HEDGEFUNDIE's excellent adventure Part II: The next journey

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DMoogle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

hameshatumkochaha wrote: Mon Jan 24, 2022 11:42 am Hi,
This is a great place to get HFEA updates. There seems to be one on Reddit as well. I just learned about the composer's refinement.
Questions:
1. While we have two threads on HFEA (Part 1 and 2), is there somewhere that lists the refinements made? I saw the composer's, I see a few posts earlier an idea to short the inverse 3x ETFs etc. If someone has compiled a list and is tracking, please post.
2. HFEA is certainly quite interesting as many of us are following it, investing in it, plan to invest in it. I wonder if there are some other good ideas (many exist that follow the backtesting but not as interesting) that are listed somewhere. I stumbled on the HFEA a month ago and almost missed reading it... If there are some other interesting ideas, I would like to know.
I know both are a little wide nets but I guess I am not the only one thinking / thought about these questions...
Thanks!
1. I would say not really, just because the concepts in this thread have branched out in a lot of different directions - more/less leverage, alternatives to LTTs (TMF), market timing, adding more diversification via gold and other asset classes, alternative leverage instruments (futures/options/margin/box spreads), tech/small cap/international tilt, as well as plenty of others.

IN MY PERSONAL OPINION, the most fleshed-out refinement that's true to the core concepts of HFEA (which is really rooted in modern portfolio theory) is the use of ITTs instead of LTTs, as detailed in the Modified HFEA thread. I'd start there.

2. There are millions of investing ideas out there, but typically the Bogleheads mindset is basic is best. One of the beauties of HFEA is its simplicity; it's basically just a 55/45 portfolio levered up (with daily leverage rebalancing).
comeinvest
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

Hydromod wrote: Mon Jan 24, 2022 8:17 am
comeinvest wrote: Mon Jan 24, 2022 3:08 am How can we avoid the tax drag?
What if I don't rebalance in taxable when it would result in taxable gains?
I understand the portfolio will temporarily deviate from the target allocation, but let's say I implement HFEA with treasury futures, box spreads, and equity index ETFs (probably the most efficient implementation in taxable), and do all the regular rebalancing except from equities.
Short version of proposed strategy:
Two scenarios: 1. Equities crashed -> I sell treasury futures, buy equities; 2. treasuries crashed -> buy new treasury futures. Wait until the equities portion of the portfolio self-corrects.
Have we tested something like that somewhere in this thread?
I don't remember seeing a whole lot of analysis on tax implications. I'm almost certain nothing with futures.

I'd be a bit careful about timing rebalancing around tax gains. Presumably the equity positions are going to usually outgain the treasury positions, so rebalancing is usually from equities. In backtesting with the 40/60 flavor of HFEA, the median duration before rebalancing was roughly 105/180/250 days for 10/15/20% bands. It can be years between crashes. So the portfolio can get really equity-rich between crashes without regular rebalancing, leaving more exposed and less for crash protection.

Of course, tax mitigation is important. But if taxes take the equivalent of 1 - 3% ER on a strategy that returns >20% CAGR, you should also consider how much you want to distort the crash protection required to get the >20% CAGR?
I'm skeptical about extrapolating anything from the past, and as pointed out in this thread, the returns of HFEA might be muted in the next decade, at best. So 1 - 3% can have a big impact. I'm actually implementing mHFEA as you probably know, which uses treasury futures. I think in taxable accounts the most efficient implementation is with treasury futures, options box spreads, and equities. You are correct that equities will more often outperform, which would lead to an equity-rich portfolio; but on the other hand as the leveraged portfolio grows, it would require re-leveraging to keep the constant leverage ratio, so I think the portfolio might get back in balance by itself with my proposed rebalancing strategy (do all the regular rebalancing except FROM equities if it would lead to a tax drag). The treasury futures are already marked to market, so no additional tax drag here.
adamhg
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by adamhg »

This isn't really HFEA specific, but I know a lot of us use M1.

I moved to M1 to make rebalancing HFEA easier at the end of last year. I thought today was a gift and tried to do a simple TLH by swapping out my UPRO/UMDD with SPXL/MIDU. At 2, M1 successfully closes out my positions but reopened with nearly $1k in cash left over for no apparent reason which missed out on the end of day 6% rally.

Some more details here: https://www.reddit.com/r/M1Finance/comm ... gned_to_do

I'll be closing my M1 account asap. Support didn't even seem bothered by it. They tried to assure me they'd trade it tomorrow morning but couldn't promise they wouldn't just decide to leave 100k in cash the next time.
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cos
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by cos »

adamhg wrote: Mon Jan 24, 2022 10:56 pm This isn't really HFEA specific, but I know a lot of us use M1.

I moved to M1 to make rebalancing HFEA easier at the end of last year. I thought today was a gift and tried to do a simple TLH by swapping out my UPRO/UMDD with SPXL/MIDU. At 2, M1 successfully closes out my positions but reopened with nearly $1k in cash left over for no apparent reason which missed out on the end of day 6% rally.

Some more details here: https://www.reddit.com/r/M1Finance/comm ... gned_to_do

I'll be closing my M1 account asap. Support didn't even seem bothered by it. They tried to assure me they'd trade it tomorrow morning but couldn't promise they wouldn't just decide to leave 100k in cash the next time.
Yeah, I've been frustrated by similar issues in the past, but I've yet to find another broker which matches M1 in terms of automation. I'm with 'em for the long haul, and I have a feeling their behavioral hacks will save me more money than I've lost through little glitches like this one.

