Author Topic: Sliding Allocation  (Read 9820 times)

Pooperman

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Sliding Allocation
« on: January 24, 2015, 11:28:38 AM »
I was just wondering yesterday what would happen if you were to change allocation over the long term according to these preset rules (perhaps using Betterment for simplicity of diversification):

Reallocate every 6 months where your allocation changes in this manner:
If the market is now above where it was the last time you reallocated, shift 5% towards bonds (i.e. 90/10 becomes 85/15).
If the market is now lower than where it was last time you reallocated, shit 5% towards stocks
If the market is now lower and a crash has occurred or is occurring since you last reallocated, reset to 100% stocks.
If you reach 50/50 allocation and the market is higher, do nothing.

Would something mechanical like this that is well diversified do better, the same, or worse than constant allocation?

Kaspian

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Re: Sliding Allocation
« Reply #1 on: January 24, 2015, 11:37:00 AM »
This sounds sort of like rebalancing?   There are two schools to rebalancing--one group rebalances on the calendar (once or twice a year) and others rebalance based on percentages.  There are lots of people who do exactly as you say--when one allocation becomes 5% off, they move money there to bring it back in line.  ...This is what you're talking about, right?  Most studies of rebalancing show that it doesn't make a great deal of difference how or how often you do it.  It's just a good think to do so to ensure you're buying low, selling high, and taking advantage of gains in any of your asset classes.

Pooperman

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Re: Sliding Allocation
« Reply #2 on: January 24, 2015, 11:51:02 AM »
This sounds sort of like rebalancing?   There are two schools to rebalancing--one group rebalances on the calendar (once or twice a year) and others rebalance based on percentages.  There are lots of people who do exactly as you say--when one allocation becomes 5% off, they move money there to bring it back in line.  ...This is what you're talking about, right?  Most studies of rebalancing show that it doesn't make a great deal of difference how or how often you do it.  It's just a good think to do so to ensure you're buying low, selling high, and taking advantage of gains in any of your asset classes.

Instead of rebalancing (say keeping an 80/20 split), I'm saying change your target allocation depending on what the market has already done in the last 6 months since you last changed. Thoughts for why it might be good: forces you to keep in the market and over time should lock in gains as the market rises. The issue is that if you run into a secular bull, you can end up at a 50/50 split and miss out on some of the top end gains.

Basically the idea was to take rebalancing and push it farther. Rebalancing is forced market timing (in a good way). So instead of staying at your designated allocation, you attempt to gain from doing the opposite. If the market is on an upward trajectory, things are actually getting riskier for a crash to happen, so you'd want a higher bond percentage. If the market has recently crashed, now's a good time to ride the return back up and be in stocks. Your bonds have already gotten their bump when the crash happened. That's the idea anyways.

Market timing can't be done precisely, but there are definitely ways to get some of the advantage perfect market timing would give you, while not allowing you the chance to make stupid decisions with your money.

MrMoogle

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Re: Sliding Allocation
« Reply #3 on: January 24, 2015, 02:08:11 PM »
I wouldn't do this with looking at the value of an index (DOW or S&P).  If I were to implement something like this, I would think the Shiller P/E would be better.  And 5% changes over 6 months is a lot.  If you did it starting in 2008, you'd be at 70% bonds now, since it's gone up almost every 6 month period since then.  Maybe 5% over a year.

Defining what a crash is also difficult.  The last crash dropped 50%, what if you bought back in after the first 20%, there's still lots of loss there.

Whether this beats just 100% stocks is questionable, and a lot more complicated. 

Pooperman

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Re: Sliding Allocation
« Reply #4 on: January 24, 2015, 03:56:53 PM »
I wouldn't do this with looking at the value of an index (DOW or S&P).  If I were to implement something like this, I would think the Shiller P/E would be better.  And 5% changes over 6 months is a lot.  If you did it starting in 2008, you'd be at 70% bonds now, since it's gone up almost every 6 month period since then.  Maybe 5% over a year.

Defining what a crash is also difficult.  The last crash dropped 50%, what if you bought back in after the first 20%, there's still lots of loss there.

Whether this beats just 100% stocks is questionable the question, and a lot more complicated.

