Saturday, February 26, 2011 12:02:00 PM
RE : Dynamic Income
The choice of start date just prior to the Wall St Crash for the comparison upon reflection wasn't the best choice.
Moving up the date rate
clearly the fixed (grey line) was much more volatile than the dynamic (blue line), which is also evident in the averages as shown at the bottom.
An 11% average with 14% standard deviation will typically produce a 10.1% annualised. A 16% average with 10% standard deviation will typically produce a 15.6% annualised.
So by taking profits off the table (keeping some of gains in a rainy-day pot), and not taking gains during declines (which is a bit like adding-low), for an extended period of time, when compared to consistently taking around the same amount as income (similar to buy and hold), the volatility, average gain and hence annualised gain were higher for the add-low/reduce-high type approach than it was for a buy-and-hold like approach. Whilst in this the difference is sizeable (15.6% versus 10.1% annualised rates), if you level the average gain to say 11% for both and then use the 14% versus 10% standard deviations the differences closes right down to around 0.4%, but that's still sizeable considering they're both the same underline investment.
I would guess that this effect may also be part of the reason why Value (income payers) generally tend to outperform growth (non income payers) over the longer term by around 0.5% p.a. average, i.e. in good times dividends are paid out, in bad times dividends are retained.
The choice of start date just prior to the Wall St Crash for the comparison upon reflection wasn't the best choice.
Moving up the date rate
clearly the fixed (grey line) was much more volatile than the dynamic (blue line), which is also evident in the averages as shown at the bottom.
An 11% average with 14% standard deviation will typically produce a 10.1% annualised. A 16% average with 10% standard deviation will typically produce a 15.6% annualised.
So by taking profits off the table (keeping some of gains in a rainy-day pot), and not taking gains during declines (which is a bit like adding-low), for an extended period of time, when compared to consistently taking around the same amount as income (similar to buy and hold), the volatility, average gain and hence annualised gain were higher for the add-low/reduce-high type approach than it was for a buy-and-hold like approach. Whilst in this the difference is sizeable (15.6% versus 10.1% annualised rates), if you level the average gain to say 11% for both and then use the 14% versus 10% standard deviations the differences closes right down to around 0.4%, but that's still sizeable considering they're both the same underline investment.
I would guess that this effect may also be part of the reason why Value (income payers) generally tend to outperform growth (non income payers) over the longer term by around 0.5% p.a. average, i.e. in good times dividends are paid out, in bad times dividends are retained.
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