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Author: Zeelotes Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 253522  
Subject: Longer Rebalances: Blends Date: 3/4/2006 2:59 AM
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Introduction

In response to a request, I went ahead and extended the previous research on Quarterly Rebalancing to include other longer rebalance periods. The primary purpose being to find a blend that would not be hurt by limiting the trades even further than just quarterly.

In order to do this, I took the same test as I ran for the Quarterly, but added these rebalances:

1x = Once a year
2x = Twice a year
3x = Thrice a year

And of course:

4x = Frice a year :)

The result was four distinct rebalance periods.

The blend began with always using the screen YLDEARNYEAR and then combining it with other screens to find the optimal blend. Three stocks were held from each screen for a total hold of six stocks. The period tested was 1/2/1986 to 12/31/2005 for a total backtest of twenty years.

I compared the CAGR, GSD, Sharpe and Average # of Stocks Held / Year for each of the blends. The total number of blends examined were 51. Once I found the values for each blend I ranked them and then averaged their ranks.

Optimal CAGR Blends

The optimal CAGR for these blends were as follows -- remember that YLDEARNYEAR is blended with the screen in the left column to arrive at the blend of six stocks:
   Highest                                                
CAGR Annual 2x Year 3x Year 4x Year Avg Rank
EGPLOW_PE 29.44% 35.85% 34.21% 40.64% 8.00
EGPLOW_PE_E 31.69% 35.36% 34.34% 41.29% 5.75
PLOWEG5_RS631 32.16% 35.30% 34.26% 40.84% 6.25
PLOW_PE2 31.93% 37.28% 30.54% 41.21% 7.75
REV 30.58% 37.13% 31.50% 42.35% 7.75

Looks like anything PLOW related comes out on top for this optimization.

Optimal Sharpe Blends

The optimal Sharpe blends are not too surprising. PIH_CSO ranks at the top (using the same one as in the previous test). HI_INC_CASH comes in at second place. You'll note that the third best blend includes six stocks from YLDEARNYEAR -- without overlaps.
  Highest                                               
Sharpe Annual 2x Year 3x Year 4x Year Avg Rank
PIH_CSO 1.02 1.48 1.43 1.64 3.00
HI_INC_CSH 1.04 1.32 1.37 1.45 6.25
YLDEARNYEAR 0.96 1.33 1.35 1.46 9.00
YIELD4 1.05 1.19 1.40 1.39 11.25
EGPLOW_PE_E 0.97 1.22 1.24 1.45 12.75
Tvalue 0.99 1.23 1.38 1.38 12.75

Optimal GSD Blends

I would think that these results are also not surprising. The screens that serve well in blends come out on top.
    Lowest                                                  
GSD Annual 2x Year 3x Year 4x Year Avg Rank
SAFETY_BOUNCE 15.09 14.52 13.98 14.96 1.25
YLDYEAR 15.45 14.35 15.40 15.46 2.00
YLDEARNYEAR 15.85 16.28 15.57 16.65 3.50
Z30_YLDEARNYEAR 16.19 16.59 15.21 16.84 4.50
LPE_YLD 16.54 16.02 16.46 17.40 4.75
YldDiv 16.89 16.46 16.50 16.73 5.50
YIELD4 19.13 16.41 17.34 17.48 6.75
YLDEARNYEAR2 18.35 17.35 19.06 19.06 7.75
HI_INC_CSH 19.80 18.22 19.39 20.26 10.00

Optimal Lowest # of Stocks Held Blends

This concerns which blends have the lowest turnover. The idea being that a purpose in extending the rebalance period is to limit trades. Here we find out which blends do this best.
 Lowest #   # / Year                                     
Trades Annual 2x Year 3x Year 4x Year Avg Rank
LOWPE_ZLTD 5.20 10.60 15.95 21.10 1.00
LowPE5Zltd 5.20 10.60 15.95 21.10 1.00
ZLTD 5.20 10.60 15.95 21.10 1.00
ZLTDA 5.20 10.60 15.95 21.10 1.00
LLTD 5.25 10.80 16.25 21.50 5.00
LLTD5 5.25 10.80 16.25 21.50 5.00
AssRS13 5.30 10.80 16.30 21.60 6.50

Optimal Consistency in CAGR Blends

Here I subtracted the Quarterly rebalance CAGR from the extended rebalance CAGRs. If the value is negative this means that the extended CAGR produces a better result than Quarterly. I also ranked these and then found the average of the ranks with the purpose being to find the ones that are most consistent. R13_EG comes out on top in this regard. The 3x and 2x produces a better CAGR than Quarterly. Interestingly enough, blending YLDEARNYEAR with YLDEARNYEAR2 produces an almost identical result for all rebalance periods. If you have a small portfolio and want to have a blend which does not penalize you for limiting trades, this one would not be a bad choice.
 Consistent    4x -    4x -    4x -           
CAGR Annual 2x 3x Avg Rank
R13_EG 2.62% -4.28% -2.88% 1.33
YLDEARNYEAR2 0.43% 0.40% -0.54% 2.67
REP 6.45% -4.03% 1.73% 5.00
RSEG-rgonsal 6.10% -2.35% 1.91% 6.00
YldDiv 5.38% 3.80% 1.47% 7.00
R13_EG_E 7.47% 2.13% 1.78% 7.67
YIELD4 5.79% 5.22% 0.45% 10.67

Optimal Consistency in Sharpe Blends

The best screens are the same at the top of this list, but a bit different as you move down. Once again, a negative value means that the Sharpe improved compared to the Quarterly rebalance.
   R13_EG     0.15  -0.14  -0.08  1.33
YLDEARNYEAR2 0.07 -0.02 -0.04 2.67
REP 0.23 -0.13 0.04 3.67
RSEG-rgonsal 0.25 -0.08 0.06 4.67
R13_EG_E 0.29 0.06 0.09 8.33
SLS_RS26 0.28 0.11 0.10 9.67
Tvalue 0.39 0.15 0.00 11.33
HI_INC_CSH 0.41 0.13 0.08 12.00

I ran the exact same test as above without a blend -- just on the Gold and Silver screens with the same rebalances as posted here. If there is interest in this I can share it as well.

How many on the board are interested in longer rebalances like this? I now know that research related to smaller portfolios -- which this is optimized for -- and quarterly rebalancing is strongly welcomed. But is there also interest in rebalances beyond Quarterly?
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