Side note, I'm excited to hear that more and more people are diversifying with UMDD! It's woefully underrated.
nehawk87
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by nehawk87 »

Dumping my $6K Roth Contribution in this morning. Thoughts and prayers. Hopefully this ends up to be a blessing with a healthy dip for 2022 Roth contributions.
MatthewLM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MatthewLM »

Now that LIBOR is being discontinued, what rates are most appropriate for estimating implied financing rates? With the futures strategy 3m LIBOR was often assumed but that wont be relevant going forward.
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privatefarmer
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by privatefarmer »

Lots of concern about the bad month we’ve had. I follow a version of HFEA and am up 50% over the last year, even though being down 25% just this month. I’ve also nearly quadrupled my portfolio since starting this <3 years ago.

Always important to put things into perspective. It may feel like the sky is falling but this is just noise. It’s normal. It’s part of the game.
DMoogle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

MatthewLM wrote: Tue Jan 25, 2022 9:28 am Now that LIBOR is being discontinued, what rates are most appropriate for estimating implied financing rates? With the futures strategy 3m LIBOR was often assumed but that wont be relevant going forward.
I haven't dived super deep into the simulating LETFs thread, but IIRC the Fed overnight rate was preferred?
Impatience
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Impatience »

nehawk87 wrote: Tue Jan 25, 2022 8:29 am Dumping my $6K Roth Contribution in this morning. Thoughts and prayers. Hopefully this ends up to be a blessing with a healthy dip for 2022 Roth contributions.
Rest assured your timing will be better than mine
MatthewLM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MatthewLM »

DMoogle wrote: Tue Jan 25, 2022 11:29 am I haven't dived super deep into the simulating LETFs thread, but IIRC the Fed overnight rate was preferred?
I found that thread and some were using the Fed Funds Effective Rate. I'll likely use that, perhaps with some adjustments.
bgf
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by bgf »

privatefarmer wrote: Tue Jan 25, 2022 11:05 am Lots of concern about the bad month we’ve had. I follow a version of HFEA and am up 50% over the last year, even though being down 25% just this month. I’ve also nearly quadrupled my portfolio since starting this <3 years ago.

Always important to put things into perspective. It may feel like the sky is falling but this is just noise. It’s normal. It’s part of the game.
I only started in September, so I'm down. With new Roth contributions coming early in the year, this may not be a bad thing in the long run though.

The only thing that has surprised me is the amount of intraday volatility. I say this objectively, as my risk tolerance for this strategy is sufficient. I wonder what kind of rebalancing would have been deemed optimal if we could account for intraday moves and not just closing prices. Given the detail of this thread, it's probably already been discussed.

But yea, intraday moves can be wild and crazy!
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
Mokonack
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Mokonack »

comeinvest wrote: Mon Jan 24, 2022 4:54 pm I'm actually implementing mHFEA as you probably know, which uses treasury futures. I think in taxable accounts the most efficient implementation is with treasury futures, options box spreads, and equities...
I've been lurking and following this thread and related threads for a while. There are a few people who reference using futures to implement the mHFEA strategy, but I don't recall seeing a consensus on allocations for mHFEA. Reading the thread I saw various breakdowns comparing LTT/ITT/STT with differing leverage factors on each. Do you mind sharing what your specific allocation is?
DMoogle
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DMoogle »

Mokonack wrote: Tue Jan 25, 2022 2:00 pm
comeinvest wrote: Mon Jan 24, 2022 4:54 pm I'm actually implementing mHFEA as you probably know, which uses treasury futures. I think in taxable accounts the most efficient implementation is with treasury futures, options box spreads, and equities...
I've been lurking and following this thread and related threads for a while. There are a few people who reference using futures to implement the mHFEA strategy, but I don't recall seeing a consensus on allocations for mHFEA. Reading the thread I saw various breakdowns comparing LTT/ITT/STT with differing leverage factors on each. Do you mind sharing what your specific allocation is?
Also doing mHFEA, targetting 165 equities/250 ITTs. One of the beauties of it is that you can scale it appropriately to your own risk tolerance.
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hiddenpower
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hiddenpower »

cflannagan wrote: Wed Jan 05, 2022 11:49 am
Afrofreak wrote: Wed Jan 05, 2022 10:18 am
cflannagan wrote: Wed Jan 05, 2022 8:21 am
AlinMC wrote: Wed Jan 05, 2022 5:19 am
60/40 in order to maintain the current ratio. This maximizes performance according to backtests, ensuring rebalance only occurs quarterly.
I'm not aware of any such backtests, can you point me out to those so I can see for myself? Yes, quarterly rebalancing frequency have been backtested, I'm referring to the part where you say it've been backtested to show it's better to make new contributions at current allocations (60/40 for example) than to add money into underperforming asset to bring it back to the target allocation, then add the rest of the new money according to target %'s.
If done correctly, making new contributions to the portfolio makes no difference in the performance (in terms of %) of it, so you can simply backtest as if you had not made any contributions at all. That's kind of the point.

