TL;DR

wheezle

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Re: Risk-adjusted exposure to S&P 500
« Reply #65 on: October 07, 2018, 02:32:43 PM »
"Does having a variable rate of investment in the market to reduce volatility outperform having a fixed rate of investment (at some value that provides the desired volatility)?".  Since you have provided NO data on other methodologies to reduce volatility, you didn't answer this critical question.
I guess this is the crux of the issue, then. "Is this approach actually better than the equivalent stock/bond allocation?"

My inclination is that the variable allocation with a 50% risk limit (what I'm using) would outperform, e.g., 80/20, since my approach is 100% in stocks nearly all the time, whereas the 80/20 portfolio has a constant drag in the name of volatility reduction.

Thanks. I guess this is the big question, and the next thing to look into.

jacoavluha

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Re: Risk-adjusted exposure to S&P 500
« Reply #66 on: October 07, 2018, 04:10:52 PM »
"Does having a variable rate of investment in the market to reduce volatility outperform having a fixed rate of investment (at some value that provides the desired volatility)?".  Since you have provided NO data on other methodologies to reduce volatility, you didn't answer this critical question.
I guess this is the crux of the issue, then. "Is this approach actually better than the equivalent stock/bond allocation?"

My inclination is that the variable allocation with a 50% risk limit (what I'm using) would outperform, e.g., 80/20, since my approach is 100% in stocks nearly all the time, whereas the 80/20 portfolio has a constant drag in the name of volatility reduction.

Thanks. I guess this is the big question, and the next thing to look into.

the real crux of the issue is "can I time the market?"

I don't think I can.  If you think you can, then you should try.

PizzaSteve

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Re: Risk-adjusted exposure to S&P 500
« Reply #67 on: October 08, 2018, 08:40:56 AM »
"Does having a variable rate of investment in the market to reduce volatility outperform having a fixed rate of investment (at some value that provides the desired volatility)?".  Since you have provided NO data on other methodologies to reduce volatility, you didn't answer this critical question.
I guess this is the crux of the issue, then. "Is this approach actually better than the equivalent stock/bond allocation?"

My inclination is that the variable allocation with a 50% risk limit (what I'm using) would outperform, e.g., 80/20, since my approach is 100% in stocks nearly all the time, whereas the 80/20 portfolio has a constant drag in the name of volatility reduction.

Thanks. I guess this is the big question, and the next thing to look into.

the real crux of the issue is "can I time the market?"

I don't think I can.  If you think you can, then you should try.

Adding to your question, "Can you successfully market time AND earn back all the transaction costs, advisory fees, extra taxes and bid-ask spreads being paid every time one adjusts their market positions?' 

The bar is even higher than matching the volatility, return and tax efficiency of static allocations to efficient vehicles.
« Last Edit: October 08, 2018, 08:43:03 AM by PizzaSteve »

wheezle

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Re: Risk-adjusted exposure to S&P 500
« Reply #68 on: October 08, 2018, 08:58:20 AM »
Adding to your question, "Can you successfully market time AND earn back all the transaction costs, advisory fees, extra taxes and bid-ask spreads being paid every time one adjusts their market positions?' 

The bar is even higher than matching the volatility, return and tax efficiency of static allocations to efficient vehicles.
Yes, true! In my case, I can adjust my allocation twice a month at no cost, so I'm not going to worry about this just yet. But in the future, if I'm going to consider using this approach, this would need attention.

RWD

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Re: Risk-adjusted exposure to S&P 500
« Reply #69 on: October 08, 2018, 09:29:09 AM »
Adding to your question, "Can you successfully market time AND earn back all the transaction costs, advisory fees, extra taxes and bid-ask spreads being paid every time one adjusts their market positions?' 

The bar is even higher than matching the volatility, return and tax efficiency of static allocations to efficient vehicles.
Yes, true! In my case, I can adjust my allocation twice a month at no cost, so I'm not going to worry about this just yet. But in the future, if I'm going to consider using this approach, this would need attention.
How are you avoiding short term capital gains?

wheezle

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Re: Risk-adjusted exposure to S&P 500
« Reply #70 on: October 08, 2018, 10:35:06 AM »
How are you avoiding short term capital gains?
Retirement account.

