Backtesting for the Optimum HBPP Allocations

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stone
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Re: Backtesting for the Optimum HBPP Allocations

Post by stone » Fri Mar 29, 2013 12:20 pm

rocketdog wrote:
Gerard van Nes wrote:Your strategy on  ratio VP and PP seems to me a bit weird. VP is some strange invention to satisfy your emotional behaviour. If your behaviour is related to your age, it make sense. But I doubt that.
For me, I don't use a VP. I really have no idea what the future brings.
Well, I consider the PP to be a somewhat conservative allocation portfolio.  I have a long investing time horizon, so I'm willing to take higher risks with some of my portfolio (the VP portion).  Since the longer the time horizon you have the more risk you can afford to take, it stands to reason that when I'm young my VP should be larger than my PP, and as I approach retirement I should shift funds from my VP to my PP. 

I'm not recommending that everyone do that, mind you.  It's just the approach I've come up with that fits my investing style.  If my PP repeatedly outperforms my VP over the next 5-10 years, I may reconsider this tactic and start shifting my VP funds into my PP at a faster rate.
Could you just cut down the cash part of the PP to give a slightly better return and somewhat bumpier ride?
A Japanese person in 1989 even with a long time horizon would be regretting having gone in stock heavy by now.
CraigR once posted something very compelling about a long time horizon actually being no help against risk. If you intend to sell stock in 50 years time and one day before you sell, the market falls by 30%, then that is just as bad as if you only bought the stock the day before. Perhaps if you never intend to sell and have an infinite time horizon as when managing a foundation's endowment fund or whatever, then return and not price volatility is all that matters.
Last edited by stone on Fri Mar 29, 2013 12:24 pm, edited 1 time in total.
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Re: Backtesting for the Optimum HBPP Allocations

Post by melveyr » Fri Mar 29, 2013 12:37 pm

Yeah time horizon and risk tolerance are two separate things that get conflated all the time by the investment industry. The reason they get conflated is because financial institutions benefit from you thinking that you have a higher risk tolerance. Since most people don't have a ton of money, which means it would be very painful for them to lose it, the firms convince people to take risks by constructing this idea of risk diminishing with time. Financial institutions specialize in offering the riskier products. They cannot compete with things like I-Bonds, so they only push things that are riskier.

You can check out Paul Samuelson or Zvi Bodie to see why risk does not diminish with time. With most things in finance you are less likely to get screwed if you pay more attention to the academics than the salesmen.
Last edited by melveyr on Fri Mar 29, 2013 12:39 pm, edited 1 time in total.
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Re: Backtesting for the Optimum HBPP Allocations

Post by KevinW » Fri Mar 29, 2013 1:52 pm

melveyr wrote: The reason they get conflated is because financial institutions benefit from you thinking that you have a higher risk tolerance.
Do you understand why the financial industry has an interest in selling higher-risk investment products? They clearly do since practically every firm and advisor, even consumer-friendly ones like Vanguard and TIAA-CREF, push everyone to very risky portfolios. I've never understood this since the ERs on bond funds are generally comparable or higher than those on stock funds.
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Re: Backtesting for the Optimum HBPP Allocations

Post by stone » Fri Mar 29, 2013 2:34 pm

KevinW wrote:
melveyr wrote: The reason they get conflated is because financial institutions benefit from you thinking that you have a higher risk tolerance.
Do you understand why the financial industry has an interest in selling higher-risk investment products? They clearly do since practically every firm and advisor, even consumer-friendly ones like Vanguard and TIAA-CREF, push everyone to very risky portfolios. I've never understood this since the ERs on bond funds are generally comparable or higher than those on stock funds.
I guessed that the push for retail sales of risky assets came from quite high up the financial food chain. Someone needs to be buying high and selling low in order to feed the gains of those who are buying low and selling high. I guess much of the buying high is done as stock buy backs by corporations but they also want retail customers who are likely to panic and sell low to create bargain buying opportunities. There is a big hunger for dumb money. The dumber the better I guess ???
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Re: Backtesting for the Optimum HBPP Allocations

Post by melveyr » Fri Mar 29, 2013 3:02 pm

KevinW wrote:
Do you understand why the financial industry has an interest in selling higher-risk investment products? They clearly do since practically every firm and advisor, even consumer-friendly ones like Vanguard and TIAA-CREF, push everyone to very risky portfolios. I've never understood this since the ERs on bond funds are generally comparable or higher than those on stock funds.
They cannot compete on the lower end of the risk spectrum because of products like T-Bills, TIPS, or I-bonds. So the best course of action is to convince people that those products are innapropriate for their situation.

