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RE: Behaviour, rebalancing, tax and cost efficiencies
Investors and advisors, who regularly face an onslaught of competing claims about how to achieve outperformance, have four bona fide ways to enhance returns, including behaving properly in adverse market conditions, being tax savvy, keeping costs low and rebalancing,
http://www.etf.com/sections/features/21064-buckley-4-ways-advisors-control-alpha.html?fullart=1&start=2
Breaking each of the elements down, Buckley said being a “great behavioral coach” is probably worth 150 basis points of excess return each year. The Vanguard executive was referring to disciplines such as keeping invested when markets turn lower and continuing to put money into the market.
He estimated that being tax savvy might be worth another 60 basis points a year, while keeping costs low and rebalancing are worth 50 basis points and 40 basis points a year, respectively. Again, the four practices are worth an estimated 300 basis points a year—not a trivial amount over the arc of time.
My highlights.
With AIM taking care of behaviour and rebalancing. Its up to you to invest tax and cost efficiently.
Whilst many investors anticipate that they'll behave correctly - often when the crunch comes they'll do the complete opposite (sell after stocks are down instead of increasing stocks. Not reduce (profit take) when prices are high - due to greed of expectation of further gains to come).
Rebalancing and behaviour go hand-in-hand and the above article estimates that adds near 2% yearly to gains. I've seen many instances where investors behave badly - doing the complete opposite to the right thing - amounting to a 2% cost (they lag the market by 2% due to not having added when low, reduced when high and/or rebalanced at appropriate times).
Clive
Hi Ray
A AIM of ^VIX price only, no cash interest added to AIM cash (i.e. AIM cash used as a brake to ensure you don't add too much into a prolonged declining VIX share price) with perhaps 10% allocated to that AIM and the other 90% allocated to more conventional stock AIM(s) could help alleviate market corrections.
The relatively small amount allocated to the VIX AIM doesn't weigh too heavily upon the overall portfolio (combined AIM's total value), but when stocks are crashing the VIX can soar such that AIM VIX throws of sizeable amounts of cash just at a time when stock AIM's are crying out for cash with which to buy more stock. i.e. potentially smooths out down dips during the likes of dot com crash, 2008 financial crash (and Aug/Sept 2011)
That's potentially better than holding a little in a short stock AIM as short stock has a definite negative longer term bias. Whilst VIX is more aligned to a 0% bias (assuming it wasn't initially bought at a relatively high VIX level).
A risk with stock AIM's is that all of cash is exhausted and the share price continues further down, but you don't have any reserves with which to add more stock. If one holding (VIX AIM) is however throwing off cash then you can continue to fill AIM stock buy trades. Long VIX is better suited to that than is short VIX (XIV) - as XIV will also generally be buying at those times.
That might be best managed with asymmetric cash reserve sharing - mostly only ever moving surplus cash from the VIX AIM into stock AIM, but not the other way around (such that the VIX AIM dries up its cash reserve without repeatedly buying too much VIX exposure). Not entirely sure how that might work however as there would be occasions when you might want to increase the amount of funds in the VIX AIM (i.e. not entirely asymmetric cash sharing). Perhaps that adjustment might be made only at a time when the VIX was relatively low. I suspect a reasonable choice might be to start a VIX AIM when the VIX was relatively low (as it was until its recent upward jump), and look to liquidate/close out that AIM when it had shown a sizeable gain, deploy the proceeds into other AIM's (that likely would be keen to be gifted the cash reserves at that time), and then later restarting a VIX AIM when the VIX was low again. Mostly the VIX AIM might have a poor showing - flat or even negative for prolonged periods and appear to be a poor choice - but then during a stock crash its value/gains would be appreciated. Generally starting a VIX AIM when the VIX was low, closing when the VIX was high, would see acceptable overall gains from that AIM.
Found this to be interesting as well. The 50% invested providing 85% of the fully invested return made me think of this graphic on the Vanguard investors website.
This is the link/page to which I think you are referring
https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-risk
A point of note is that those are arithmetic averages (I believe). That doesn't however impact the overall ratio though i.e. for 100% stock we might approximate the standard deviation as being the highest extreme for 100% stock i.e. 54.2% highest annual gain, less the average gain of 10% = 34.2% as being a three sigma (standard deviation) event, such that 1 standard deviation approximates to a third of that = 11.4%
Given the arithmetic average (10%) and standard deviation (11.4) we can approximate the geometric gain using Pythagorean CAGR approximation
which works out in that particular case to 9.4% annualised.
Do the same for 50-50 (max 32.3%, average 8.3%, approx std. dev of 8 - and a 8.3% arithmetic average with 8 std. dev = 8 annualised (geometric) approximation.