RWD

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Re: Risk-adjusted exposure to S&P 500
« Reply #71 on: October 08, 2018, 10:57:35 AM »
How are you avoiding short term capital gains?
Retirement account.
Makes sense, thanks.

ILikeDividends

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Re: Risk-adjusted exposure to S&P 500
« Reply #72 on: October 08, 2018, 05:50:11 PM »
@Systems101, I couldn't have said it better myself; obviously, otherwise, I would have.

I had resolved not to post on this thread anymore, but on behalf of any new investors who might stumble into this thread, I just wanted to say thanks for doing that.
Plus One.  Thanks for an excellent, and educational post.  I wish I had the patience and writing skills to post such well reasoned, logical and kind words for the OP to learn from.  He should read it multiple times, slowly and thoughtfully, as it is a really good example of how to conduct oneself professionally in a online debate type situation.
We can certainly agree that the post exemplifies professional conduct, whether online or offline, but I thought it was less an example of debating talent than it was an example of critical thinking, structured within a highly disciplined analytical framework.  Of course, that would certainly be an advantage in any debate as well.

But back to the referenced post.  While the primary target audience was apparently new investors, I think most investors of all stripes could find much to take away from that post.  I certainly did, and apparently you did too.

Any others who might skip reading it merely because it is quite a bit longer than a typical forum post, no matter how seasoned of an investor you might be, is in my opinion overlooking one of those rare gems that show up in public forums from time to time.

« Last Edit: October 10, 2018, 01:30:02 AM by ILikeDividends »

twig21

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Re: Risk-adjusted exposure to S&P 500
« Reply #73 on: October 08, 2018, 08:40:17 PM »
You are only mentioning downside.  When the VIX is high there is more also more probability of upside.  It seems like you are trying to protect yourself from the downside but by doing this your are going to "protect" yourself from the upside as well.

IMO timing the market rarely works.

PizzaSteve

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Re: Risk-adjusted exposure to S&P 500
« Reply #74 on: October 08, 2018, 10:45:59 PM »
Adding to your question, "Can you successfully market time AND earn back all the transaction costs, advisory fees, extra taxes and bid-ask spreads being paid every time one adjusts their market positions?' 

The bar is even higher than matching the volatility, return and tax efficiency of static allocations to efficient vehicles.
Yes, true! In my case, I can adjust my allocation twice a month at no cost, so I'm not going to worry about this just yet. But in the future, if I'm going to consider using this approach, this would need attention.
How are you avoiding bid ask spread?  just curious, though it should be small. I would advise trading intraday.

wheezle

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Re: Risk-adjusted exposure to S&P 500
« Reply #75 on: October 09, 2018, 09:15:29 AM »
You are only mentioning downside.  When the VIX is high there is more also more probability of upside.  It seems like you are trying to protect yourself from the downside but by doing this your are going to "protect" yourself from the upside as well.
Of course! But this is the same thing that people who do 80/20 stocks/bonds are doing. The 20% bond allocation means that you aren't participating in that degree of stocks' upside or downside -- because that 20% isn't in stocks at all.

The virtue of the strategy I'm talking about is that I'm almost always 100% in stocks. In volatile periods, I'm allocating more to bonds. So I assume I will get better returns over time than the guy who is always doing 80/20 or 60/40. Does that make sense? This means my strategy has been 100% in stocks almost the whole time (occasionally ~90%) since the last recession.

How are you avoiding bid ask spread?  just curious, though it should be small. I would advise trading intraday.
The TSP C Fund doesn't have a b/a spread. Like other indexing mutual funds, they send in a bunch of market-on-close (MOC) orders to rebalance their exposure at the end of the day. The price that plan participants get is whatever price the fund gets as they accumulate and liquidate. The end-of-day price is all there is, and it's one-dimensional. All the trading "frictions" are internalized by the fund.

