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Old 07-08-2014, 05:51 PM   #9
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Re: Compounding Long-Only

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Originally Posted by BlueHorseshoe »
Yes, but this isn't necessarily linked to the compounding aspect, is it? For example, suppose I draw off any profits so that the account always remained at a fixed amount by month end, but still rebalance the portfolio each month based on a consideration of all parts of the portfolio.

The allocation of reinvested profits could differ from the allocations of the rebalanced portfolio aside from these. For example . . . 10k account with 60% (6k) allocated to Stock A . . . 1k portfolio profit at month end . . . Monthly rebalance, 70% of 10k (7k) allocated to Stock A, but only 30% of profits (300) allocated to Stock A, so position size is 7,300, and not 70% of 11k (7,700).

........

In a previous thread here I argued that the individual components of a portfolio should be 'rewarded' with increased position size dependent on their unique performance; I now find myself doing the opposite and spreading the benefit from components that have performed strongly to 'reward' equally those that have underperformed. And yet that's what masses of testing tells me is the right thing to do.

Cheers,

BlueHorseshoe
Hi, I thought I got it but now I am confused again (too much wine tonight)....from your example at the end of the month, its like you are reweighting based on 2 different formula components.
A normal reweighting formula --- this takes you from 60% to 70% for stock A and
An inverse profit formula - you are taking the profit for the month (1k) and rebalancing on a % of that, as an inverse % of the total weighting.
Hence you are actually increasing your winners by a smaller amount if there is a profit (assuming the first normal reweighting formula is flat).

So I get that you are now reweighting across all portfolio instruments. Regardless of where the PL came from.

I dont think compounding makes much difference as to how you are getting it as it looks more like you are capturing a little bit of both trend following and mean reversion. Like having a mix of two strategies in one, and you are making the most of the only free lunch there is - diversification......whic h makes a lot of sense....and is an interesting take on it.
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Old 07-11-2014, 06:37 AM   #10

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Re: Compounding Long-Only

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Originally Posted by SIUYA »
A normal reweighting formula --- this takes you from 60% to 70% for stock A and
An inverse profit formula - you are taking the profit for the month (1k) and rebalancing on a % of that, as an inverse % of the total weighting.
Hi SIUYA,

My lack of clarity again (and sadly I've had neither beer nor wine for several days).

The "Stock A/B" example I gave was purely by way of explaining that reinvested returns could be allocated with a separate criteria to the one used for rebalancing. So profits would not have to be distributed back to the poorer performing components.

This isn't what I'm doing though . . .

So I get that you are now reweighting across all portfolio instruments. Regardless of where the PL came from.

That's correct.

I dont think compounding makes much difference as to how you are getting it as it looks more like you are capturing a little bit of both trend following and mean reversion.

That's what I have concluded, although the intention was to capture the former (as my swing trading account focuses on mean reversion and I wanted diversification of styles across the two accounts).

As always, thanks for your thoughts and help.

Regards,

BlueHorseshoe
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