8% annualised from 50-50 compared to 9.4% annualised from 100% stock is also 85%.
Clive.
Hi RCA420
Just to clarify
The stacked green coloured cash and blue coloured stock values in the first of these charts is scaled to the left hand Y-axis, which is log scaled, which makes cash look much more heavier. i.e. the top of the blue bar is the combined sum of both cash + stock value.
I had to log scale that axis otherwise you don't get to see much/any of the earlier years. Linear scaled is more or less just a flat line over most of the earlier years and then a large up-rise for later years.
A better visual guide as to cash reserves is the second chart which shows the cash reserve % weighting over time.
Cash reserves rose somewhat abruptly (if a decade+ long period can be classified as being abrupt) from the 50% initial start date level (1871) up to 80%+ levels as in the late 1870's there was predominately deflation, whilst cash was earning something like a +5% to +6% nominal return i.e. was exceeding 'inflation' by close to 7%/year real.
Whilst nominal share prices broadly sideways zigzagged in the late 1800's, real share prices rose strongly, dividends were good and so was cash, as such 'AIM of real share price' accumulated much cash reserves, depleted stock exposure during those years. Which turned out to not only be rewarding, but also a reasonable precursor to the sizeable declines in real share prices in the early 1900's (up to WW1 years).
Hi balbrec2
Hi Tom
the "cash" component is calculated based upon the inflation/deflation of the period influencing its relative value to the stock side. Is that correct?
Yes. Basically the share price used by AIM is the nominal share price divided by the running CPI index value (i.e. as though 1871 CPI = 1 (using Shillers data however has Jan 1871 CPI index = 12.46 for the dataset I hold, and S&P = 4.4, such that my AIM spreadsheet start date real stock price = 0.356)), i.e. the real share price (only) value is AIM'd.
Cash initially the same as stock value (1871), but is supplemented with cash interest and stock dividends and is subsequently recorded in real (cost of living adjusted) terms. To do that I convert back each periods real cash value to a nominal amount by multiplying the previous periods real cash (less/plus any AIM trade amounts) value by the running CPI figure. Then revise that nominal figure to account for any nominal interest earned, and supplement that with any nominal dividends according to the nominal adjusted stock value amount held, and then set that total nominal cash value back to a real value by dividing by the CPI figure. Such that both stock value and cash values are shown in real terms.
For each period (month) Shiller's data includes nominal price only S&P and the dividend value associated to that. I calculate a dividend yield for the period as the nominal dividend value divided by the nominal share price and then take the 12th root of that factor (months worth of dividend factor). Subtracting one from that and multiplying by the current nominal stock value = nominal dividend value amount earned by that amount of stock value.
For cash interest I just took the yearly one-year-interest rate figures and 12th root of that i.e. 6% yearly = 1.06 and 12th root of that = 1.00486755/month factor.
In some months the recorded AIM cash actually declines in real terms despite both dividends and cash interest having added to cash, because inflationary erosion of the exceeded the amounts that cash interest and dividends added.
RE: AIM (of Real values) since 1871
Yet another observation : Why did that AIM indicate such high levels of cash reserves in the late 1800's ? Simply because between 1871 and 1900 there was deflation, with the CPI index in effect halving over those years, whilst one year interest rates arithmetic averaged something like +5.2% (versus around -2.5% yearly average negative inflation (deflation)). i.e. 'cash' was generating +6.9% annualised real across 1871 to 1900. So again, a good call, even though the 'cash reserves chart' looks weird over those years.
RE: AIM (of Real values) since 1871
My suspicions are that the historic Portfolio Control upward bias at around 2.5%/year real rate will continue to be a reasonable 'choice' (average) going forward as I believe many central banks specifically target that sort of inflation rate (UK targets a 2% inflation rate as I believe do both the US and Canada ???).
At/near the 2009 lows I personally struggled with cash reserve deployment. Upon getting down to around 15% cash reserves I felt torn between whether going all-in or keeping some back in anticipation of prices potentially declining lower. The vWave provided a good guide but emotions (fear) did somewhat prevail overall. Going by the cash % indicated in that AIM chart I posted earlier, I actually more closely followed that choice - purely out of luck (fear) rather than guidance - even if that wasn't the best overall choice in practice (would have been more rewarding to have gone all-in at the March/April 2009 lows).
Generally overall that AIM seems to have levelled cash reserves to appropriate levels over time, such as 70% cash reserves being indicated at the 1999 pre-dot-com crash, 1970's peak, early 1980's trough etc. Enough reasonable historical good calls to instil faith in its continued ability to make future good calls IMO.