Suppose you have a portfolio that starts at 55/45 UPRO/TMF and by mid-quarter has drifted to 60/40 and you make a contribution. If you split the new money up 60/40, identical to your current allocation, then by default your TWRR but not your MWRR will be the same whether you made that contribution or not. You can test this out by going on PV, set rebalancing to quarterly and check the CAGR. Then, add monthly contributions still with quarterly rebalancing and check again. The CAGR is now the sum of the returns of the portfolio plus contributions but the TWRR will be identical to original CAGR. The only way this is possible is if you contribute at current allocations. If, however, you buy the depreciated asset (in this case TMF) such that your allocation goes back to 55/45, then you have just completed a rebalance halfway through the quarter and that will change both your TWRR and MWRR to the downside according to backtests. This is why it's necessary to contribute at current allocation, so you're not unintentionally rebalancing your portfolio halfway through the quarter.
Okay, yeah I see what you mean. Good to know going forward. Anytime I've been adding new money, I've only been doing those very close to rebalancing dates (like within few trading days), so any thing I "lose" by going with target allocation instead of current allocation if I added new money a few trading days before rebalancing dates should be minimal.
But does it actually matter if you rebalance more frequently than quarterly? Does it make a big difference if adding the current drift proportion or always splitting new contributions by 55/45? I'd like to DCA a cash-roth account and then let it ride and quarterly rebalance it
TheDoctor91
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by TheDoctor91 »

cos wrote: Mon Jan 24, 2022 11:21 pm
adamhg wrote: Mon Jan 24, 2022 10:56 pm This isn't really HFEA specific, but I know a lot of us use M1.

I moved to M1 to make rebalancing HFEA easier at the end of last year. I thought today was a gift and tried to do a simple TLH by swapping out my UPRO/UMDD with SPXL/MIDU. At 2, M1 successfully closes out my positions but reopened with nearly $1k in cash left over for no apparent reason which missed out on the end of day 6% rally.

Some more details here: https://www.reddit.com/r/M1Finance/comm ... gned_to_do

I'll be closing my M1 account asap. Support didn't even seem bothered by it. They tried to assure me they'd trade it tomorrow morning but couldn't promise they wouldn't just decide to leave 100k in cash the next time.
Yeah, I've been frustrated by similar issues in the past, but I've yet to find another broker which matches M1 in terms of automation. I'm with 'em for the long haul, and I have a feeling their behavioral hacks will save me more money than I've lost through little glitches like this one.

Side note, I'm excited to hear that more and more people are diversifying with UMDD! It's woefully underrated.
You convinced me to tilt more towards UMDD :)
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Afrofreak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

hiddenpower wrote: Tue Jan 25, 2022 4:41 pm But does it actually matter if you rebalance more frequently than quarterly? Does it make a big difference if adding the current drift proportion or always splitting new contributions by 55/45? I'd like to DCA a cash-roth account and then let it ride and quarterly rebalance it
Is it a big difference? No, probably a few percentage points depending on how much you're contributing vs. your initial contribution. What I don't understand is why there is such an aversion (not calling you out specifically but in general) to doing what has historically been shown to be the best method? If you DCA, just do it at current ratios instead of 55/45. Where's the big kerfuffle?
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hiddenpower
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hiddenpower »

Afrofreak wrote: Tue Jan 25, 2022 6:29 pm
hiddenpower wrote: Tue Jan 25, 2022 4:41 pm But does it actually matter if you rebalance more frequently than quarterly? Does it make a big difference if adding the current drift proportion or always splitting new contributions by 55/45? I'd like to DCA a cash-roth account and then let it ride and quarterly rebalance it
Is it a big difference? No, probably a few percentage points depending on how much you're contributing vs. your initial contribution. What I don't understand is why there is such an aversion (not calling you out specifically but in general) to doing what has historically been shown to be the best method? If you DCA, just do it at current ratios instead of 55/45. Where's the big kerfuffle?
Because timing matters. Your CAGR can be a lot better or worse depending on when you lump sum.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

hiddenpower wrote: Tue Jan 25, 2022 6:30 pm
Afrofreak wrote: Tue Jan 25, 2022 6:29 pm
hiddenpower wrote: Tue Jan 25, 2022 4:41 pm But does it actually matter if you rebalance more frequently than quarterly? Does it make a big difference if adding the current drift proportion or always splitting new contributions by 55/45? I'd like to DCA a cash-roth account and then let it ride and quarterly rebalance it
Is it a big difference? No, probably a few percentage points depending on how much you're contributing vs. your initial contribution. What I don't understand is why there is such an aversion (not calling you out specifically but in general) to doing what has historically been shown to be the best method? If you DCA, just do it at current ratios instead of 55/45. Where's the big kerfuffle?
Because timing matters. Your CAGR can be a lot better or worse depending on when you lump sum.
Who said anything about lump-summing?
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hiddenpower
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hiddenpower »

