Huh, 1/N Asset Allocation is Quite Robust

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Kbg
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Huh, 1/N Asset Allocation is Quite Robust

Post by Kbg » Tue Dec 20, 2022 10:15 pm

For the wonky types.

https://papers.ssrn.com/sol3/papers.cfm ... id=4281138

And of course, 1/N is how the PP does it.
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joypog
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Re: Huh, 1/N Asset Allocation is Quite Robust

Post by joypog » Thu Dec 22, 2022 6:44 pm

Interesting. That's pretty much what I settled on 1/n of US LCG, US SCV, Intl SCV, Gold, LTT, and STT (I'm doing a barbell for the bonds because we're still thinking about buying a house so I like having the "ready-cash" for a down payment)

It works for me because it's simple and it focuses the mind. Is it really worthy of adding to N? If so, go all in. If not, stay away (though I do keep a small variable portfolio for messing around).
1/n weirdo. US-TSM, US-SCV, Intl-SCV, LTT, STT, GLD (+ a little in MF)
whatchamacallit
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Re: Huh, 1/N Asset Allocation is Quite Robust

Post by whatchamacallit » Fri Dec 23, 2022 1:51 am

Interesting.

I was not familiar with this but found some more context in a 2011 paper that was also in support.

http://arno.uvt.nl/show.cgi?fid=129399
In circa 400 A.D. Jewish Rabbi Issac Bar Aha recommended always to invest a third into land, a
third into merchandise and to keep a third at hand. This method later became well-known under
the name “1/n asset allocation strategy”, “equal asset allocation strategy” or “naïve strategy” and is
further defined by DeMiguel et al.(2009) as ”the one in which a segment 1/n of wealth is allocated
to each of N assets available for investment at each rebalancing data.” The strategy requires
investing an equal part of the capital in the different present assets. Nowadays this rule is often
labelled as naïve and too simple, by McClatchy and VandenHul (2005) for example.
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seajay
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Re: Huh, 1/N Asset Allocation is Quite Robust

Post by seajay » Fri Dec 23, 2022 3:11 am

whatchamacallit wrote:
Fri Dec 23, 2022 1:51 am
Interesting.

I was not familiar with this but found some more context in a 2011 paper that was also in support.

http://arno.uvt.nl/show.cgi?fid=129399
In circa 400 A.D. Jewish Rabbi Issac Bar Aha recommended always to invest a third into land, a
third into merchandise and to keep a third at hand. This method later became well-known under
the name “1/n asset allocation strategy”, “equal asset allocation strategy” or “naïve strategy” and is
further defined by DeMiguel et al.(2009) as ”the one in which a segment 1/n of wealth is allocated
to each of N assets available for investment at each rebalancing data.” The strategy requires
investing an equal part of the capital in the different present assets. Nowadays this rule is often
labelled as naïve and too simple, by McClatchy and VandenHul (2005) for example.
The Talmud context was in relation to safety/security, where the discussion/proposals were more along the lines of protection by holding a third in merchandise, a third in-hand, a third buried in the ground i.e. hidden away (not on your person). Many modern day interpretations are as you indicate, land, stocks, cash (gold). Another might be stocks, T-Bills, gold. But all still 1/N

Interesting to compare a Larry twist - shift bond risk over to the stock (and gold) side, holding more volatile stocks such as Small Cap Value, compared to the PP

PV

On a Monte Carlo measure ...

PV MC

Looks safer/better than the PP's PV MC

... worse cases were less bad, average/best cases were better (based on 3.333% 30 year SWR i.e. return of your inflation adjusted money via 30 yearly instalments).
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Hal
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Re: Huh, 1/N Asset Allocation is Quite Robust

Post by Hal » Fri Dec 23, 2022 12:36 pm

seajay wrote:
Fri Dec 23, 2022 3:11 am

Interesting to compare a Larry twist - shift bond risk over to the stock (and gold) side, holding more volatile stocks such as Small Cap Value, compared to the PP

PV

On a Monte Carlo measure ...