Crash is any drop of 20% or more. Here's the thing, you want to be 100% bonds the day before a crash, right? When the crash bottoms out, you want to be 100% stocks as well. How can you slide your allocation between those two reasonably without going off the deep-end of trying to predict when either event will happen? Maybe using the Schiller P/E as a guide vs using the Russel 3000 would be better. having a stop at, say, 50/50 (no more bonds than 50%) would keep you around in a secular bull potentially. However, the original question was whether or not this would be better than taking a particular allocation (say 80/20, or as you said, 100/0) and sticking with it, rebalancing every 6 months.

smilla

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Re: Sliding Allocation
« Reply #5 on: January 24, 2015, 09:06:52 PM »
I feel the same Pooperman or rather, i have the same questions.  I have been working on my IPS and beside my base allocations I list floating allocations.  The difficulty is in stating when specifically I may deliberately stray from the base into the floating.  I will be following this thread.  Thanks.
« Last Edit: January 24, 2015, 09:09:23 PM by smilla »

halfshellmeijin

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Re: Sliding Allocation
« Reply #6 on: January 25, 2015, 06:58:30 AM »
If you read "The Intelligent Asset Allocator" he says something like this is an advanced strategy. Specifically he talks about shifting the allocation from something that has had gains to something that has losses (selling high and buying low). He says this is risky because many people get pulled into trying to time the market. If you were to do this, you would want solid and objective cues to tell you what to do so you can follow through with your plan. There are few questions worth considering. For instance, will you still shift the asset allocation if all assets classes get a positive return, but your stocks out preform your bonds? Or will you continue to shift your asset allocation more than 10% from the original plan?

The book also talks about only doing 1% for each shift as well. Personally I would think that 5% shift would be way too much and would seems to get away from my target asset allocation quickly. For instance, I would be okay with shifting my allocation from 90/10 (stocks/bonds) to say 88/12, but I don't feel that shifting all the way to 80/20 still represents the same strategy that I had at 90/10.

Crushtheturtle

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Re: Sliding Allocation
« Reply #7 on: January 25, 2015, 07:56:22 AM »
You're talking about capturing momentum, in a "mild" way.

I'm investigating this, which is decidedly more committed:

http://www.alpharotation.com/resources/Adaptive%20Asset%20Allocation%20-%20A%20Primer.pdf

Pooperman

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Re: Sliding Allocation
« Reply #8 on: January 26, 2015, 02:18:40 PM »
You're talking about capturing momentum, in a "mild" way.

I'm investigating this, which is decidedly more committed:

http://www.alpharotation.com/resources/Adaptive%20Asset%20Allocation%20-%20A%20Primer.pdf

Thanks for that. The original post was my rough idea, nothing scientific about it at all. Hopefully some other people can get in on the question!

Pooperman

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Re: Sliding Allocation
« Reply #9 on: February 24, 2015, 09:50:27 AM »
I'd rather raise this thread from the dead than to start a new one. I put together some graphs on this idea.

Scenario parameters: both 80/20 and sliding start with 10k and at 80/20 allocation. S&P 500 is used to represent stocks, VBMFX is used to represent bonds. The scenario begins Dec 31 1986 and ends Jan 2 2015. Both rebalance every 6 months. The sliding allocation changes like so: if stocks rose, 5% towards bonds. If stocks fell, 5% towards stocks. If stocks fell by 20% or more (comparing the 6 months ago price to the today price), 100% stocks.



EDIT: fixed image

hodedofome

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Re: Sliding Allocation
« Reply #10 on: February 24, 2015, 11:00:40 AM »
If you want to get scientific about it, you would backtest this as far back as data allows (hopefully 100+ years) as well as do it with other countries as well. That would at least give you some out of sample data to compare it to.

You will also have to be ok with underperforming a standard allocation for years, with the expectation that it will pay off in the long run (this is assuming it's a good strategy to begin with). You'll find that figuring out a strategy is the easy part, it's sticking with it while it's underperforming is the hard part.

Pooperman

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Re: Sliding Allocation
« Reply #11 on: February 24, 2015, 11:07:10 AM »
If you want to get scientific about it, you would backtest this as far back as data allows (hopefully 100+ years) as well as do it with other countries as well. That would at least give you some out of sample data to compare it to.

You will also have to be ok with underperforming a standard allocation for years, with the expectation that it will pay off in the long run (this is assuming it's a good strategy to begin with). You'll find that figuring out a strategy is the easy part, it's sticking with it while it's underperforming is the hard part.

