Author Topic: Ratcheting mechanism  (Read 2075 times)

ac

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Ratcheting mechanism
« on: April 01, 2015, 11:39:11 AM »
Please give reasonable critiques to this idea.

Buy $10k of vti
Buy $10k of bnd

Often these move inversely.  People move funds from equities to bonds (also cash, but I'm ignoring that for now).

Today for instance vti is -0.31% and bnd is +0.44% (right now)

So I could sell say half of bnd and put it into vti.  Then when vti makes a relatively strong move against bnd, I could do the opposite.  And ratchet my way up over time faster than just leaving it in vti.

And this sounds like a get rich quick scheme so maybe its silly.

I know I'd have a higher tax bill than buy and hold. 

And that both bnd and vti could just go down.

But is this a reasonable thing to at least try out?

forummm

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Re: Ratcheting mechanism
« Reply #1 on: April 01, 2015, 11:44:42 AM »
Eventually you'd end up with 100% of one. Possibly the first week. You could just do standard rebalancing over longer time periods.

Jack

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Re: Ratcheting mechanism
« Reply #2 on: April 01, 2015, 11:58:17 AM »
But is this a reasonable thing to at least try out?

That's a really simple idea. Because it's so simple, somebody else has surely thought of it first. Therefore, either there's already a fund somewhere that does it, or it's been proven not to be a good idea.

If such a fund does exist, you probably might as well just buy that fund (if the expense ratio is reasonable). Otherwise, you know better than to try it at all.
« Last Edit: April 01, 2015, 01:46:19 PM by Jack »

pennyhandlebar

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Re: Ratcheting mechanism
« Reply #3 on: April 01, 2015, 12:32:10 PM »
It's an interesting idea! And while the market does tend to discover and exploit most opportunities like this very efficiently, don't forget about Michael Burryhttp://en.wikipedia.org/wiki/Michael_Burry, who was apparently one of the only people outside the major banks that realized you could read CDO documentation and pick the worst ones to bet against. So who knows, maybe this is original.

Questions: Do you have a way to automate this, or would you be doing it manually? If manually, how often are you willing to fiddle with it? Take that period (daily, weekly, monthly, etc.) and get past performance of those two funds on that interval (every day for the last six months, etc.). Then test it out: how would you do with manipulation (and maybe paying for trades) vs. buying and holding. Is it worth it?

Also I think that FORUMM has a good point - unless you set some minimums to ensure you retain some amount of each, you'll just wind up with 100% in one investment pretty soon.

BarkyardBQ

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Re: Ratcheting mechanism
« Reply #4 on: April 01, 2015, 12:47:26 PM »
Someone more knowledge on this might tell me I'm wrong but... I think you would have to have more than 10k in each, and you'd have to ladder those purchases into 90 windows otherwise your subject to Short Term Trading/Fees.

electriceagle

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Re: Ratcheting mechanism
« Reply #5 on: April 01, 2015, 01:40:06 PM »
Eventually you'd end up with 100% of one. Possibly the first week. You could just do standard rebalancing over longer time periods.

Yep, you would miss out on the sudden, large positive moves in stocks that make up about half of all gains. This is a variable asset allocation system. There are already lots of those around; read up on their strengths and weaknesses and see how this fits in.

Gone Fishing

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Re: Ratcheting mechanism
« Reply #6 on: April 01, 2015, 02:02:48 PM »
Do it inside a retirement account to avoid short term taxes.

ac

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Re: Ratcheting mechanism
« Reply #7 on: April 02, 2015, 09:17:47 AM »
Thanks guys

Unfortunately I fiddle with my assets a bunch already

However I've decided not to mess with this