Wednesday, 28 October 2015

Update to Real Time Asset Allocation Experiment

I'm going to post a link to my real time asset allocation spreadsheet at the top of the blog, re: the index funds I've been buying.

I know it's not exciting, but I want to be able to be accountable for (hopeful) accumulation (as opposed to destruction) of wealth over time.

Last weekend, I posted a hypothetical study of compound return regarding dollar cost averaging into SPY = the market.  I came to the conclusion that a systematic monthly allocation into x % SPY (or equivalent) and x% bonds for my long term tax deferred accounts using a rule based methodology (i.e., add incremental units only when I am getting a lower price) may result in an expected compound return over time (before dividends and interest) of between 4% and 5%.

I further reasoned out that rather than arbitrarily add incremental units of the market once a month based on lower monthly market closes vs. the previous month, that I should expect compound returns to improve by almost 100 bps over time by adding more incremental capital once cumulative annual returns go negative.

So with all of this mumbo jumbo in mind, here's where I'm at, and here's what I have done.

On August 25th, I allocated $900 into various index funds at my discount brokerage across the accounts I managed.  These were allocated evenly across:
  • TD e-Series CDN Index
  • TD e-Series US  / DJIA CDN $ hedged Index
  • TD e-series Int'l / Euro Index CDN $ hedged
  • TD d-series NA Dividend Index
  • TD e-series CDN bond index

On September 23rd, I allocated $3,300 into various index funds at my discount brokerage across the accounts I managed.  These were allocated evenly across the same funds.

Here is my template for tracking the monthly index unit allocations.  For what it's worth, October will be a non-equities allocation month as I have not been able to get a lower price for any of the individual equity index funds I already own (or for SPY for that matter).  I have allocated some additional capital into the bond index this month. The bond index I'm tracking below is based on the prices of the ishares Canadian government bond index fund.

DatePrice SPY (input)Units IndexPrice Bonds (input)Units BondsCumulative unitsM2MP/L Per unitCumulative costValue Index (input)Value Bonds (input)P/L unitsCpd. annualized return

A few comments:

  • Although the study uses SPY and ishares XGB, the actual holding period returns will differ between what I've bought each month vs. what I'm using to above to track real time compound cumulative annualized return.  The actual cost basis of the "Value Index" and "Value Bonds" cells in the table above is based on what I've actually allocated in the accounts.  For the most part, I expect the correlation of returns between the index funds I've bought and SPY to be fairly close over time.
  • The compound cumulative annualized return is nonsensical for the first year.  I'm doing a straight annualization of the monthly P/L, which holds little significance over too short a time period.  The compound cumulative annualized return really only starts making sense after the first year (or three)
  • While the historical study I originally did looked at month end closing prices of historical SPY for hypothetical allocations, I over-rode the system rules (which didn't actually exist two months ago) by allocating capital on days in the market where I perceived there to be an opportunity to allocate capital.  In retrospect, these two dates, August 25th and September 23rd (my birthday) turned out to be very good days to have bought the index.  I didn't know this at the time, and I had I known then what I know now, I should have allocated much more capital at the time!  But, I'm really just a schmuck writing a blog hoping to make my way towards a long term compound return of between 4% and 6% on a portion of my retirement assets, and I don't expect to be able to make great timing choices ad infinitum.  If I perceive really grizzly days in the market intra-month, I may override the time constraint rules if SPY is lower at that point than the previous month's close, but for the most part, I will stick to the rules.

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