Afrofreak wrote: Tue Jan 25, 2022 6:52 pm
hiddenpower wrote: Tue Jan 25, 2022 6:30 pm
Afrofreak wrote: Tue Jan 25, 2022 6:29 pm
hiddenpower wrote: Tue Jan 25, 2022 4:41 pm But does it actually matter if you rebalance more frequently than quarterly? Does it make a big difference if adding the current drift proportion or always splitting new contributions by 55/45? I'd like to DCA a cash-roth account and then let it ride and quarterly rebalance it
Is it a big difference? No, probably a few percentage points depending on how much you're contributing vs. your initial contribution. What I don't understand is why there is such an aversion (not calling you out specifically but in general) to doing what has historically been shown to be the best method? If you DCA, just do it at current ratios instead of 55/45. Where's the big kerfuffle?
Because timing matters. Your CAGR can be a lot better or worse depending on when you lump sum.
Who said anything about lump-summing?
No, probably a few percentage points depending on how much you're contributing vs. your initial contribution. What I don't understand is why there is such an aversion (not calling you out specifically but in general) to doing what has historically been shown to be the best method? If you DCA,
I misunderstood this. What has been historically been shown to be the best method? I've mostly seen lump sum.
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hiddenpower
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hiddenpower »

Afrofreak wrote: Tue Jan 25, 2022 6:52 pm
hiddenpower wrote: Tue Jan 25, 2022 6:30 pm
Afrofreak wrote: Tue Jan 25, 2022 6:29 pm
hiddenpower wrote: Tue Jan 25, 2022 4:41 pm But does it actually matter if you rebalance more frequently than quarterly? Does it make a big difference if adding the current drift proportion or always splitting new contributions by 55/45? I'd like to DCA a cash-roth account and then let it ride and quarterly rebalance it
Is it a big difference? No, probably a few percentage points depending on how much you're contributing vs. your initial contribution. What I don't understand is why there is such an aversion (not calling you out specifically but in general) to doing what has historically been shown to be the best method? If you DCA, just do it at current ratios instead of 55/45. Where's the big kerfuffle?
Because timing matters. Your CAGR can be a lot better or worse depending on when you lump sum.
Who said anything about lump-summing?
No, probably a few percentage points depending on how much you're contributing vs. your initial contribution. What I don't understand is why there is such an aversion (not calling you out specifically but in general) to doing what has historically been shown to be the best method? If you DCA,
I misunderstood this. What has been historically been shown to be the best method? I've mostly seen lump sum.
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Afrofreak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

hiddenpower wrote: Tue Jan 25, 2022 7:23 pm I misunderstood this. What has been historically been shown to be the best method? I've mostly seen lump sum.
The best rebalancing period has been quarterly according to PV, though someone else on this forum pointed out that doing it daily may be more beneficial. My point was simply that if you follow HF's advice to rebalance quarterly with your portfolio, then it should logically follow that you do the same with your contributions, meaning allocation it such that the overall ratio of the portfolio remains the same as if you had not contributed any money at all and then rebalancing the whole thing come end of quarter. This is what I was explaining in the thread that you originally quoted. As for the timing of the contributions themselves, lump sum has been shown to be the best method about 66% of the time according to Ben Felix on YouTube. This also makes sense if we consider that the market generally goes up over time, thus you want as much invested as early as possible. Now of course, there's the mental aspect to consider so I'll leave that one up to you.
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hiddenpower
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hiddenpower »

Afrofreak wrote: Tue Jan 25, 2022 7:50 pm
hiddenpower wrote: Tue Jan 25, 2022 7:23 pm I misunderstood this. What has been historically been shown to be the best method? I've mostly seen lump sum.
The best rebalancing period has been quarterly according to PV, though someone else on this forum pointed out that doing it daily may be more beneficial. My point was simply that if you follow HF's advice to rebalance quarterly with your portfolio, then it should logically follow that you do the same with your contributions, meaning allocation it such that the overall ratio of the portfolio remains the same as if you had not contributed any money at all and then rebalancing the whole thing come end of quarter. This is what I was explaining in the thread that you originally quoted. As for the timing of the contributions themselves, lump sum has been shown to be the best method about 66% of the time according to Ben Felix on YouTube. This also makes sense if we consider that the market generally goes up over time, thus you want as much invested as early as possible. Now of course, there's the mental aspect to consider so I'll leave that one up to you.
To be clear, if you DCA every two weeks, but quarterly rebalance, you're saying to deposit at whatever the current drift allocation is? But you're also mentioning daily rebalancing is also claimed to be pretty fine.
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Afrofreak
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

hiddenpower wrote: Tue Jan 25, 2022 8:02 pm
Afrofreak wrote: Tue Jan 25, 2022 7:50 pm
hiddenpower wrote: Tue Jan 25, 2022 7:23 pm I misunderstood this. What has been historically been shown to be the best method? I've mostly seen lump sum.
The best rebalancing period has been quarterly according to PV, though someone else on this forum pointed out that doing it daily may be more beneficial. My point was simply that if you follow HF's advice to rebalance quarterly with your portfolio, then it should logically follow that you do the same with your contributions, meaning allocation it such that the overall ratio of the portfolio remains the same as if you had not contributed any money at all and then rebalancing the whole thing come end of quarter. This is what I was explaining in the thread that you originally quoted. As for the timing of the contributions themselves, lump sum has been shown to be the best method about 66% of the time according to Ben Felix on YouTube. This also makes sense if we consider that the market generally goes up over time, thus you want as much invested as early as possible. Now of course, there's the mental aspect to consider so I'll leave that one up to you.
To be clear, if you DCA every two weeks, but quarterly rebalance, you're saying to deposit at whatever the current drift allocation is? But you're also mentioning daily rebalancing is also claimed to be pretty fine.
That's right.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DarkMatter731 »

DMoogle wrote: Tue Jan 25, 2022 11:29 am
MatthewLM wrote: Tue Jan 25, 2022 9:28 am Now that LIBOR is being discontinued, what rates are most appropriate for estimating implied financing rates? With the futures strategy 3m LIBOR was often assumed but that wont be relevant going forward.
I haven't dived super deep into the simulating LETFs thread, but IIRC the Fed overnight rate was preferred?
Am I being dumb here or isn't that going to massively underestimate financing costs?

