I don't think switching from one diversified portfolio to another reduces risk. They can't both be fully diversified. In the example of switching from ITT to STT, you're switching from missing one huge segment of the global bond and financial market, to missing a different segment. The variance in returns will be greater than if you owned both.Hfearless wrote: ↑Sun Oct 24, 2021 8:53 am With the obvious caveat that market timing methods that do better than chance are few and far between, and that the ones that backtest well don’t come with any guarantees either—
Conditional on the existence of a market timing method that actually works, doesn’t switching from one diversified portfolio to a different diversified portfolio reduce risk?skierincolorado wrote: ↑Fri Oct 22, 2021 8:38 pm By diversifying we can maintain the same expected value with lower variance. Market timing is inherently less diversified and therefore has higher variance.
Note that the entire concept of rebalancing has a market timing element to it—you trade what performed better for what performed worse and expect the latter to revert to the mean, bringing in some profit.
So primarily a psychological concern.skierincolorado wrote: ↑Fri Oct 22, 2021 8:38 pm Also, and this comes to your second point, performing *different* than the market is a risk. If most retail investors are rolling in it because they bought stocks, and you are missing out because you bought much more bonds than most, you may be priced out of buying a home for example. It's also a psychological burden and increases the odds you will abandon ship - further increasing your risk.
To what extent does your suggestion of 125:200 include this concern? What would the allocation be under the sole goal of maximizing the long-term gain, assuming the mental fortitude not to deviate from the IPS?
I also don't think rebalancing is market timing, depending on how it is done. In leveraged strategies it is often necessary to rebalance back to market weights just due to the volatility decay or low-volatility boost. One can very easily stray from market weights. The bond market is also always growing as new debt is issued.
What backtested best since 1955 in terms of sharpe ratio is something like 125/250. I actually don't do 125/200 personally, more like 130/180.
The above reason is one of the reasons why. But I and other posters also found that there is less variance in the final total return from stocks than from bonds. There were several other reasons as well for shifting a little more to stocks. It still backtests extremely well. Gotta skim the thread and hte thread that millenialmillions started.