Aug. 21, 2019
Improving overall portfolio performance over the long term might not be that hard to do. However, you will need a long-term vision of things to do so.
We all know the future compounding value formula: Cap. ∙ (1 + r)t.
Say you want your long-term portfolio performance to produce twice as much as it could and wonder how much more return, or effort, would be needed to accomplish the task.
This is requesting: 2 ∙ Cap. ∙ (1 + r)t = Cap. ∙ (1 + r + g)t. And the question is, what is the value of g over the trading interval t?
For instance, on an initial capital: Cap. = 1,000,000, after one year we would be requesting with r = 10% that the outcome be: 2,200,000. This is not just doubling r; it is doubling the outcome. To do this, you would need: r + g = 120% or g = 110%!
Understandably, our trading systems do not generate that kind of performance at will. However, if you give it time, the problem gets more trivialized, meaning that the added effort to double one's performance might not require that high a g number.
The formula for t = 20 would require adding 3.38% to the 10% base scenario. This means that a CAGR of 13.38% would be sufficient to double one's outcome compared to the base 10% return.
If you add more time, like going for t = 30 years, the added push will drop to 2.57%. And going for 40 years, a g = 1.92% would have done the job. This added g is acting over the portfolio's entire trading interval. To put this in perspective, it is like requesting an added 2% to your average profit target. On a 100-dollar stock, that is requesting 2 dollars more for an exit. Doing simulations on this, you should observe that most of those requests would be honored. It is where a long-term vision of things can leave its mark.
You know, even before you start, that the added effort in reaching for more might not be that elusive or that hard to get. But you will need to plan for it and, most probably, need to reengineer your trading strategy.
Adding g is comparable to adding some long-term alpha, and it is generated by your own program routines. You have an example of applying such procedures in the following article, Reengineering For More, where I did just that: reengineered a trading strategy to produce more over the long term.
BTW, it is the same problem that you have: Cap. = 10,000,000, Cap. = 100,000, or Cap. = 1,000,000,000 to manage, g would be the same.
Created. Aug. 21, 2019, © Guy R. Fleury. All rights reserved.