Simple strategy - calculations doubts

Investing / Portfolios
1

Hi,
I have two ETFs: IWDA (“global” equities) and DBZB (“global” bonds) 50/50.

The strategy I would like to adopt is about selling around 20% from DBZB when IWDA share price drops around 7% and then buy IWDA shares keeping an eye at how DBZB is reacting to the market events. Ideally when IWDA recovers, I would move the 20% back to DBZB to re-establish the 50/50 ration

The doubt is about my calculus knowledge and the uncertainty that I am missing something that could affect the final results. I tried to use ChatGPT for some help but I think some human support is still needed :).

Question :
does this action of moving part of DBZB around make sense? :stuck_out_tongue:
is it sufficient to consider the following aspects during the sell/buy operation?:

  • DBZB’s average purchase price: if it is higher than the share price price , I have to consider that I will lose money but the operation might still be worth. At the beginning I missed to consider this.

  • the calculation can(?) solely focus on the amount of money sold from DBZB . The operation does not affect the remaining part of the capital(besides the avg purchase price). The only thing to pay attention to are the point above and the point below. At the beginning I was trying to consider the value of the entire funds but that only requires unnecessary calculation

  • the spreadsheet should be able to calculate when it is profitable to move the movey back to DBZB (sell DBZB and buy IWDA). If the DBZB share price is too high when IWDA recovers from its losses then I should be able to take that into consideration

This is the link to the spreadsheet, maybe it talks better than my exaplanation. The yellow cells are those supposed to be modified. Only the table at the top is relevant.

NOTE : you can edit the spreadsheet if you want (I suggest you clone the tab and make your changes if you wish)

2

Why did you choose your 50/50 allocation in the first place?

I see three ways to look at it:

  • One is that you have chosen a 50/50 allocation based on your assessed risk tolerance and you target a lower volatility than the approximative 70/30 that you would seek when enacting your strategy.

  • One is that you expect that allocation to perform better than others going forward and are targetting additional returns by generally holding that allocation (except when enacting your strategy), than by holding, say, a 70/30 allocation.

  • The last one I can think of is that it comes from a place of agnosticity: you don’t know how stocks nor bonds will perform, or if or which one will outperform the other going forward and consider slicing it 50/50 to give as much of a chance to each of them in the future.

The way I would approach your question varies depending on which one of those (or another one) went under the choice of your allocation. I think understanding your base allocation will help better assess your proposed strategy.

1 Like
3

Hi,
in my opinion this is out of topic as my question is about the computational aspects, to make sure I am not doing something wrong in relation to that… I would avoid discussing the reason of my choice in this thread to avoid hijacking the discussion.
No offence, Is my initial post misleading?
That considered , I will give a feedback to your question: I backtested the performance of my portfolio + considered the current uncertainty of the markets and I was happy with that choice. On top of that, I am happy to take advantage of downturns of the market as explained in my initial post.

4

My apologies, I was under the impression you also wanted to assess the strategy itself. Reading again your initial post, it is clear that your intent is only to address the technical implementation/modelling of it.

On top of my general inclination, I may have let my expectations wander off after reading the title. In case further misunderstanding occurs, I would explicit what the subject of the doubts are also in the title. I also took the “does it make sense?” question to be more broadly based than solely the calculations involved.

I will refrain from further interference since the mathematical aspects of it are not my expertise and others will be able to help further.

2 Likes
5

thanks, I made the corrections.

6

Basically this is market timing using a dynamic asset allocation. the problem with this strategy is, like in all market timing strategies you would not be able to judge the tops and bottoms.

if market drops 7% you will move to 70-30, but what if it drops another 10% after? will you be comfortable if it drops 15% more after that? and on the rise, when will you rebalance back to 50-50? at the previous high? what if market rallies 20% after that point?

You will eventually end up having 50-50 allocation in bull markets (when there are new highs), and 70-30 in bear markets (when there are new lows). yes, you will gain some from potential volatility, but you will also pay spread , transaction cost and emotional stress. I can tell you from now after a few trades you will say 'this time is different there is bank crisis, let me hold off the 70-30 balancing for a while, or change the 7% treshold to 15%"

Whatever the spreadsheet says , this is not a sustainable strategy. My recommendation if you are already OK having 70-30 asset allocation as your risk assessment. 1) keep the allocation stable, 2) rebalance when needed. and 3) take a small amount of fixed fund as play money to scratch your market timing desires.

8 Likes
7

I keep investing every time it drops 7% until DBZB is almost “emply”. I keep track of every switch and switch back every time the market does +7% or so.

that’s what I want, and it is in line with the back test results.

no stress, I am quite happy is the makets drop 20-30% from time to time as long as they recover few years later.

I don’t agree, based on the data I have for the last 20-25 years (but probably even longer) it could work in my opinion