If implied financing costs = roll costs, the FED overnight rate is an underestimate of financing costs.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

DarkMatter731 wrote: Wed Jan 26, 2022 5:41 am
DMoogle wrote: Tue Jan 25, 2022 11:29 am
MatthewLM wrote: Tue Jan 25, 2022 9:28 am Now that LIBOR is being discontinued, what rates are most appropriate for estimating implied financing rates? With the futures strategy 3m LIBOR was often assumed but that wont be relevant going forward.
I haven't dived super deep into the simulating LETFs thread, but IIRC the Fed overnight rate was preferred?
Am I being dumb here or isn't that going to massively underestimate financing costs?

If implied financing costs = roll costs, the FED overnight rate is an underestimate of financing costs.
My understanding is that SOFR is supposed to be the replacement of LIBOR. Except that SOFR is secured, while LIBOR was an unsecured rate, which some objected. The little problem is that many real world applications like loans that were based on LIBOR are unsecured, and my understanding is that the "experts" are now trying to figure out which rate to use. (Seems to defeat the point of discontinuing LIBOR, but what do I know.)
My understanding is that the implied spreads in futures and options are determined by the market, which can be affected by LIBOR, SOFR, fed funds rate, treasury bill rates, or deviate from all of them given supply and demand or perceived risk or balance sheet constraints of hedgers.
MatthewLM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MatthewLM »

DarkMatter731 wrote: Wed Jan 26, 2022 5:41 am Am I being dumb here or isn't that going to massively underestimate financing costs?

If implied financing costs = roll costs, the FED overnight rate is an underestimate of financing costs.
For quarterly futures, I know research suggested that 3m LIBOR aligned quite well with the futures financing rate. Therefore I ran a linear regression with the fed funds rate as the independent variable and 3m LIBOR as the dependent. I found that FFER*0.9948+0.2901 matches 3m LIBOR quite closely, so I'll use that.
MatthewLM
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by MatthewLM »

Here's the outcome of my predicted 3M LIBOR using the Fed Funds Effective Rate and backdating further using the 1-month T-bill returns taken from the Kenneth French data library.

Image
DarkMatter731
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by DarkMatter731 »

MatthewLM wrote: Wed Jan 26, 2022 6:36 am
DarkMatter731 wrote: Wed Jan 26, 2022 5:41 am Am I being dumb here or isn't that going to massively underestimate financing costs?

If implied financing costs = roll costs, the FED overnight rate is an underestimate of financing costs.
For quarterly futures, I know research suggested that 3m LIBOR aligned quite well with the futures financing rate. Therefore I ran a linear regression with the fed funds rate as the independent variable and 3m LIBOR as the dependent. I found that FFER*0.9948+0.2901 matches 3m LIBOR quite closely, so I'll use that.
Interesting.

I guess I've never really thought about it but it's still so surprising to me that this strategy of leveraging up seems to have backtested well in higher interest rate environments. Intuitively, it seems like financing futures or UPRO or TMF becomes prohibitively expensive if 3m LIBOR is far higher than what it currently is.

Combine that with lower equity returns if you're leveraging up and it seems like a recipe for failure. Yet it seems to work - what am I missing? I feel like I'm missing something obvious.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by majasan »

cos wrote: Mon Jan 24, 2022 11:21 pm
adamhg wrote: Mon Jan 24, 2022 10:56 pm <SNIP>
Side note, I'm excited to hear that more and more people are diversifying with UMDD! It's woefully underrated.
Hi ...are you not worried about MIDU's volume ?
Volume 13,145
Avg. Volume 57,732
Edit : Or is it like the volume of NTSX ? . I place market orders and get filled mid of the bidXask spread.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

DarkMatter731 wrote: Wed Jan 26, 2022 7:12 am I guess I've never really thought about it but it's still so surprising to me that this strategy of leveraging up seems to have backtested well in higher interest rate environments. Intuitively, it seems like financing futures or UPRO or TMF becomes prohibitively expensive if 3m LIBOR is far higher than what it currently is.