This is as far back as I could find bond data in the 30 mins I looked for it. I wanted to backtest as far back as I could to see if it was actually a good idea or not. With more time/resources, I could do it both by sector and by overall stock/bond, but I can't be bothered. The data contains one complete cycle (1987-2009). I'd also like to run the backtest quarterly vs semi-yearly too, but too much time.

retireatbirth

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Re: Sliding Allocation
« Reply #12 on: February 24, 2015, 04:37:28 PM »
Could you add various asset allocations to your graph such as 100/0, 90/10, 70/30, 60/40? That way we can see if this strategy has  outperformed other asset allocations in addition to 80/20. Since it has only outperformed 80/20 since the recession it looks like, this might have a strong recency bias.
« Last Edit: February 24, 2015, 04:39:25 PM by retireatbirth »

Pooperman

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Re: Sliding Allocation
« Reply #13 on: February 24, 2015, 06:54:05 PM »
Could you add various asset allocations to your graph such as 100/0, 90/10, 70/30, 60/40? That way we can see if this strategy has  outperformed other asset allocations in addition to 80/20. Since it has only outperformed 80/20 since the recession it looks like, this might have a strong recency bias.

I would expect it to do better after a crash as compared to before. I haven't looked at the 3 month model nor vs other allocations as you mentioned. This was a quick (as in like an hour) run through to see how it did given all the data I had access to. If you know how I can push bonds farther back, I can test over a longer period of time. What I'd really like to do is go from 1965 - 2015. That way I get two cycles, one where bonds are stupidly high yield, and one where bonds are stupidly low yield. Major crashes are quite rare, minor downturns are fairly common in comparison (i.e. 15-25% over a couple years vs drops like in '08 and '87). I can more easily compare everything from 100/0 to 0/100 on a graph (say 100/0, 80/20, 60/40, 40/60, 20/80, 0/100 so it isn't too cluttered) than I can doing 6 month vs 3 month. I can see where you're coming from in recency bias, and part of that has to do with the minimal amount of data (relatively) compared to what would really be necessary to even tune the idea into something workable if it works at all.

AZryan

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Re: Sliding Allocation
« Reply #14 on: February 24, 2015, 10:47:18 PM »
Is there a problem maybe with having to do a great deal of buying and selling to keep such floating allocation adjusted according to your rules?
Meaning that maybe this is really the best way to protect against over/under valued sections of the portfolio, BUT if you've gotta pay a crapload of cap gains tax and short term tax to keep it up, maybe that's the reason this isn't usually recommended?

Pooperman

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Re: Sliding Allocation
« Reply #15 on: February 25, 2015, 03:55:31 AM »
Is there a problem maybe with having to do a great deal of buying and selling to keep such floating allocation adjusted according to your rules?
Meaning that maybe this is really the best way to protect against over/under valued sections of the portfolio, BUT if you've gotta pay a crapload of cap gains tax and short term tax to keep it up, maybe that's the reason this isn't usually recommended?

401k? IRAs? Rebalancing done with contributions?

Pooperman

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Re: Sliding Allocation
« Reply #16 on: February 26, 2015, 09:00:01 AM »
Could you add various asset allocations to your graph such as 100/0, 90/10, 70/30, 60/40? That way we can see if this strategy has  outperformed other asset allocations in addition to 80/20. Since it has only outperformed 80/20 since the recession it looks like, this might have a strong recency bias.

Here you go!



Next step is to figure out how 3 months compares to 6 months.

retireatbirth

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Re: Sliding Allocation
« Reply #17 on: February 26, 2015, 05:56:10 PM »
Could you add various asset allocations to your graph such as 100/0, 90/10, 70/30, 60/40? That way we can see if this strategy has  outperformed other asset allocations in addition to 80/20. Since it has only outperformed 80/20 since the recession it looks like, this might have a strong recency bias.

Here you go!



Next step is to figure out how 3 months compares to 6 months.

Could you set a log y axis?

Your sliding allocation has done well so I dont think theres any reason not to try it. Its not that risky and maybe it will continue to outperform.

Pooperman

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Re: Sliding Allocation
« Reply #18 on: February 27, 2015, 04:00:45 AM »
Snip

Could you set a log y axis?

