Jerome and Ihor (racerguy),
The Book needs to have weekly Rebalance, and not annual if the assets (ports) you’re using have weekly rebalance. Bottom line: always set your Book Rebalance the same as your Simulation Rebalance. During this, your Book will always reflect the changes to positions (reconstitution) and changes to the weights (rebalance) that take place in the underlying Portfolios/Sims. Your Book is supposed to keep the two assets in the proper weight relationship, i.e., 60%-40% or 50%-50%, etc. weight for your two assets (or three, four, etc.).
In BOOKS, you want to select rebalance settings that will keep the relationship between your contributing Sims close to your target relational weight – but you also want to minimize unnecessarily small transactions that can run up commissions and reduce returns. To do this, the Minimum Rebalance Transaction (MRT) is the setting you will adjust. Unfortunately, the Book Simulation and the Live Books are inconsistent in the way they handle transactions for relational weighting.
In the Book Simulations, under the Rebalance tab, you have two possible settings: 1) Minimum Rebalance Transaction (MRT), and 2) Asset Tolerance – and they are both in a Percentage amount.
[color=royalblue]BOOK SIMULATION - REBALANCE SETTINGS[/color]
In the Live Books, under the Rebalance tab, you are only provided with Minimum Rebalance Transaction (the Asset Tolerance disappears) – and the MRT it is in a Dollar amount only.
[color=royalblue]LIVE BOOK - REBALANCE SETTINGS[/color]
A percentage amount across the board is more logical to me because I don’t want to be continually adjusting the dollar amount as my Live Book gains value every week, month, and year (at least that’s the plan). Having to remember to check this every so often is just one more thing to do. I have settled on putting a tickler on my calendar to prompt me to adjust the dollar amount in my Live Books every quarter as they increase in value.
In the Book Simulations, I want to minimize excessive small, costly transactions, but I also want to keep the weights near my optimum to get the highest performance. I have settled on using a Minimum Rebalance Transaction (MRT) of 5% and an Asset Tolerance set at 5%. I find that if it is set higher than this, they can really get out of whack.
Some Books show a higher AR in the Simulations if I use a higher MRT, such as 20%. But a higher setting for MRT can cause an Equity/Fixed Income Book to get really out of whack. For example, a 60-40 weighting scheme can reach an 80% weighting for the Equity portion, and only 20% for the Fixed Income portion as the equity asset significantly outperforms the fixed income asset! A 60-40 target can become 80-20 if you don’t stay on top of it. For this reason, I have settled on 5% for this setting.
Now, it is a mystery to me what happens to the “Asset Tolerance” setting when a Book Simulation is converted to a Live Book! Obviously, it disappears, but how is that handled by the algorithms? What should the Asset Tolerance be set at in my Book Simulations to duplicate its disappearance when my Book goes live? I have yet to find anyone who can explain this to me, but perhaps someone will now (hope).
Also, the other big mystery to me is why we have a percentage for these settings in the Book Sim and a dollar amount in the Live Book. As it stands now, we cannot accurately simulate the performance of any Live Book. It kind of feels like the Book project is unfinished, but maybe I’m just misinformed.
Perhaps Paul, Aaron, or Marco or another p123 member can address these mysteries and complete my explanation. I would love to see that explanation also!