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Author: Rayvt Big gold star, 5000 posts Top Favorite Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 74759  
Subject: Re: Hi gang... wow!!! Date: 9/19/2013 4:55 PM
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If I understand Dave's explanation correctly, 1/3 of the S&P gains would go into the "guarding against the 50% drop" bucket.

How? By selling the assets? ... it seems like implementing this strategy could work against the goal that the strategy is supposed be accomplishing.


We need for Dave to clarify if this is what he means. But I suspect that this is pretty much what he's thinking.

My first inclincation was to type out "This is a silly idea", but then realised that it only seem silly to me because I've worked out a myriad of such schemes over many years, and learned much. *Today* I know it's silly and ineffective, but it took me years to puzzle out *why* it's ineffective - and hence silly."

The position you sell indeed won't have a loss if the market goes down. But neither will it have a gain if the market goes up. There is an imputed cost when you sell off a position and move it to cash. The cost is the gains that you forego.

But the cost is invisible whereas the loss is highly visible. So you think that shifting it to cash is a clear profit. But money that you leave on the table is just as much of a loss as money that goes down the drain. And the way that stock market statistics work out, in the long run the foregone gain is larger than the avoided loss.

This is an analog of the 0%/12% floor and cap of an IUL. My early-on complaint about that was that the cap hurts you more than the floor helps you. It's just that you don't see the hurt but do see the help.

Every study I've even read says the same thing: The best method is to pick an asset allocation and rebalance periodically. This is so unquestioned that it would be a pure waste of effort to stick code in the spreadsheet to effectuate a "move some of the stock gain to cash".

The other problem with the method is: "When do you pull out the profit?" As soon as the position shows a profit? So everytime it starts to show a gain you nip it in the bud?
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