Your sliding allocation has done well so I dont think theres any reason not to try it. Its not that risky and maybe it will continue to outperform.

Not sure how to do that with Google Sheets. The results may just be dumb luck, which is why I'd like to have a longer testing period (need more bond data!). Preferably from 1965 - 2015.

retireatbirth

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Re: Sliding Allocation
« Reply #19 on: February 27, 2015, 06:11:40 AM »
What happens if you roll the reallocation period? So, Jan,Jul vs Feb,Aug vs Mar,Sept etc

It looks like the sliding allocation has avoided any major dips, but most of those have happened in October I think so if the next were to occur in say July, it might not do as well.

Pooperman

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Re: Sliding Allocation
« Reply #20 on: February 27, 2015, 06:21:45 AM »
What happens if you roll the reallocation period? So, Jan,Jul vs Feb,Aug vs Mar,Sept etc

It looks like the sliding allocation has avoided any major dips, but most of those have happened in October I think so if the next were to occur in say July, it might not do as well.

Correct. This needs to be tested, as does shorter timespans (3 month/4 month rebalancing). The above graph is Jan/July.

EDIT: I'll get to the data crunching for different start dates and the 3/4 month rebalancing on Sunday.
« Last Edit: February 27, 2015, 06:51:52 AM by Pooperman »

RWD

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Re: Sliding Allocation
« Reply #21 on: February 27, 2015, 08:12:41 AM »
I was thinking about a similar idea to this yesterday. Something like holding 60/40 or 70/30 and then reallocating to 90/10 or 100 in the event of a crash.

Wolf359

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Re: Sliding Allocation
« Reply #22 on: March 02, 2015, 05:56:02 PM »
I've been reading everything I can on investing, and have gone back to the classics. 

In "The Intelligent Investor," Benjamin Graham states:

"We recommended that the investor divide his holdings between high-grade bonds and the leading common stocks; that the proportion held in bonds never be less than 25% or more than 75%, with the converse being necessarily true for the common stock component; that his simplist choice would be to maintain a 50-50 proportion between the two, with adjustments to restore the equality when market developments had disturbed it by as much as, say, 5%.  As an alternative policy he might choose to reduce his common-stock component to 25% if he felt the market was dangerously high, and conversely to advance it toward the maximum of 75% if he felt that a decline in stock prices was making them increasingly attractive."

In other words, he was talking about asset allocation and rebalancing.  That last sentence sounds a lot like what you are proposing, a sliding allocation. 

Pooperman

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Re: Sliding Allocation
« Reply #23 on: March 03, 2015, 03:56:42 AM »
I've been reading everything I can on investing, and have gone back to the classics. 

In "The Intelligent Investor," Benjamin Graham states:

"We recommended that the investor divide his holdings between high-grade bonds and the leading common stocks; that the proportion held in bonds never be less than 25% or more than 75%, with the converse being necessarily true for the common stock component; that his simplist choice would be to maintain a 50-50 proportion between the two, with adjustments to restore the equality when market developments had disturbed it by as much as, say, 5%.  As an alternative policy he might choose to reduce his common-stock component to 25% if he felt the market was dangerously high, and conversely to advance it toward the maximum of 75% if he felt that a decline in stock prices was making them increasingly attractive."

In other words, he was talking about asset allocation and rebalancing.  That last sentence sounds a lot like what you are proposing, a sliding allocation.

It does. I'm going to test the various methods (some of mine, some of the classics) and see how they do. So far I've done about half of the scenarios I'd like to, and I found more data (back to Jan 1980).

Wolf359

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Re: Sliding Allocation
« Reply #24 on: March 03, 2015, 07:19:24 AM »
I was thinking about a similar idea to this yesterday. Something like holding 60/40 or 70/30 and then reallocating to 90/10 or 100 in the event of a crash.

I'm reading so much material so quickly that it's all starting to mash together, so I can't cite the source correctly.  Either Swedroe or Bernstein explored this strategy.  There are some nuances/caveats to it.

First, if you do it, make sure your bonds are treasuries or the highest quality bonds. Don't chase yields while you're waiting for the market to crash.  The reason is that junk bonds actually track with the market during major crashes.  In other words, they'll be down at the same time the market is, so the assets may not be there to shift into stocks.  In 2009, every asset class was down except treasuries, CDs, and cash.