Combine that with lower equity returns if you're leveraging up and it seems like a recipe for failure. Yet it seems to work - what am I missing? I feel like I'm missing something obvious.
Well, now, it's possible that we're not simulating it correctly. The means of creating that leverage they actually used is something that didn't exist in the 70's. Then again, I was not going to say it "backtested well" either. You could say it "avoided ruin."
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

Afrofreak wrote: Tue Jan 25, 2022 6:29 pm
Is it a big difference? No, probably a few percentage points depending on how much you're contributing vs. your initial contribution. What I don't understand is why there is such an aversion (not calling you out specifically but in general) to doing what has historically been shown to be the best method? If you DCA, just do it at current ratios instead of 55/45. Where's the big kerfuffle?
You know, I would have said that in 10,000 posts, or whatever it is, we really didn't have any discussion about contributing. I guess I just missed that. When it all started, it was all "5% or 10% of your portfolio" and see what happens over X years. If I was going to contribute, in my Roth IRA, it'd be $7000 a year probably in one shot. But I don't. If this works, then pretty soon your contributions become really unimportant. If it doesn't work, and you find yourself contributing during a crater event, then that'll surely prove to be a boon however you do it. FWIW.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

Afrofreak wrote: Tue Jan 25, 2022 6:29 pm
hiddenpower wrote: Tue Jan 25, 2022 4:41 pm But does it actually matter if you rebalance more frequently than quarterly? Does it make a big difference if adding the current drift proportion or always splitting new contributions by 55/45? I'd like to DCA a cash-roth account and then let it ride and quarterly rebalance it
Is it a big difference? No, probably a few percentage points depending on how much you're contributing vs. your initial contribution. What I don't understand is why there is such an aversion (not calling you out specifically but in general) to doing what has historically been shown to be the best method? If you DCA, just do it at current ratios instead of 55/45. Where's the big kerfuffle?
By "historically," are you talking about the 10 year portfoliovisualizer backtest? The concern I have with it is that its results might be accidentally datamined. There have been a lot of good posts in this thread that show that, generally speaking, more frequent rebalancing is better. Contributing to the underweight etf also lines up with the conventional wisdom about buying whichever asset has fallen more. It just feels weird to buy an etf knowing you're going to sell it in a few weeks, haha.

I guess it depends on how you weigh the evidence.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

hillclimber wrote: Wed Jan 26, 2022 12:11 pm
Afrofreak wrote: Tue Jan 25, 2022 6:29 pm
hiddenpower wrote: Tue Jan 25, 2022 4:41 pm But does it actually matter if you rebalance more frequently than quarterly? Does it make a big difference if adding the current drift proportion or always splitting new contributions by 55/45? I'd like to DCA a cash-roth account and then let it ride and quarterly rebalance it
Is it a big difference? No, probably a few percentage points depending on how much you're contributing vs. your initial contribution. What I don't understand is why there is such an aversion (not calling you out specifically but in general) to doing what has historically been shown to be the best method? If you DCA, just do it at current ratios instead of 55/45. Where's the big kerfuffle?
By "historically," are you talking about the 10 year portfoliovisualizer backtest? The concern I have with it is that its results might be accidentally datamined. There have been a lot of good posts in this thread that show that, generally speaking, more frequent rebalancing is better. Contributing to the underweight etf also lines up with the conventional wisdom about buying whichever asset has fallen more. It just feels weird to buy an etf knowing you're going to sell it in a few weeks, haha.

I guess it depends on how you weigh the evidence.
Yes, I'm referring to the past 12 years since the inception of UPRO, TQQQ and TMF. However if you extend that to TLT's inception in 2003 you still get the same result, quarterly is superior to monthly on a nominal and risk-adjusted basis. Do you mind linking the posts you're referring to? My argument is simply that if you accept that quarterly rebalancing is the way to go as HF prescribed and we do not challenge that presumption, then logically you must also do the same with additional contributions. Similarly, if we accept that say weekly or daily rebalancing is better, then that should apply to the whole portfolio too. We can't have one rule for new contributions and another for the rest of the portfolio, that makes no sense.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by comeinvest »

MatthewLM wrote: Wed Jan 26, 2022 6:41 am Here's the outcome of my predicted 3M LIBOR using the Fed Funds Effective Rate and backdating further using the 1-month T-bill returns taken from the Kenneth French data library.

Image
Probably very similar to https://fred.stlouisfed.org/series/TEDRATE
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

Afrofreak wrote: Wed Jan 26, 2022 12:21 pm
Yes, I'm referring to the past 12 years since the inception of UPRO, TQQQ and TMF. However if you extend that to TLT's inception in 2003 you still get the same result, quarterly is superior to monthly on a nominal and risk-adjusted basis. Do you mind linking the posts you're referring to? My argument is simply that if you accept that quarterly rebalancing is the way to go as HF prescribed and we do not challenge that presumption, then logically you must also do the same with additional contributions. Similarly, if we accept that say weekly or daily rebalancing is better, then that should apply to the whole portfolio too. We can't have one rule for new contributions and another for the rest of the portfolio, that makes no sense.
Yeah, sure. Here is one.
akxc wrote: Thu Jan 06, 2022 10:04 pm The following chart shows the difference in annualized return for quarterly compared to daily rebalancing based on which day of the quarter is used for rebalancing. I also deducted a 0.1% expense on the amount being transferred between the two funds in each rebalance (current 30 day bid ask spread is .04% for TMF and .02% for UPRO). Sure enough, rebalancing right on the quarter has significantly outperformed other rebalancing periods. But on average, there is a significant benefit to rebalancing daily. Over the simulated Hedgefundie 1986-2019 dataset, this works out to a 92 basis point premium for rebalancing daily over quarterly. I'm inclined to believe the benefit of rebalancing on/around the quarter over the actual life of UPRO/TMF is just by chance based on this analysis.

