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Andy,
Here are the results from Bernstein's buy and hold asset allocation
methods based on my implementation of them.
1998 -7.86
1999 27.73
2000 3.30
2001 2.83
2002 1.76
2003 49.95
2004 23.76
YTD 4.35
The statement I made was if I had used Bernstein's approach, I would
have been nearly as well off money wise as I have been trading.
Your question implies do I do better than the numbers above from
trading. Yes, considerably better. However, when you consider that the
numbers I've given you are nearly all capital gains, the issue becomes
taxes and expenses.
If you consider Federal and State Tax on my trading profits, I pay
nearly 50% of my earnings to the government. Then there is the issue
of expenses--data, professional fees for accountants and attorneys,
educational materials, equipment and software.
There is no social security tax, nor can I deduct expenses because I
don't file as a trading business. I can't contribute to a defined
benefits plan or SEP or 401K. I could set up a Sub S and trade from
that but it triggers automatic detailed audits when it's a trading
company, which I don't much like based on the others I have had to put
up with.
When I draw money out of a buy and hold account, I don't pay tax on
the full amount. I only pay tax on the difference between my cost
basis and the gain. On the gain I only pay 15%. So I don't need to
draw out as much to have the same after tax income. When you figure it
all out, my taxes would be very small on draws from the buy and hold
accounts.
None of this includes time, hours and hours of time. What's that
worth? Over the last five years, I've put more hours into my trading
than I did when I was working full time. My previous job was very
demanding, trading demands more.
When I take all of the factors into consideration, for me, I can't
give trading an overwhelming endorsement even though I actually make
money from it.
Before I started trading full time, I worked the problem backwards. In
other words I estimated what I would make from buy and hold and then
what I would have to make from trading to beat that including the
taxes, expenses, etc. I missed the time estimate.
So far my financial models have been within the expected tolerances,
but each year when I evaluate the comparable worth including the
intangibles, it's a hard question to answer in hindsight between which
method would have been better.
One of the issues for someone who has to make a living from a buy and
hold asset allocation model is the performance of the model during the
first three years. The first three years generally determine how
successful the method will be over the long run.
For example, if I had started the Bernstein method with a combination
of a couple of losing years and then a strong year and then a couple
of profitable but low return years, the Bernstein method would not
compare as favorably to trading as it does. Not only is there drawdown
from losing money, there is additional drawdown from living expenses.
That extra drawdown makes it harder to recover in the good years. You
can easily see this with Monte Carlo simulation, which I have run on a
number of asset allocation models.
For anyone who is not trying to make a living off of a portfolio, then
the starting point is not nearly so important. In that case, I almost
always recommend the asset allocation model instead of trading.
For those who want to have some fun trading or swinging for home runs
or whatever, I suggest they put 90% of their assets into the model and
only trade with 10%.
As I mentioned in the other articles, there have been other benefits
to trading outside of the money. However, in reviewing the last five
years, it's a tough choice--at least for me.
Everybody has their reasons for whatever they do. I don't mind sharing
my reasoning if it helps someone else make an informed decision.
--- In equismetastock@xxxxxxxxxxxxxxx, "metastkuser"
<andysmith_999@xxxx> wrote:
> Super. If I recall correctly, you said in a prior post that had you
> used Bernstein's approach, your trading results over the last few
> years would be no worse than they are now? Surely that can't be right.
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