Second, this is essentially market timing, which is contrary to a passive indexing strategy.  You can't predict the market.  What happens if the bull market keeps running for another year, or two, or three?  Will you be sitting with lower returns until then?

Third, this requires great courage to actually execute.  Have you invested during a major market crash?  In 2008, banks were failing, investment companies were failing, insurance companies were failing, local governments were running out of money.  The major car companies almost went out of business.  The US government was nationalizing private companies (they didn't call it that, but that is essentially what you call it when the government owns GM.)  Major firms (Lehman Brothers, Merrill Lynch)  that had been around for 100 years closed.  Everything feels like a watershed moment has occurred, that things are different this time.  And that's when you're proposing to drop all bonds and go 100% all in.  It's easy to plan for it, but hard to actually execute in the moment.  In addition, you may not buy in at the bottom.  If you buy in, and the market slides another 30%, then stays there for five years, will you be able to stay the course?  Ask a Russian, they're going through this right now.  The currency is collapsed, they're under sanctions, oil prices (that they depend on for revenues) are low and staying there -- is this the best time to buy into the Russian stock market?

The conclusion was that this is actually a very aggressive strategy.  Sitting on the sidelines during a long bull market, then buying in during a bear is actually hard to do.  Great returns require great risk.  Great risk means you can lose your money.

I'm thinking of a less aggressive variation.  Following bond recommendations to temper risk allows participation in the stock market, but lowering the bond allocation a little during market downturns may enhance returns.  I'm still learning and thinking about it, though.

RWD

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Re: Sliding Allocation
« Reply #25 on: March 03, 2015, 08:12:39 AM »
I was thinking about a similar idea to this yesterday. Something like holding 60/40 or 70/30 and then reallocating to 90/10 or 100 in the event of a crash.

I'm reading so much material so quickly that it's all starting to mash together, so I can't cite the source correctly.  Either Swedroe or Bernstein explored this strategy.  There are some nuances/caveats to it.

First, if you do it, make sure your bonds are treasuries or the highest quality bonds. Don't chase yields while you're waiting for the market to crash.  The reason is that junk bonds actually track with the market during major crashes.  In other words, they'll be down at the same time the market is, so the assets may not be there to shift into stocks.  In 2009, every asset class was down except treasuries, CDs, and cash.

Second, this is essentially market timing, which is contrary to a passive indexing strategy.  You can't predict the market.  What happens if the bull market keeps running for another year, or two, or three?  Will you be sitting with lower returns until then?

Third, this requires great courage to actually execute.  Have you invested during a major market crash?  In 2008, banks were failing, investment companies were failing, insurance companies were failing, local governments were running out of money.  The major car companies almost went out of business.  The US government was nationalizing private companies (they didn't call it that, but that is essentially what you call it when the government owns GM.)  Major firms (Lehman Brothers, Merrill Lynch)  that had been around for 100 years closed.  Everything feels like a watershed moment has occurred, that things are different this time.  And that's when you're proposing to drop all bonds and go 100% all in.  It's easy to plan for it, but hard to actually execute in the moment.  In addition, you may not buy in at the bottom.  If you buy in, and the market slides another 30%, then stays there for five years, will you be able to stay the course?  Ask a Russian, they're going through this right now.  The currency is collapsed, they're under sanctions, oil prices (that they depend on for revenues) are low and staying there -- is this the best time to buy into the Russian stock market?

The conclusion was that this is actually a very aggressive strategy.  Sitting on the sidelines during a long bull market, then buying in during a bear is actually hard to do.  Great returns require great risk.  Great risk means you can lose your money.

I'm thinking of a less aggressive variation.  Following bond recommendations to temper risk allows participation in the stock market, but lowering the bond allocation a little during market downturns may enhance returns.  I'm still learning and thinking about it, though.

Very interesting! That makes a lot of sense. Would corporate bonds not be considered high quality? Vanguard's corporate bond funds don't have history going back to 2008 so I can't see how they would have done during the crash.

I'm thinking of keeping an allocation that I'd be happy with even if the market didn't crash (maybe 70/30 or 80/20) with the option of shifting it to be more aggressive in a downturn.

tdogz

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Re: Sliding Allocation
« Reply #26 on: March 03, 2015, 10:00:39 AM »
Very interesting! That makes a lot of sense. Would corporate bonds not be considered high quality? Vanguard's corporate bond funds don't have history going back to 2008 so I can't see how they would have done during the crash.

