In the last article, we talked about how to learn to recognize "mistakes" in investment, and we focused on dismantlingLow valuation traps, high-growth bubbles, and moat illusionsThe three factors that are most likely to cause investors to make "cognitive mistakes". In fact, in real investment, it is often easier said than done, and making mistakes is still a matter of probability. Then, if you build a fault-tolerant mechanism under the assumption that mistakes are inevitable, mistakes may become less terrible. In this issue, we'll answer how to manage "errors" and talk about itHow to build a portfolio with high fault tolerance and a good balance between risk and return.
The law of mean reversion in nature reveals the establishment of an important fault-tolerant mechanism in asset allocation, that isRebalancing strategy
Rebalancing is an important tool for long-term investment. After setting an asset allocation target, the actual portfolio will deviate from the target allocation as the market fluctuates. Rebalancing refers to the action of adjusting the composition to the target again.
A simple example can be demonstratedRebalancing creates valueThe process:
Assuming that a ** ticket does not rise or fall, the return is always 0. But this ** ticket, there will be fluctuations in the middle.
There is an investor at this time:
50% of the funds will be allocated to this ** ticket;
Keep 50% of your funds in cash.
After that, the 50:50 ratio is restored every year.
This is a typical 50:50 dynamic equilibrium strategy.
Let's assume:(1) In the first year, we invest 500 yuan to **, 500 yuan in cash.
This ** ticket was cut in half in the first year, ** this part became 250 yuan, and the cash of 500 yuan remained unchanged.
At this point of rebalancing, we have to take out $125 from cash to buy**. After that, he held $375 in cash, $375**.
(2) Year 2: ** Return to the level at the beginning of the first year.
375 yuan **, become 750 yuan. With the addition of $375 in cash, the total assets are $1,125.
Rebalancing at this point will hold 562$5 of ** and 562$5 in cash.
**First cut in half and then doubled, the stock price does not rise or fall, and the cash does not rise or fall. But with rebalancing, the amount of assets for investors magically increased by 125%。
The assumption implied by the rebalancing operation is thatThe optimal asset allocation made by long-term investors based on their own characteristics and judgment of the return, risk and correlation of assets. If the yield follows an independent identically distribution, then rebalancing is optimal. Rebalancing strategies are irrelevant to short-term investors, as short-term investors stop investing after one investment period. An important outcome of the implementation of the rebalancing strategy is to actively ** the assets that perform well and raise the ** low proportion of assets, therefore,A rebalancing strategy is a countercyclical, value-based strategy.
Financial economist Andrew Ang pointed out that the essence of rebalancing is a strategy to short volatility. He used a binary tree model to show that the rebalancing operation is equivalent to trading a sell option. When the market falls to the lower rebalancing bound, the investor** is equivalent to selling the out-of-the-money put optionWhen the market rises to the rebalancing limit and the investor sells, it is equivalent to selling the out-of-the-money call option. The difference between the two is:Rebalancing operations are less stressful to replenish margin and are more suitable for long-term investors.
Both historical backtesting and investor practice have confirmed the existence of a rebalancing premium, which is a premium for shorting volatility, which can be approximated by the difference between the geometric average and the arithmetic mean of investment returns. The higher the volatility of the asset class, the greater the rebalancing premium.
The reason why the rebalancing strategy is a long-term effective asset allocation strategy is essentially because it is a "fault-tolerant mechanism" based on the idea of risk budgeting. By over-allocating less risky assets and under-over-balancing risky assets in the portfolio for a long time, a more optimized risk-return profile can be achieved. The dividend low-volatility strategy with stable income performance in China in recent years, and the Bridgewater all-weather strategy that has passed through multiple rounds of market cycles overseas are typical cases of portfolio optimization through the rebalancing mechanism and excellent returns.
The dividend yield factor can be used as a variable for downside risk to some extent。Statistically, the higher the dividend yield, the smaller the downside risk in the future, under the premise that the company's fundamentals have not undergone disruptive changes.
Bonus low volatility strategy selectionHigher dividend yields and lower volatilityAs a constituent stock, when there are more constituent stocks, a decrease in dividend yield or an increase in volatility will automatically rebalance the index, that is, selling will increase more and increase less.