RE: AIM (of Real values) since 1871
<OT> Robotics/biotech, could develop to a level where it is possible to capture a image of the entire human mind. Putting religion aside, if a person is a collection of all their experiences and that can be saved onto a hard disk of some kind or installed into a robotic body then conceptually it would be possible to travel at the speed of light (transmission of that dataset via radiowaves), or make time/distance seem trivial (slow robotic body time clock down to perhaps 1 clock tick per hour such that 100 years of travel time seemed like 10 days). Bodies could also be evolved more quickly to better suit the particular environment within which they lived.
Frightening but intriguing thoughts.
Hi Steve
AIM S&P Real since 1871
Hi Steve, nice going for 2013. Taking some off the table to build up a 34% cash reserve also seems a wise choice given more recent relative strength.
This next chart shows AIM of S&P Composite real (cost of living adjusted) share price, monthly reviews, with (real) dividends and (real) one year interest rate amounts added to its cash reserves (cash interest was assumed to be 1 year interest rate i.e. perhaps reflective of holding something like some in T-Bills (for liquidity) and some in perhaps 2 or 3 year bonds/bond ladder).
Generally stock price (only) might broadly grow with inflation plus perhaps GDP. They'll also pay a dividend which in this context might be considered as the real reward. Setting AIM to 0% SAFE, 10% minimum trade size will simply add or reduce after each 10% move in real share price, and uplift Portfolio Control after each buy (compensatory increase to reflect GDP)
Excepting short dated inflation bonds, assets tend to be volatile around inflation, such that the AIM captures those motions.
Year end 2013 that's indicating around 44% cash reserves to be appropriate. vWave's more recent value indicates around 43% cash reserves to be appropriate (which implies that ValueLine are anticipating relatively low earnings on average over the next 4 years across the 1700 individual stocks or so that they monitor).
The stacked green (cash) and blue (stock value) bars (scaled to left hand Y-axis) are log scaled, so that gives a false impression of being cash heavy. The red (real share price) line is scaled to the right hand Y-axis. Averaged around 2 trades/year typically, with close to two-thirds of trades being buy trades.
Despite averaging half the stock exposure AIM produced a 1% lower reward than 100% stock buy and hold (5.75% annualised real versus 6.7% annualised real) - assuming total gains (accumulation, dividends and cash interest reinvested). It also did a reasonable job of suggesting appropriate amounts of cash reserves (stock exposure) to hold over time.
All the best for the new year.
Clive.
Just noticed that in my earlier posting I said
Under older versions of windows you had to double click the top right area as the 'close' window action.
which should have read top LEFT
The other option is to single click that top left box and select the CLOSE option.
Remember that when setting Newport Stock codes to use all 5 characters (maybe underscores to pad out shorter codes to 5 characters). Help within Newport is via F1 key.
Shift-F4 on the maintenance screen is another useful key sequence to remember that brings up the Portfolio Control adjustment screen.
they purchased a flat in the same complex in Putney (across the street from Putney Heath). It was near Wimbledon if memory serves.
That's real close to where I live Steve.
London and sub's prices have held up relatively well. Typical SW19 (Wimbledon) flats (apartments) I believe cost around £400K ($650K). For a detached house its more like £2.5M ($4M).
In Canterbury where we have another house prices are a lot cheaper - typically around £450K ($700K) for the average house. Prices dropped a little mostly due to a dry market with no one buying. Some of the local for sale boards however seem to be turning more frequently to sold boards.
Irish house prices seemed to drop a lot more, as I believe was also the case for more northerly homes in England.
For nostalgia I've also dropped MyWay and a MyWay demo DOS programs into the Windows/Newport DOSBox zip file
Re: Newport AIM software
Merry Xmas to you and yours Tom - and to all AIM'ers
RE: Leveraged ETF's.
RE: Description of the "V/L Appreciation Potential"
Hi Tom.
There's some background detail in this link (PDF)
http://www.castleim.com/wp-content/uploads/2013/06/33Castle_Comm_VLMAP.pdf
Re: High vWave
http://www.ritholtz.com/blog/2013/10/nyse-margin-debt-at-record-high/
and
http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=table&key=3153&category=8
i.e. Margin Debt, somewhat confirm the recent relative high
Regards. Clive.
The purpose of a PP is not to increase its value over the rate of inflation. Rather it is a way to maintain purchasing power.
When the treasury vault is empty the Sovereign/Treasury/State will tend to 'confiscate' and will legislate and/or tax accordingly.
There are instances in history where holding stocks, gold, treasury bills and treasury bonds each and collectively have lost heavily in real (cost of living) adjusted terms. Of the order of >50% amounts (more than half of wealth lost) for PP like asset allocations.
