I want to buy initial positions in proportion with a defined “formula weight” but do not want to rebalance existing positions once they have been initiated. The purpose is to minimize trading costs and optimize tax controls. My 2018 track record (actual vs theoretical) is being destroyed by slippage and taxes because:
[]Slippage+impact were not part of my original calculus
[]My system is not taking advantage of long-term capital gains tax rates
[]My system is not harvesting tax losses
[]My system is not paying attention to higher cost bases due to wash sales
The simplest solution, in my mind, would be to be reconstitute without rebalancing. However, when I try to reconstitute on a more frequent basis than rebalance, I receive the message: [quote]
Reconstitution without rebalance will invest available funds equally among new positions
[/quote]
Thus, any new positions will not be bought in proportion to the weight-formula.
Is anyone able to come up with a workaround? For example, is there a way to make the rebalance parameters ultra-restrictive without affecting new positions (i.e., buy new positions in proportion with the weight-formula)?
It’s relatively easy to do this. Set max portfolio drift to 10% but max position drift to 100% and min rebalance transaction to 100%. Allow 100% deviation from exposure after rebalance. You’ll see your new transactions bought at exactly the weights specified in your position weight formula but no rebalancing after they’ve been bought. See the attached transaction record for an example of how this works in practice.
The drawback is that you’ll see that the percent of cash invested will exceed 100% throughout the period. But you can easily adjust that figure using Excel. On the summary page, download the summary (the download button by the chart). In column N, to the right, put in =C4/G4, =C5/G5, etc. This is your leverage (it’s more precise than the leverage in column I). Then, in column O, put 1 in the first cell (O4), =O4*((G5/G4-1)/N5+1) in the second cell, and =O5*((G6/G5-1)/N5+1) in the third cell, then copy that third cell all the way down. At the bottom will be your total return on $1.00, which you can then annualize.
Also a good idea. Seems like a lot of work to implement though as rebalancing to 1x will incur additional transactions not captured by the sim.
And actually, I personally do not mind if the leverage gets off-target at times. I see this as a just a bottom-up way of market timing. I.e., being more or less aggressive on a portfolio level should correspond the quantity/magnitude of potential deals on the market.