The Corporate Bond fund in my 401(k) - RITCX - has a history going back that far. From June 1, 2007 until December 5, 2008, RITCX lost 41.74%. In contrast, the S&P 500 index lost 37.68% during that period, but the Vanguard Total Bond Market (VBMFX) was up 0.10% during the same time frame.

Pooperman

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Re: Sliding Allocation
« Reply #27 on: March 03, 2015, 10:28:19 AM »
Very interesting! That makes a lot of sense. Would corporate bonds not be considered high quality? Vanguard's corporate bond funds don't have history going back to 2008 so I can't see how they would have done during the crash.

The Corporate Bond fund in my 401(k) - RITCX - has a history going back that far. From June 1, 2007 until December 5, 2008, RITCX lost 41.74%. In contrast, the S&P 500 index lost 37.68% during that period, but the Vanguard Total Bond Market (VBMFX) was up 0.10% during the same time frame.

Another similar fund (through fidelity) will give a pretty good idea (FBNDX). I got more data through using that fund (though not back through 1972 as I had hoped!).

Agree with the above poster who said this is market timing (it is!). The whole point is to take the emotion out of timing and see if there is any advantage to doing this or whether staying with some sort of constant allocation is better. If it is better, under what circumstances and limitation? I've not finished my preliminary, open-ended, version (any allocation between 100/0 and 0/100 allowed), but I've seen that it just expands the possible outcomes following the strict outcomes put forth in the original post. The 6-month reallocation had returns anywhere from 0.5x through 2x the constant 80/20 returns (as of Feb 2nd). The 0.5x is a direct result of not allocating to 100/0 on the 1987 crash (it was ~19.5% below the last point, not above the 20% threshold).

Some things I will run tests on: allocating to 100/0 after any 20% drop from the market highs, limiting the bottom (i.e. no lower than x/y), allocating to 100/0 after a crash/downturn and bringing it back to the standard allocation of 80/20 over a period of x cycles then maintain 80/20 until another crash/downturn.

Wolf359

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Re: Sliding Allocation
« Reply #28 on: March 03, 2015, 01:26:43 PM »
There's another mechanical strategy I'm trying to understand called value averaging.  It's sort of like weighted dollar cost averaging.

I'm already locked into saving regular amounts until I retire. By default, that's dollar cost averaging. Value averaging may be a way to increase the contributions when the market is down, and reduce contributions when the market is up.  There's even a point where it triggers a sell signal to reduce a position.

Pooperman

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Re: Sliding Allocation
« Reply #29 on: March 03, 2015, 01:33:19 PM »
There's another mechanical strategy I'm trying to understand called value averaging.  It's sort of like weighted dollar cost averaging.

I'm already locked into saving regular amounts until I retire. By default, that's dollar cost averaging. Value averaging may be a way to increase the contributions when the market is down, and reduce contributions when the market is up.  There's even a point where it triggers a sell signal to reduce a position.

Basically, you decide a yearly gain you want to achieve (say 8% real). Every year, you hit that 8% goal by either withdrawing, adding, or doing nothing. This forces you to revert your portfolio to the mean every year and gives you steady returns. Not sure if this strategy is a winner or loser in the long run vs just constant allocation. Worth testing!

Pooperman

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Re: Sliding Allocation
« Reply #30 on: March 05, 2015, 03:30:49 PM »
Research done (dun duuuuuun)!

Here are my findings (and some pretty graphs to explain!). First, 100% stocks over the last 35 years is the correct play (slightly above average, $330k for comparisons to the others). Second, all numbers include dividends. VFINX (Vanguard S&P 500) is used to represent stocks, and FBNDX is used to represent bonds. Everything starts with $10k invested at 80/20 on 1/2/1980 and ends with the most recent reallocation month. The blue line in each graph is 80/20 reallocated monthly.

6 Month Reallocation


4 Month Reallocation


3 Month Reallocation


2 Month Reallocation


1 Month Reallocation

The Orange line is modified (set to 100/0 whenever a crash has occurred)

Modified 6 Month Reallocation

The lowest one is the worst of the 6 month reallocations. The top one is the first modification (set to 100/0 when a crash has occurred), the bottom one is the second modification (limit within the bounds of 100/0 and 60/40).