Additionally, they are in the business of selling dreams. You can't build dreams out of low risk investments.
Last edited by melveyr on Fri Mar 29, 2013 3:04 pm, edited 1 time in total.
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Re: Backtesting for the Optimum HBPP Allocations

Post by pugchief » Fri Mar 29, 2013 4:11 pm

Slotine wrote:
KevinW wrote:
melveyr wrote: The reason they get conflated is because financial institutions benefit from you thinking that you have a higher risk tolerance.
Do you understand why the financial industry has an interest in selling higher-risk investment products? They clearly do since practically every firm and advisor, even consumer-friendly ones like Vanguard and TIAA-CREF, push everyone to very risky portfolios. I've never understood this since the ERs on bond funds are generally comparable or higher than those on stock funds.
Fees.

Finance and medicine are the only places I know where kickbacks are legal.  Fudiciary responsibilities set limits on what advisors can sell, but those limits are quite loose.  I know of no one that would hit the bond-only one.
Kickbacks and fee-splitting are quite illegal in medicine. What are you referring to and can you site a source?

Btw, fee-splitting is quite acceptable in the legal field, but guess who makes the laws?
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Re: Backtesting for the Optimum HBPP Allocations

Post by stone » Fri Mar 29, 2013 4:27 pm

To some extent it might be partly that the people actually doing the retail selling actually believe the hype themselves. I think the way compounding works is really quite counter-intuitive. People all too easily fail to grasp that a 50% loss needs a subsequent 100% gain to get even. That effect creates the illusion that it genuinely is a good idea to be taking goofy risks.
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Re: Backtesting for the Optimum HBPP Allocations

Post by MachineGhost » Fri Mar 29, 2013 6:20 pm

Slotine wrote: To be fair, medicine does have laws against direct-fees tied to the sales.  Gifts, speaking presentations, research payments, advisory fees all borderline legitimate uses, which makes it so hard to combat.
There is kickbacks in referring patients to diagnostic centers owned by the docs doing the referring.  This is especially egregarious in Medicare.  I trust no doctor's referral.  I'll price shop myself, thanks!
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Re: Backtesting for the Optimum HBPP Allocations

Post by pugchief » Sat Mar 30, 2013 12:40 pm

MachineGhost wrote:
Slotine wrote: To be fair, medicine does have laws against direct-fees tied to the sales.  Gifts, speaking presentations, research payments, advisory fees all borderline legitimate uses, which makes it so hard to combat.
There is kickbacks in referring patients to diagnostic centers owned by the docs doing the referring.  This is especially egregarious in Medicare.  I trust no doctor's referral.  I'll price shop myself, thanks!
What you are describing is NOT a kickback, although it might be considered ethically questionable. The doc is referring the patient to a location at which he has ownership interest and thus receives a cut of the profits.

I am a dentist. I, as do most dentists, send my crown work to outside labs for fabrication. But if I opened a dental lab in the empty space next door, and hired a technician to do the crowns for me and other local DDSs at an hourly rate, would you consider that a 'kickback' since my labwork is being done at a facility I own?

Now if a patient needs to see an orthodontist, for instance, and I make a deal with one guy that for every patient I send him, he will pay me $X, THAT is a kickback, or in other terms "fee-splitting", and I would lose my license if not end up in jail. [And again, lawyers do it all the time, within the boundaries of the law.]
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Re: Backtesting for the Optimum HBPP Allocations

Post by MachineGhost » Sat Mar 30, 2013 1:45 pm

I stand corrected, sir!
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Re: Backtesting for the Optimum HBPP Allocations

Post by hedgehog » Sat Jun 15, 2013 4:11 am

Best is multivariate testing where you not only change one parameter (the 25-25-25-25 allocation) but more than one parameter at the same time including the distribution of the stocks, bonds, cash and metals portfolio and the rebalancing bands or timings as well. All at the same time. This is how it is professionally done.

http://en.wikipedia.org/wiki/Multivariate_testing

We need a little more advanced programmer to do that, though.
Last edited by hedgehog on Sat Jun 15, 2013 4:26 am, edited 1 time in total.
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Re: Backtesting for the Optimum HBPP Allocations

Post by Peak2Trough » Sat Jun 15, 2013 11:52 am

hedgehog wrote:We need a little more advanced programmer to do that, though.
Ummmm.... k.  Thanks for your feedback.
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