Image
There have been other posts that have similar conclusions, but I don't have them at hand right now.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by km91 »

comeinvest wrote: Wed Jan 26, 2022 12:52 pm
MatthewLM wrote: Wed Jan 26, 2022 6:41 am Here's the outcome of my predicted 3M LIBOR using the Fed Funds Effective Rate and backdating further using the 1-month T-bill returns taken from the Kenneth French data library.

Image
Probably very similar to https://fred.stlouisfed.org/series/TEDRATE
Spread adjustment for 3mo Libor over SOFR is 26.16 bps per ISDA methodology, ie Libor equivalent rate = SOFR + 0.2616%

https://assets.bbhub.io/professional/si ... 210305.pdf
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

hillclimber wrote: Wed Jan 26, 2022 1:36 pm There have been other posts that have similar conclusions, but I don't have them at hand right now.
None of that is relevant though because we do rebalance at the beginning of the quarter, so whether on average daily rebalancing during the quarter is superior, that's not what is being suggested or recommended.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

It's relevant because it suggests that the quarterly rebalancing outperformance is due to luck.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

Afrofreak wrote: Wed Jan 26, 2022 1:58 pm
hillclimber wrote: Wed Jan 26, 2022 1:36 pm There have been other posts that have similar conclusions, but I don't have them at hand right now.
None of that is relevant though because we do rebalance at the beginning of the quarter, so whether on average daily rebalancing during the quarter is superior, that's not what is being suggested or recommended.
At the start, folks were saying to rebalance quarterly without worrying about the day of the quarter. It moved around to strictly the turn of the quarter as information like the presented chart became available.

I don't think any difference in average returns between monthly (end-of-month) and quarterly (end-of-quarter) is at all significant, given the noise. There's been more dispersion in quarterly results (higher highs and lower lows) when considering fixed duration evaluation periods.

Daily rebalancing gives an additional ratchet effect from many small trades that are biased towards sell high, buy low. This disappears when the rebalance frequency is longer than a couple of days. It's probably not worth the effort unless some sort of automated system is implemented, IMO.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by wfrobinette »

adamhg wrote: Mon Jan 24, 2022 10:56 pm This isn't really HFEA specific, but I know a lot of us use M1.

I moved to M1 to make rebalancing HFEA easier at the end of last year. I thought today was a gift and tried to do a simple TLH by swapping out my UPRO/UMDD with SPXL/MIDU. At 2, M1 successfully closes out my positions but reopened with nearly $1k in cash left over for no apparent reason which missed out on the end of day 6% rally.

Some more details here: https://www.reddit.com/r/M1Finance/comm ... gned_to_do

I'll be closing my M1 account asap. Support didn't even seem bothered by it. They tried to assure me they'd trade it tomorrow morning but couldn't promise they wouldn't just decide to leave 100k in cash the next time.
If you want in and out at your discretion then M1 is the wrong place for sure. It's not for day trading. To top it off if you are doing this type of trading in a cash account is not the smartest move either.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

hillclimber wrote: Wed Jan 26, 2022 2:41 pm It's relevant because it suggests that the quarterly rebalancing outperformance is due to luck.
I'm not convinced. There's another chart that came with the one you reposted which showed the differential across 7 year time periods. They all have a distinctive U-shape that is getting more pronounced as time goes on. I'm not well-versed enough to calculate whether it is statistically significant or not, but from looking at it with a naked eye it would be foolish to suggest there isn't a pattern there.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

The difficulty with backtesting rebalancing strategies is that a handful of good quarterly rebalances could be enough to skew the results. I wouldn't want to accidentally select my rebalancing strategy based on the september effect. Even if it does happen to be statistically significant, the results may not be applicable to the future because statistics is a complicated field of study.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

hillclimber wrote: Wed Jan 26, 2022 7:40 pm The difficulty with backtesting rebalancing strategies is that a handful of good quarterly rebalances could be enough to skew the results. I wouldn't want to accidentally select my rebalancing strategy based on the september effect. Even if it does happen to be statistically significant, the results may not be applicable to the future because statistics is a complicated field of study.
In the graph that I'm referring to there are six different 7 year periods, none of which are overlapping, and the results are all the same. That is hardly a handful of good quarterly rebalances skewing the results. If something is statistically significant and you say that past performance does not equate to future results then what are we even doing here? You might as well say that the negative correlation between stocks and Treasuries may not be negative in the future. At some point we have to extrapolate and make assumptions about the future based on past performance. There will always be a risk involved that things may change, ultimately investing is getting paid for taking on said risk. All we can do is ensure that we are not unnecessarily taking on idiosyncratic risk.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

