tag:blogger.com,1999:blog-5465015914589377788.post1870451725164098269..comments2023-01-26T14:34:50.928-05:00Comments on Michael James on Money: A Failure to Understand RebalancingMichael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger4125tag:blogger.com,1999:blog-5465015914589377788.post-80008378091642150122022-07-01T23:07:59.037-04:002022-07-01T23:07:59.037-04:00I think you've got rebalancing figured out.I think you've got rebalancing figured out.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-51562253798569991242022-07-01T18:28:34.318-04:002022-07-01T18:28:34.318-04:00I read Edesess' article and was puzzled by it....I read Edesess' article and was puzzled by it. I wondered if my puzzlement was due to my weaker background in finance. What I previously read about rebalancing was that it's part of risk management. And that rebalancing between stocks and bonds is more important than rebalancing between stock subasset classes. William Bernstein has written about the rebalancing bonus, but has emphasized that at best, it adds 1% to returns. I'm glad that I'm not the only person who thinks Edesess missed the boat on that article. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-33080894951892575142022-06-27T14:05:28.435-04:002022-06-27T14:05:28.435-04:00I would say that your observation is related to th...I would say that your observation is related to the main criticism that rebalancing should be applied to one's entire portfolio and not just a subset. As soon as Edesess was repeating his game, he created the problems of where the new money comes from, and as you observed, why can't I continue to invest the money I had left after the previous game ended.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-75892250287433540472022-06-27T13:46:24.994-04:002022-06-27T13:46:24.994-04:00I haven't read the whole piece but isn't a...I haven't read the whole piece but isn't another flaw in the argument that though the odds of each coin flip are independent, each flip is linked to the next and the outcome of each prior flip affects what you have available to invest into the next?<br /><br />For Ex. I have $5 that I can invest in a sequence of 5 coin flips ($1 for each flip). Same rules apply, heads I double my money, tails I lose half my money. However at each flip I invest a new dollar plus the money I have left from prior flips.<br /><br />Therefore in the loser scenario I have:<br />Flip 1 $1 Lose $0.50<br />Flip 2 $1.50 ($1 new plus $0.50 from flip 1). Lose $0.75<br />Flip 3 $1.75 ($1 new plus $0.75 from flip 2 and 1). Lose $0.88<br />Flip 4 $1.88 ($1 new plus $0.88 from flips 3, 2, and 1) Lose $0.94<br />Flip 5 $1.94 ($1 new plus $0.944 from flips 4, 3, 2, and 1) Lose $0.97. <br />So with $5 you wind up with $0.97 an 80% loss<br /><br />On the winning side:<br />Flip 1 $1 becomes $2<br />Flip 2 $3 becomes $6<br />Flip 3 $6 becomes $12<br />Flip 4 $13 becomes $26<br />Flip 5 $27 becomes $54<br />$5 becomes $54, a 980% return.<br /><br />Anonymousnoreply@blogger.com