From 2010 to 2023, S&P China A** Dividend Low Volatility 50 Index All-Return (SPCLLHCTSPI) has an annualized Sharpe ratio of 0475, and the CSI 300 index was 0051, the Shanghai Composite Index and the Shenzhen Component Index are 0002 and -0036。
Data**: wind, the statistical interval is 2010 1 1-2023 9 8. The Sharpe ratio calculates risk-adjusted performance based on the excess return on an asset or portfolio. A higher Sharpe ratio means that an asset or portfolio has achieved better performance after absorbing risk. Excess return is the actual rate of return of an asset or portfolio minus the risk-free rate of return, and the risk of return is the volatility of the asset or portfolio. Sharpe ratio = (rp - rf) p. where RP is the excess rate of return on an asset or portfolio;RF is the risk-free rate of return;p is the volatility of an asset or portfolio.
Ray Dalio, the founder of Bridgewater, believes that any asset** is related to these two factorsThe level of economic activity (growth, recession) and ** level (inflation, deflation).。Bridgewater uses a risk-parity approach to asset allocation, where each asset brings the same amount of volatility to the overall portfolio.
For an all-weather strategy, what it does is take the same risk for each economic state and have the same impact on the entire portfolio. Regardless of how many assets are in one state, the volatility caused by their positions should be the same as those caused by the positions of the instruments owned by the other three states. When asset performance diverges sharply due to changes in the macro environment, the portfolio will complete continuous strategic asset allocation through rebalancing operations based on risk parity.
From 1970-2011, the all-weather combination vs the traditional combination (60:40) with the same volatility, the Sharpe ratio for the all-day was 075, the traditional combination is 037。
Data**: Bridgewater China's official website article "Portfolio Construction|Postmodern Portfolio Ideas", by Ray Dalio, see **.
Simulated Results Disclosure Statement: The simulated results have a number of inherent limitations, including the fact that there is no representation that any account will or is likely to make a profit or loss similar to the results shown. In fact, there is often a significant difference between the simulated and real results of any trading program. One of the limitations of simulation results is that they tend to be hindsight. In addition, there is no financial risk involved in simulated trading, and no simulated trading record can fully reflect the impact of financial risks in actual trading. For example, despite a trading loss, it is possible to reverse or firm a particular trading procedure, which can seriously affect the actual trading results. There are many other factors that are relevant to this market, either in general or when performing any particular trading procedure, which cannot be fully taken into account when presenting the simulated results, but which can adversely affect the actual trading results.
It should be noted thatRebalancing is a shorting of changes in the market mechanism and does not take effect when there is a fundamental change in the market mechanism. Fundamental changes in market mechanisms sometimes occur, but not commonly.
In extreme cases, if an asset has undergone an irreversible capital destruction (such as the Revolution of 1917), the rebalancing strategy will lead to more assets that will eventually disappear and become worthless. This is value destruction, not value creation.
toBeautiful ** fieldFor example,The S&P 500 Volatility Index of U.S. stocksIn 2008 (the global financial crisis) and 2020 (the global pandemic), there was a significant trend jump, representing a significant change in the market mechanism after being hit by external events twice in the past few decades, when the rebalancing premium of a single asset will disappear, and more classes of perpetual, low-correlation assets will need to be introduced for better fault tolerance (such as the aforementioned coverage of ** bond commodities). Bridgewater's all-weather strategy for alternative assets, successfully weathered the market turmoil of 2008 and 2020).
Overall, build onePortfolios with a high tolerance for faultIt takes a few steps:
SelectSustainability, long-term, low correlationof investable assets.
Identify and adequately evaluateRisks,SettingsRisk budget
Based on risk budgetingAsset allocation,And ongoingDynamic rebalancing
In the long run,As long as the investment target does not disappear completely, a disciplined rebalancing strategy is better than a holding strategy. This assumption is reasonable for most major asset classes. And because of the presence of speculators in the market, the returns between asset classes have a certain mean reversion characteristic. This "fault-tolerant mechanism" based on the idea of risk budgeting has not only been verified by a large amount of historical data, but will continue to exist in the financial market for a long time and become an important "principle" in multi-asset investment.
In the investment world where "mistakes" are inevitable, only by "surviving" can we continue to cultivate a deeper understanding of the world and a stronger insight into business. No matter what happens in the market, as long as it can "survive", through the effect of compound interest, the long-term return must be considerable. And to ensure survival, we need to establish a correct view of risk, more adequatelyRecognize "mistakes".and create a fault-tolerant mechanism to control riskManage "errors".In order to face the future more calmly and make more rational decisions.
"True heroism is to love life after seeing the truth of life. ”
Risk Warning: **There are risks, investment should be cautious. The above content is for informational purposes only and is not indicative of future performance and is not intended as investment advice. The views expressed herein and ** are current and subject to change. Do not quote or ** without consent.