Is this the post you're talking about, Afrofreak?
akxc wrote: Fri Jan 07, 2022 12:18 pm
Hydromod wrote: Fri Jan 07, 2022 7:20 am This is pretty much what I had found. To be clear on the details, each curve represents 63 separate simulations, one for each trading day in the first quarter, with each simulation run for the same number of trading days and rebalancing on the same trading day of the quarter?
Yes.
Hydromod wrote: Fri Jan 07, 2022 7:20 am To get at timing luck, a series of fixed-duration simulations are nice. There was a post on reddit I linked to here that looked at a whole series of simulations over time. I haven't tried the calculation, but if the work holds up it is some strong evidence that there is a systematic benefit based on day of the quarter (in other words, not entirely timing luck).
Don't have time to dig into too much of a deeper analysis, but here are the results from 1986-2021 data broken down into discrete ~7 year subsets:
Image
Hydromod wrote: Fri Jan 07, 2022 7:20 am I'm surprised that the daily trade still won over quarterly with the slippage included, even though it is better without (at least based on closing prices). Now I'm wondering whether some issue arises by the fluctuations between open and close for the two funds for real trading (i.e., TMF systematically lags UPRO during the day), since the daily close is not practical. M1 limits trades to two windows, for example, which may not have prices that are all that correlated to the daily close.
Agreed. I don't trade daily, so I don't have experience with how this would turn out in practice, and don't know if my 0.1% transaction cost is a good estimate. For example, I could imagine there being larger bid-ask spreads on high volatility days which would also likely be when you are transitioning larger amounts between the two funds.
Looking at the graph, I wouldn't say "the results are all the same." The data is pretty noisy.

The negative correlation between stocks and treasuries is well established statistically and has a good theoretical justification. Even with those, the negative correlation beaks down sometimes.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

hillclimber wrote: Wed Jan 26, 2022 10:27 pm Looking at the graph, I wouldn't say "the results are all the same." The data is pretty noisy.

The negative correlation between stocks and treasuries is well established statistically and has a good theoretical justification. Even with those, the negative correlation beaks down sometimes.
That's the one. Until someone actually calculates whether the correlation is statistically significant or not, we can argue till the cows come about whether quarterly rebalancing has historically been superior due to luck or not. I definitely see a pattern, we can agree to disagree. To reiterate, my point is simply that if one accepts quarterly rebalancing for the entirety of the portfolio as the most optimal option, one cannot then also contribute in a manner that is antithetical to quarterly rebalancing, whether that be contributing only to the depreciated asset or according to the intended allocation (55/45, 60/40, 70/30, etc.).
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by firebirdparts »

Looks like some money came unlost in my excellent adventure.

correlations of 1 are okay some days.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by hillclimber »

Afrofreak wrote: Thu Jan 27, 2022 12:51 am That's the one. Until someone actually calculates whether the correlation is statistically significant or not, we can argue till the cows come about whether quarterly rebalancing has historically been superior due to luck or not. I definitely see a pattern, we can agree to disagree. To reiterate, my point is simply that if one accepts quarterly rebalancing for the entirety of the portfolio as the most optimal option, one cannot then also contribute in a manner that is antithetical to quarterly rebalancing, whether that be contributing only to the depreciated asset or according to the intended allocation (55/45, 60/40, 70/30, etc.).
Yeah, I'm fine with agreeing to disagree. You commented that you didn't understand why there was an "aversion" to doing things your way, so I thought I could explain the reason so many people are skeptical.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Hydromod »

Afrofreak wrote: Thu Jan 27, 2022 12:51 am To reiterate, my point is simply that if one accepts quarterly rebalancing for the entirety of the portfolio as the most optimal option, one cannot then also contribute in a manner that is antithetical to quarterly rebalancing, whether that be contributing only to the depreciated asset or according to the intended allocation (55/45, 60/40, 70/30, etc.).
I don't think the contribution strategy is very important. The contribution allocation cannot affect the returns for the previously contributed portfolio.

So we are talking only about the returns of the contribution from the contribution date to the rebalance date, which is less than a quarter.

On average, UPRO might return 6% in a typical six-week period and TMF might return 4%. Assuming a monthly $1000 contribution, on an annual basis that averages to $720 vs. $480. The difference is $240. After a couple of years, this is roundoff error relative to the portfolio returns.

With that said, the risk profile is different for the contributions, since it is a short-term calculation only. You can take advantage of expected behavior without worrying much about tail risk prior to rebalancing. I'd argue that it might make sense to contribute 100% UPRO in tax-advantaged and to the underweight in taxable.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by LeverageWBeverage »

I don't think that quarterly rebalancing is luck. When you run the choices available in portfolio visualizer, the more you rebalance the better it gets. No rebalancing is worse than yearly, which is worse than semi-annually, which is worse than quarterly.

But when you get to monthly it gets worse than quarterly. Is that because something magically happens exactly on the quarter or is it because you need to give the etfs some time to run and take advantage of momentum between rebals? Maybe one or the other or a bit of both.

So what does that mean for daily? I have no idea but I would think letting them run a bit is probably better than daily rebals. All I know for sure is that portfolio visualizer clearly only has month end data. At least that is true for the free version. I have been running it all month to see where my portfolio is since i started vs where portfolio visualizer thinks it should be at. Its been a crazy month but the number is the same every day i try it because it has no idea what is going on until month end. So that is something to keep in mind.
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Re: HEDGEFUNDIE's excellent adventure Part II: The next journey

Post by Afrofreak »

hillclimber wrote: Thu Jan 27, 2022 10:35 am
Yeah, I'm fine with agreeing to disagree. You commented that you didn't understand why there was an "aversion" to doing things your way, so I thought I could explain the reason so many people are skeptical.
I can't understand people who follow one rule for the entire portfolio and another for their additional contributions. If they do not believe quarterly rebalancing to be superior then that's their prerogative, I have no issues with that as long as it's consistent.
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