PizzaSteve

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Re: Risk-adjusted exposure to S&P 500
« Reply #76 on: October 09, 2018, 11:00:17 AM »
You are only mentioning downside.  When the VIX is high there is more also more probability of upside.  It seems like you are trying to protect yourself from the downside but by doing this your are going to "protect" yourself from the upside as well.
Of course! But this is the same thing that people who do 80/20 stocks/bonds are doing. The 20% bond allocation means that you aren't participating in that degree of stocks' upside or downside -- because that 20% isn't in stocks at all.

The virtue of the strategy I'm talking about is that I'm almost always 100% in stocks. In volatile periods, I'm allocating more to bonds. So I assume I will get better returns over time than the guy who is always doing 80/20 or 60/40. Does that make sense? This means my strategy has been 100% in stocks almost the whole time (occasionally ~90%) since the last recession.

How are you avoiding bid ask spread?  just curious, though it should be small. I would advise trading intraday.
The TSP C Fund doesn't have a b/a spread. Like other indexing mutual funds, they send in a bunch of market-on-close (MOC) orders to rebalance their exposure at the end of the day. The price that plan participants get is whatever price the fund gets as they accumulate and liquidate. The end-of-day price is all there is, and it's one-dimensional. All the trading "frictions" are internalized by the fund.
Thanks for the response.  You should in theory receive returns close to whatever level of risk exposure you select.  The logic that dynamic vs static allocations yield more market exposure with less market risk is a false assumption, IMHO (and financial markets experience), due to market timing not predicting up or down, only volatility levels which caps upside and downside exposure for periods out of the market, which offset, in theory.
« Last Edit: October 10, 2018, 09:01:14 AM by PizzaSteve »

wheezle

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Re: Risk-adjusted exposure to S&P 500
« Reply #77 on: October 09, 2018, 03:21:37 PM »
You should in theory receive returns close to whatever level of risk exposure you select.
If the math checks out and I'm not actually incurring some extra costs (slippage, commission, access, management fees, tax, etc.) that I don't see, then this makes intuitive sense. Basically, that extra 10%+ peak-to-trough loss (above my 50% risk limit) in the depths of '08 was a high-risk, high-reward scenario that I would have essentially opted out of by targeting volatility.

The logic that dynamic vs static allocations yield more market exposure with less market risk is a false assumption, IMHO (and financial markers experience), due to market timing not predicting up or down, only volatility levels which caps upside and downside exposure for periods out of the market, which offset, in theory.
And this is the other piece of the puzzle. Obviously, I'm still thinking that by maintaining a 100% stock allocation in the lower-volatility periods, I will beat the "equivalent" stock/bond allocation (it's difficult to say for sure what "equivalent" means in terms of volatility risk). But this is something I'm still trying to get a handle on. I signed up for "portfolio123.com" because I saw someone posting a 60/40 backtest from the platform, but I can't for the life of me figure out how to do that, and I don't think I can import the historical allocations from safer401k even if I could figure out how to make the other stuff work.

So I may have to do a bit more digging and learning on my own (perhaps with the help of the safer401k people and my colleague, if he has time) before I can get a sense for whether I'm right about this, at least when using data from the last 20-ish years. If it's equivalent or better, I'll be very happy with the methodology.

I kind of wish safer401k did this for me already, with replicable data and an explanation, and I plan on expressing that to them.

ILikeDividends

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Re: Risk-adjusted exposure to S&P 500
« Reply #78 on: October 09, 2018, 10:01:22 PM »
Adding to your question, "Can you successfully market time AND earn back all the transaction costs, advisory fees, extra taxes and bid-ask spreads being paid every time one adjusts their market positions?' 

The bar is even higher than matching the volatility, return and tax efficiency of static allocations to efficient vehicles.
Yes, true! In my case, I can adjust my allocation twice a month at no cost, so I'm not going to worry about this just yet. But in the future, if I'm going to consider using this approach, this would need attention.
How are you avoiding bid ask spread?  just curious, though it should be small. I would advise trading intraday.
Purely out of respect for @PizzaSteve, who for some unfathomable reason continues to try to explain this to you, I want to add one more point to his list of drag factors, which is inherent in your strategic proposal; regardless of whether executed in a taxable account, or in an IRA account.

If volatility spikes due to a downside move in the market, you will only know that event happened after that downside market move has already occurred.