With the PP you'll pay insurance costs in the form of lost opportunity costs (lower rewards than might have been provided elsewhere for apparent greater security), only to potentially see that insurance/security invalidated when needed the most. By design (Sovereign. State, Treasury specifically targeting 'confiscations'), not by coincidence.
An irony is that stocks - which are often seen as the more riskier asset, tend to be less risky over the longer term than government bonds - which are often seen as the least risky asset. If stocks achieve a 100% real gain over a period of time and then abruptly lose half you've still the same as the original amount. If bonds pace inflation over a period of time but then lose half, you're down by a half. The PP is more inclined to fall into that latter category.
RE: Permanent Portfolio
Hi Rien
The Permanent Portfolio (PP) has some serious flaws. For instance consider you loaded 100 gold coins into your safe as the 25% gold allocation. The price rises 40% and you sell nearly 30% of those coins as part of a conventional PP rebalance event. You're down to 70 coins remaining in the safe, and perhaps having injected the sale proceeds into other assets that continued to decline (lose).
Repeat...several times more and after 4 sequential rebalances you've 24 coins left in your safe.
Relatively speaking you've no more coins than someone who simply deposited 24 coins (6% of total original fund value amount) into their safe and just left them there.
Three, four or more sequential reduce trades can occur - such as in the 1970's. Had the 1970's subsequently gone on to become a hyperinflation event then that could have been like Weimar Germany 1918 to 1922 years and in having reduced your gold down to 6% or less levels as per the above, and the subsequent protection when needed the most (1923) might have been little - perhaps worse than someone who had bought and held just a dozen or so coins in their safe).
Other risk factors include taxes and costs. In effect with the PP you pay insurance, but run with a considerable risk that the insurance becomes null and void just when you needed it the most. Take gold again 1934 when it was forced to be sold to the treasury (in effect it became illegal to own any investment grade gold) only to then see the price ramped upwards.
During the 1980's, high inflation, high treasury yields, high taxation and costs would have seen net real (after costs and taxes) treasury values decline significantly in real terms rather than the apparent hedging of inflation that some would suggest.
Such 'bad luck' cases are not coincidental - but are by design. Confiscations go back hundreds of years to when Kings used to send their knights and debt collectors out to replenish the Sovereign vaults.
The PP barbell of 25% short term treasury, 25% long dated treasury is little different to holding 50% in a bullet. A bullet fund can shorten the duration (risk) without giving up the reward by diligently trading (moving to the sweet spot (better valued)) duration. In the 1980's when Harry Browne presented the 4x25 PP yields were relatively high such that the barbell was perhaps more appropriate (ignoring taxes). At more recent historic low yields however the bullet is the better choice IMO.
If 25% stocks, 75% 'bonds' is your preferred asset weightings, then I'd suggest that 25% stocks, 70% 2 year treasury fund and 5% 3x leveraged gold ETF would be a better choice than the PP. Reviewed once yearly and look to only ever increase the gold allocation (if it had declined below 5% weighting, increase it back to 5% weighting), never reducing gold (excepting if in a hyperinflation event and all other assets had in effect declined heavily in value).
Had however you AIM-HI'd the PP assets individually then 2005-2012 inclusive I'm seeing around a 1.2% higher yearly reward assuming the PP held T-Bills for cash (0.7% more for AIM if the PP held 2 year Treasury for cash), which was achieved with AIM averaging 29% in cash (less risk). But equally AIM would have reduced actual gold holdings down (more recent gold AIM would be holding something like 45% cash reserve i.e. see above warning).
IIRC Robert Lichello included a non-complimentary remark in his book about Harry Browne. There are those out there now that continue to promote the 'benefits' of the PP - but are doing so from a background little different to that bloke down the pub.
Take care.
Rien, remember :
1. You have to be in it to win it.
2. Valuations matter.
If you don't invest, your cash might not even keep up with inflation (after taxes).
If you buy high and sell low your investments might not even keep up with cash returns. AIM will help value assets and advise you how much is appropriate to deploy (and/or top slice/profit take).
Even if you just achieve the mathematical average (index) reward, that will be a lot better than what many other investors actually achieved who due to choice of timing bought too much when relatively high, or didn't add (or worse - sold) when low.
AIM's not perfect and wont have you fully deploy at the exact bottom (or sell at the exact peak) - but it will tend to cost average in (out) at around those levels. Which is often a lot better than what other investors achieve.
Re vWave.
I see you've found it already Rien.
Hi Bob
Rien
You'll find that if you
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@-moz-document domain(investorshub.advfn.com)
{
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#ctl00_CP1_mright {display:none;}
#ctl00_sqbot {display:none;}
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Your IH experience will be much better. All of the hot links (pop up ads when you hover over certain words) will disappear, together with other ads, and the message area will be full screen width.