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Jrinne
Re: Shoutout to our Model Designers and mechanical, “boring” market beating investing

P123,

P123 could try to make the case that using P123 works for the average Joe by taking the equally-weighted returns of the active designer models. That way survivorship bias would not be a problem.

I am not sure I would recommend doing that.

P123 could also EASILY make the case that P123 can work for someone who has a good amount of experience by creating some models by Marco, Yuval and Dan and following the aggregate returns. Marco, Yuval and Dan could even define how much weight to put on each of their models at the beginning of each month and be free to add or remove models at any time.

We could at least hope that 3 professionals with a great deal of experience with P123's platform would thrive doing this.

Let me just assume that in a relatively short period of time this portfolio would be killing the market. Then it is true that P123 could easily document its usefulness in a short amount of time. P123 could document its usefulness without having to sort thorough a bunch of cherry-picked data that people decide to present in the forum or sort through the P123 designer models with the survivorship bias and make post hoc decisions with flawed data that has a huge selection bias.

I think I would do that if I were at P123 and I had confidence in the usefulness of my product and if I thought that all that talk about an efficient market comes from a bunch of egghead academics.

But it would be easy to do. And we would know for sure (whatever the result might be).

Jim

Great theory, "and yet it moves."
-Quote attributed to Galileo Galilei (1564-1642) gets my personal award for the best real-world use of an indirect proof or reductio ad absurdum.
`

May 13, 2022 5:26:18 AM       
Edit 9 times, last edit by Jrinne at May 13, 2022 6:13:55 AM
marco
Re: Shoutout to our Model Designers and mechanical, “boring” market beating investing

If the SP returns 10% annualized ... To get equivalent returns with a high turn portfolio I should get 15-18% annualized over 20 years. I would love to find such a portfolio, but am not sure that it exists and has the same volatility or less.


I don't agree with that. I think it's more like 11%-13.5% to be worth it. Here's why:

SP pays around 1.8% on average in yield, which is taxable. So that reduces the returns to around 9.5% This is equivalent to 13.5% in a high turnover model with a 30% tax rate. BUT..... with a high turnover model, tax loss harvesting is *always* available to you, for the entire 20 years. With buy & hold tax loss harvesting is not possible.

This is huge. Lets say you have a rule to sell everything and switch to SP when your yearly loss is -15%. Then after 31 days you go back to your model to avoid wash sale rule. This loss would cover your gains for about 1.5 years. There have been 9 years in the past 30 years that would trigger this. This covers your taxes for 13 years (9*1.5), or about 1/3 of the time. And if you get a little lucky, maybe you lock in much bigger losses like -30, or -40 in the 5 worse years bc your SP position might also have lost more.

In other words, 13.5% high turnover model is far superior than SP in taxable accounts provided you do tax-loss harvesting. Maybe even a 11-12% high turnover model is better than the SP.

Sorry it's all back of the envelope math. But seems right. Here's the intra-year data I used

https://www.calamos.com/insights/volatility-o...ear-drawdowns-are-common/

Attachment 13.05.2022_16.12.00_REC.png (268703 bytes) (Download count: 110)


Portfolio123 Staff.

May 13, 2022 4:12:06 PM       
Edit 12 times, last edit by marco at May 14, 2022 2:48:01 AM
RTNL
Re: Shoutout to our Model Designers and mechanical, “boring” market beating investing

Thanks, let me work thru this!

May 13, 2022 8:45:42 PM       
Jrinne
Re: Shoutout to our Model Designers and mechanical, “boring” market beating investing

From this site (and others I think): https://www.nerdwallet.com/article/taxes/tax-loss-harvesting

"Investors are allowed to claim only a limited amount of losses on their taxes in a given year. You're allowed up to $3,000 per year to offset taxable income ($1,500 if you're married, filing separately)."

So that is a maximum $60,000 over a 20 year period, I think. Not a trivial number. and this should not be ignored. This should probably be used by every P123 member earning income in the United States. The relative impact of this, and the percent of assets rationally dedicated to this strategy could vary widely for each member.

Great theory, "and yet it moves."
-Quote attributed to Galileo Galilei (1564-1642) gets my personal award for the best real-world use of an indirect proof or reductio ad absurdum.
`

May 14, 2022 7:09:56 AM       
Edit 5 times, last edit by Jrinne at May 14, 2022 7:33:38 AM
marco
Re: Shoutout to our Model Designers and mechanical, “boring” market beating investing

"The tax code allows joint filers to apply up to $3,000 a year in capital losses to reduce ordinary income"

Ordinary income is the key. You should be able to offset a big capital loss the following year with a big capital gain.

A 50K capital loss in one year only deducts your ordinary income tax liability by $3K, but you can carry forward 47K in capital loss the next year to offset capital gain entirely.

So it works perfectly, for any account size. Any tax experts here?

Portfolio123 Staff.

May 14, 2022 8:48:16 AM       
Edit 1 times, last edit by marco at May 14, 2022 8:59:47 AM
Jrinne
Re: Shoutout to our Model Designers and mechanical, “boring” market beating investing

Marco,

I think I am beginning to understand what you are doing with taxes. Thank you for taking the time to explain it.

Jim

Great theory, "and yet it moves."
-Quote attributed to Galileo Galilei (1564-1642) gets my personal award for the best real-world use of an indirect proof or reductio ad absurdum.
`

May 15, 2022 5:53:33 AM       
sgmd01
Re: Shoutout to our Model Designers and mechanical, “boring” market beating investing

Great discussion and I started implementing "tax alpha" recently (locking in many small losses and holding out for long term gains).

May 15, 2022 9:20:26 AM       
Chipper6
Re: Shoutout to our Model Designers and mechanical, “boring” market beating investing

Great discussion.

I have clients who pay 50% in taxes on short term gains. Trading those accounts was very difficult to justify. My thinking was that I would need to make double the benchmark in order to make trading worthwhile. I have been beating the market significantly, but not by double.

I am trying to wrap my brains around this.

If we can model tax fees into the sim I might be much more comfortable with the idea. Is that a feature that can be implemented?

May 16, 2022 10:54:06 AM       
mm123
Re: Shoutout to our Model Designers and mechanical, “boring” market beating investing

This is very good, thanks Marco.

May 16, 2022 11:02:30 AM       
dnevin123
Re: Shoutout to our Model Designers and mechanical, “boring” market beating investing

Along these lines... I have been toying around with the idea recently of incorporating and trading inside of a C-Corp. I haven't run the traps on this or spoken to a professional, but in theory with the tax changes under the last administration wouldn't capital gains be taxed at an ~20% rate whether short-term or long-term?

Anyone else given this any thought?

-Daniel

May 16, 2022 11:24:25 AM       
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