That means that when you rebalance into a strategically-adjusted lower equity allocation, you will be doing that rebalance at a lower than optimal equity sales price; i.e., not at the top of the market. 

So, as @PizzaSteve has subsequently noted, not only does your strategy leak performance on the upside (which you have already stated is ok with you), it also leaks performance on the downside as well (is that ok with you too?).

Downside volatility is yet another drag factor that buy-and-hold investors do not suffer, and which should be accounted for in your strategic model when comparing it to other more conventional volatility management alternatives.
« Last Edit: October 10, 2018, 04:20:13 AM by ILikeDividends »

PizzaSteve

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Re: Risk-adjusted exposure to S&P 500
« Reply #79 on: October 10, 2018, 09:11:53 AM »
I guess the assumption is that gains occur assymetrically during low volatility periods (upside volatility) vs downside losses (which presumably occur more during high volatility periods).  The challenge is that the data which shows this is highly skewed by a few very rapid downside events, some of which occured within seconds.   This was gleaned from a meeting with the lead public market analyst from Charles Schwab that I previously mentioned (when we were chatting after a local briefing event about someoutside the box thoughts I have on structural changes occuring to our markets that I think challenge the very notions of money and value creation in our economy. We are experiencing some really disruptive events this century, some of which are fundamental changes.  I think these may devalue backtesting in general, and may dramatically impact the very foundations of capitalism in a few decades. .. this is a long and very abstract topic to avoid for now). 

Good luck though.  I made tons of investing behavioral errors that have probable cost me a couple million $, and this one is very unlikely to hit that scale of stupidity, so you will likely perform well anyway.  Note I have made some fortunate good moves too, so dont worry about the mistake lessons.
« Last Edit: October 10, 2018, 09:14:19 AM by PizzaSteve »

wheezle

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Re: Risk-adjusted exposure to S&P 500
« Reply #80 on: October 11, 2018, 08:22:15 PM »
Ran a test with some help from colleague and data from Safer 401(k). The data from the service is their historical allocations without the recession risk factored in, so this is just the volatility aspect of risk-adjustment -- which has been the topic of this thread.

The tested portfolios used SPY and IEF (10-year Treasuries), so the data only goes back to mid-2002. Would have to do a lot more work to go further back (and would be interested in suggestions on how to make that happen). The portfolios begin at $10,000 and grow.

The blue line is a consistent allocation 80/20 portfolio (ending $38,721). The red line is the risk-adjusted portfolio (adjusted once-monthly on the last market day of the month) with a 50% loss limit (ending $44,902).



I totally understand that this is a short test, but I do think that it at least begins to demonstrate my point that the ability for my portfolio to be 100% in stocks most of the time is a big bonus compared to the drag that a consistent allocation gives you.

aspiringnomad

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Re: Risk-adjusted exposure to S&P 500
« Reply #81 on: October 11, 2018, 11:28:57 PM »
Ran a test with some help from colleague and data from Safer 401(k). The data from the service is their historical allocations without the recession risk factored in, so this is just the volatility aspect of risk-adjustment -- which has been the topic of this thread.

The tested portfolios used SPY and IEF (10-year Treasuries), so the data only goes back to mid-2002. Would have to do a lot more work to go further back (and would be interested in suggestions on how to make that happen). The portfolios begin at $10,000 and grow.

The blue line is a consistent allocation 80/20 portfolio (ending $38,721). The red line is the risk-adjusted portfolio (adjusted once-monthly on the last market day of the month) with a 50% loss limit (ending $44,902).



I totally understand that this is a short test, but I do think that it at least begins to demonstrate my point that the ability for my portfolio to be 100% in stocks most of the time is a big bonus compared to the drag that a consistent allocation gives you.