PV MC

Looks safer/better than the PP's PV MC

... worse cases were less bad, average/best cases were better (based on 3.333% 30 year SWR i.e. return of your inflation adjusted money via 30 yearly instalments).
Nice research. Another variation discussed in the distant past was to replace the TSM with SCV in the PP. Note the Sharpe & Sortino ratio.
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PP with TSM replaced  by SCV.png
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Aussie GoldSmithPP - 25% PMGOLD, 75% VDCO
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Dieter
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Re: Huh, 1/N Asset Allocation is Quite Robust

Post by Dieter » Fri Dec 23, 2022 12:57 pm

Although holy tracking error — IIRC, SCV hasn’t kept up with SP500 until quite recently
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Re: Huh, 1/N Asset Allocation is Quite Robust

Post by ppnewbie » Fri Dec 23, 2022 6:46 pm

Kbg wrote:
Tue Dec 20, 2022 10:15 pm
For the wonky types.

https://papers.ssrn.com/sol3/papers.cfm ... id=4281138

And of course, 1/N is how the PP does it.
Thanks! And now I also know about SSRN.com. I've started thinking in terms of this 1/N for infrastructure projects as well (my job). Like 1/4 cost of capital, 1/4 cost of ongoing support, 1/4 cost of training, 1/4 cost of implemenation. Or you could do that in 1/3's which gives you a 4/3's or a realistic 30 percent over budget!
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joypog
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Re: Huh, 1/N Asset Allocation is Quite Robust

Post by joypog » Sat Dec 24, 2022 9:54 am

Dieter wrote:
Fri Dec 23, 2022 12:57 pm
Although holy tracking error — IIRC, SCV hasn’t kept up with SP500 until quite recently
Yeah... that's the game with highly volatile products. Paul Merriman has a chart that compares various strategies. And a SCV+SP500 pairing ends up consistently being perfectly mediocre - never first, never last. Always in the middle.

Here is his quilt chart from 6/24/2022

https://paulmerriman.com/wp-content/upl ... V1.3-1.pdf
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1/n weirdo. US-TSM, US-SCV, Intl-SCV, LTT, STT, GLD (+ a little in MF)
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Re: Huh, 1/N Asset Allocation is Quite Robust

Post by Kbg » Sat Dec 24, 2022 10:39 am

QQQ and your favorite SCV or just SC is a great combo. Use the SP 600 vs R 2000 though.
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Re: Huh, 1/N Asset Allocation is Quite Robust

Post by Smith1776 » Sat Dec 24, 2022 1:40 pm

The "naive statistical" approach is the way to go in many, if not most cases.

It helps to prevent data mining biases and behavioural errors. Instead of, say, 4 x 25%, you open the door to "fine tuning" your asset allocation, it becomes an endless rabbit hole.

The 1/N approach is quite sophisticated in its simplicity.
I still find the James Rickards portfolio fascinating.
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Re: Huh, 1/N Asset Allocation is Quite Robust

Post by jalanlong » Tue Dec 27, 2022 11:22 am

joypog wrote:
Sat Dec 24, 2022 9:54 am
Dieter wrote:
Fri Dec 23, 2022 12:57 pm
Although holy tracking error — IIRC, SCV hasn’t kept up with SP500 until quite recently
Yeah... that's the game with highly volatile products. Paul Merriman has a chart that compares various strategies. And a SCV+SP500 pairing ends up consistently being perfectly mediocre - never first, never last. Always in the middle.

Here is his quilt chart from 6/24/2022

https://paulmerriman.com/wp-content/upl ... V1.3-1.pdf
Most risk parity portfolios I follow these days use a 50/50 of large cap growth and small cap value. That outperforms the S&P 500/SCV by a few percentage points.
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joypog
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Re: Huh, 1/N Asset Allocation is Quite Robust

Post by joypog » Sat Dec 31, 2022 6:10 am

Makes sense to go for a true barbell when one isn’t constrained by past purchases in taxable accounts and/or 401k options.
1/n weirdo. US-TSM, US-SCV, Intl-SCV, LTT, STT, GLD (+ a little in MF)
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Re: Huh, 1/N Asset Allocation is Quite Robust

Post by xmj » Wed Jan 04, 2023 3:06 am

I'll piggy-back on this a little - "fixed-mix strategies", which is, rebalancing between a smaller number of individual allocations, like the permanent portfolio does, do quite well also:

Dempster, Evstigneev, Schenk-Hoppé (2009): Growing Wealth with Fixed-Mix Strategies
This chapter surveys theoretical research on the long-term performance of fixed-mix investment strategies. These self-financing strategies rebalance the portfolio over time so as to keep constant the proportions of wealth invested in various assets. The main result is that wealth can be grown from volatility. Our findings demonstrate the benefits of active portfolio management and the potential of financial engineering.
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