Forgive my ignorance, but why can't you go back any further than "mid-2002" for an 80/20 portfolio? I just backtested 80/20 to 1972 with little to no effort at portfoliovisualizer.com. In any case, such a short time period doesn't really begin to demonstrate anything at all.



wheezle

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Re: Risk-adjusted exposure to S&P 500
« Reply #82 on: October 12, 2018, 05:04:33 AM »
Forgive my ignorance, but why can't you go back any further than "mid-2002" for an 80/20 portfolio? I just backtested 80/20 to 1972 with little to no effort at portfoliovisualizer.com. In any case, such a short time period doesn't really begin to demonstrate anything at all.
Perfect, thank you! I didn't know where to get more data. I can probably test back to 1990 with this. Should take me less than a week this time to put that together.

talltexan

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Re: Risk-adjusted exposure to S&P 500
« Reply #83 on: October 12, 2018, 08:54:03 AM »
yeah, not seeing 2000-2002 kinda leaves a lot to speculation.

wheezle

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Re: Risk-adjusted exposure to S&P 500
« Reply #84 on: October 15, 2018, 11:28:33 AM »
So... by my estimation, Safer 401(k) has seriously under-sold this data/system.

Using S&P 500 Total Return and VBMFX Total Bond fund to test since 1990, I found that my 50% risk limit portfolio outperforms in just about every way. The fact that they do NOT use total return in their calculation and DO compare their portfolios to the S&P 500 is absurd and stupid -- these are not comparable. The 50% risk profile portfolio has much, much less volatility risk than the S&P 500 and when you factor in total returns (div reinvestment), it outperforms a 100% S&P 500 allocation.

In the above, some smart commenters said that I should find the volatility level for which the 50% risk limit portfolio is comparable. That is, find the x/y stock/bond portfolio that has a similar "Max Drawdown" to the Safer 401(k) portfolio and compare their returns. I agreed that this was a fair measure, and claimed that I thought the 50% risk limit system would win out because of higher equity exposure overall (more compounding!)

Since 1990, the 50% system had a Max Drawdown of 25.5%. The most comparable stock/bond portfolio would be a 50/50, which according to this tool (thanks to @aspiringnomad for the idea), had a Max Drawdown of 27.11% (1990 to present, 50% US large cap, 50% total US bond): https://www.portfoliovisualizer.com/backtest-asset-class-allocation#analysisResults

According to portfolioanalyzer.com, the 50/50 turned $10k into $90,391. According to my own test (using the S&P 500 and VBMFX), it turned $10k into $96,251.

Meanwhile, the 50% system, with its 25.5% Max Drawdown, returned $171,857.

I would go through exactly what the 60/40, 80/20 returned, but you can do it yourself with the portfolioanalyzer tool. My own tests tend to overestimate total gains (as you can see above with the 50/50 portfolio) since I'm using slightly different numbers than they are, but it's all essentially the same.

I will end with this: The blue line is the Safer 401(k) allocations to SPXTR and VBMFX, rebalanced monthly. The red line is a 100% stock allocation.


I INVITE ANYONE TO REPLICATE THIS. Get the data from me or ask for it from the service. They didn't hesitate to send me raw data when I asked.

I still can't believe that their marketing materials don't use THIS chart instead of the garbage marketing they have up there currently.

Radagast

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Re: Risk-adjusted exposure to S&P 500
« Reply #85 on: October 15, 2018, 02:22:01 PM »
Aren't you selling yourself short? Literally the very first buy-and-hold-and-rebalance-at-year-end portfolio I entered into portfoliovisualizer had higher returns and lower loss, though I had to dial in the stock exposure to the correct volatility. From January 1 1990, 60% Vanguard PrimeCap / 40% Vanguard long term treasury bond grew $10k to $226,810 with a max drawdown of 23.16%. Obviously both numbers are better than anything you've posted. https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=1990&firstMonth=1&endYear=2018&lastMonth=12&endDate=10%2F14%2F2018&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&showYield=false&reinvestDividends=true&benchmark=VFINX&symbol1=VPMCX&allocation1_1=60&symbol2=VUSTX&allocation2_1=40&symbol3=VFINX&allocation3_2=50&symbol4=VBMFX&allocation4_2=50

If you play around with portfoliovisualizer's timing models and static allocation backtesting, I bet you can come up with dozens of better strategies within a few hours. Given that, why would you pay for the inferior SAFER401k strategy?

wheezle

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Re: Risk-adjusted exposure to S&P 500
« Reply #86 on: October 15, 2018, 03:16:11 PM »
Literally the very first buy-and-hold-and-rebalance-at-year-end portfolio I entered into portfoliovisualizer had higher returns and lower loss, though I had to dial in the stock exposure to the correct volatility. From January 1 1990, 60% Vanguard PrimeCap / 40% Vanguard long term treasury bond grew $10k to $226,810 with a max drawdown of 23.16%. Obviously both numbers are better than anything you've posted.

If you play around with portfoliovisualizer's timing models and static allocation backtesting, I bet you can come up with dozens of better strategies within a few hours. Given that, why would you pay for the inferior SAFER401k strategy?
Huh?

PRIMECAP
a.) has an expense ratio of 0.39% as compared to 0.04% for Vanguard total stock,
b.) does not even resemble the S&P 500,
c.) is not offered in my 401k,
d. ) is not even taking new money.

How is an exercise in cherry-picking expensive, actively-managed, uninvestable funds even remotely relevant to this thread?

Radagast

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Re: Risk-adjusted exposure to S&P 500
« Reply #87 on: October 15, 2018, 04:21:32 PM »
Right, I'll do your homework for you. Literally the second market timing model I entered into portfoliovisualizer had higher returns and lower loss, and it would have been the first I tried except the first bond fund I entered began in 1992. From January 1 1990, S&P500 dual momentum grew $10k to $206,920 with a max drawdown of 15.38%. Obviously both numbers are better than anything you've posted.

https://www.portfoliovisualizer.com/test-market-timing-model?s=y&coreSatellite=false&timingModel=6&startYear=1990&endYear=2018&initialAmount=10000&symbols=VFINX&singleAbsoluteMomentum=false&volatilityTarget=9.0&downsideVolatility=false&outOfMarketAssetType=2&outOfMarketAsset=VBMFX&movingAverageSignal=1&movingAverageType=1&multipleTimingPeriods=true&periodWeighting=2&normalizeReturns=false&windowSize=12&windowSizeInDays=105&movingAverageType2=1&windowSize2=10&windowSizeInDays2=105&volatilityWindowSize=0&volatilityWindowSizeInDays=0&assetsToHold=1&allocationWeights=1&riskControl=false&riskWindowSize=10&riskWindowSizeInDays=0&rebalancePeriod=1&separateSignalAsset=false&tradeExecution=0&benchmark=VFINX&timingPeriods%5B0%5D=2&timingUnits%5B0%5D=2&timingWeights%5B0%5D=33&timingPeriods%5B1%5D=4&timingUnits%5B1%5D=2&timingWeights%5B1%5D=34&timingPeriods%5B2%5D=8&timingUnits%5B2%5D=2&timingWeights%5B2%5D=33&timingUnits%5B3%5D=2&timingUnits%5B4%5D=2&timingWeights%5B4%5D=0&volatilityPeriodUnit=2&volatilityPeriodWeight=0&symbol1=VFINX&allocation1_1=100

If you play around with portfoliovisualizer's timing models and static allocation backtesting, I bet you can come up with dozens of better strategies within a few hours. Given that, why would you pay for the inferior SAFER401k strategy?

Radagast

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Re: Risk-adjusted exposure to S&P 500
« Reply #88 on: October 15, 2018, 08:01:29 PM »
If you pay me $10,000, I will give you a list of 10 investing strategies, each of which had both better return and lower maximum drawdown than the SAFER401k plan since 1990. Wait I already gave two. Consider those freebies. For $8k I will give you 8 new investing strategies that had both better returns and lower losses than the Safer401k since 1990. That is a pretty good deal: 8 symbolizes wealth in China, so its better for you I already threw out the freebies. I will also give brief written summaries of the relative merits of each strategy. For another $5,000, I will shortlist my findings to the best three methods, along with more detailed descriptions of why each did so well, including relative to Safer401k and S&P500.

jacoavluha

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Re: Risk-adjusted exposure to S&P 500
« Reply #89 on: October 15, 2018, 10:14:48 PM »
How long has "Safer401k" existed?

What were the principals of the service doing before "Safer401k"?