6 ms·

The re-balancing system (of which dollar averaging is a variant) is described in the Fortune's Formula book [1] as something that Claude Shannon [2] would demon

The re-balancing system (of which dollar averaging is a variant) is described in the Fortune's Formula book [1] as something that Claude Shannon [2] would demonstrate in his lectures at MIT as a mathematically proven guaranteed winning strategy. At the end of the talk there was a Q and A, and the first question always was "do you yourself use this system", to which he replied "Naw, the commissions alone would kill you". [1] https://www.amazon.com/Fortunes-Formula-Scientific-Betting-Casinos/dp/0809045990 https://www.amazon.com/Fortunes-Formula-Scientific-Betting-C... [2] https://en.wikipedia.org/wiki/Claude_Shannon https://en.wikipedia.org/wiki/Claude_Shannon

simo7 9y ago
Plus the formula is more geared towards diversyfing across different assets.
AgentME 9y ago
The transaction fees at Kraken and many other cryptocurrency exchanges are percentage-based, so that issue shouldn't apply here.
- Buge 9y ago
  It would still apply. Them taking a percent of my money every trade hurts me. Is there any guarantee that my profit per trade is larger than their fee per trade?
  - AgentME 9y ago
    You pay the same amount in fees for buying a lump sum of $100 in Bitcoin or for buying $100 in Bitcoin over a week using dollar cost averaging. If dollar cost averaging with no fees is better than a lump sum with no fees, then I'm not sure how adding the same fee to both strategies could make dollar cost averaging any worse relatively.
- gtrubetskoy 9y ago
  Note that Shannon did use the word "alone", implying that commissions is not the only reason why this strategy is not as great as it seems at first. I'm guessing he (being one of the most prominent mathematicians of the 20th century) picked this example exactly because it was a counter-intuitive and complex problem that seems simple on the surface.
icelancer 9y ago
Back then that was certainly true. Today it's easy and free to do using ETFs that are free to trade under certain brokers. Since I'm a boring fuddie duddie, I just rebalance my ETFs and index funds in Vanguard every so often at no cost, but I believe eTrade and some other platforms have a subset of "no commission" ETFs, Interactive Brokers has very low commissions, and if you like startups in the space, Robinhood is technically free (though order fill I hear isn't nearly as good as other major platforms, to be expected).
- nodesocket 9y ago
  Robinhood is good for quick smaller trades, but their order fill is horrible. Every time I am shocked at the prices my orders fill at. I'm fairly positive they are making money front-running or from kickbacks from exchanges.
  - benmowa 9y ago
    After reading Flash Boys: A Wall Street Revolt, I think it would be silly of me to not believe everyone is doing some variation of front running.
  - asddddd 9y ago
    They sell flow to KCG/Citadel/etc like most all (every?) retail broker.
    - icelancer 9y ago
      Pretty much. Think they route through Apex a lot as well. Interactive Brokers is the only way to go for an intermediate person who wants to speculate and have high-powered tools for a relatively low minimum ($10k I believe, $3k or so for younger people under 25?). They refuse payment on order flow, as does Fidelity, IIRC. Like I said I'm out of that game (minus small speculation on BTC for currency hedging purposes). I've found the love of index funds and low expense ratios.
  - icelancer 9y ago
    If the desire is to fill index-type ETFs at the market price, yeah, Robinhood is probably not smart. Vanguard is simply better for that. I wonder how the fills are at limit stops? Slower? Don't know who they clear through. Robinhood seems like a great fit for the person who has maxed a Roth and wants a brokerage to hold on to ETFs across low-ER providers, like Charles Schwab and iShares ETFs + Vanguard ETFs as they accumulate capital. Beyond that I can't see using it for trading or anything. If I was slanging options or speculating long/short through retail brokers, I'd be doing it on Interactive Brokers and nowhere else. (And yes, I know Robinhood doesn't do short-side work.)

simo7 9y ago

Plus the formula is more geared towards diversyfing across different assets.

AgentME 9y ago

The transaction fees at Kraken and many other cryptocurrency exchanges are percentage-based, so that issue shouldn't apply here.

Buge 9y ago
It would still apply. Them taking a percent of my money every trade hurts me. Is there any guarantee that my profit per trade is larger than their fee per trade?
- AgentME 9y ago
  You pay the same amount in fees for buying a lump sum of $100 in Bitcoin or for buying $100 in Bitcoin over a week using dollar cost averaging. If dollar cost averaging with no fees is better than a lump sum with no fees, then I'm not sure how adding the same fee to both strategies could make dollar cost averaging any worse relatively.
gtrubetskoy 9y ago
Note that Shannon did use the word "alone", implying that commissions is not the only reason why this strategy is not as great as it seems at first. I'm guessing he (being one of the most prominent mathematicians of the 20th century) picked this example exactly because it was a counter-intuitive and complex problem that seems simple on the surface.

icelancer 9y ago

Back then that was certainly true. Today it's easy and free to do using ETFs that are free to trade under certain brokers. Since I'm a boring fuddie duddie, I just rebalance my ETFs and index funds in Vanguard every so often at no cost, but I believe eTrade and some other platforms have a subset of "no commission" ETFs, Interactive Brokers has very low commissions, and if you like startups in the space, Robinhood is technically free (though order fill I hear isn't nearly as good as other major platforms, to be expected).

nodesocket 9y ago
Robinhood is good for quick smaller trades, but their order fill is horrible. Every time I am shocked at the prices my orders fill at. I'm fairly positive they are making money front-running or from kickbacks from exchanges.
- benmowa 9y ago
  After reading Flash Boys: A Wall Street Revolt, I think it would be silly of me to not believe everyone is doing some variation of front running.
- asddddd 9y ago
  They sell flow to KCG/Citadel/etc like most all (every?) retail broker.
  - icelancer 9y ago
    Pretty much. Think they route through Apex a lot as well. Interactive Brokers is the only way to go for an intermediate person who wants to speculate and have high-powered tools for a relatively low minimum ($10k I believe, $3k or so for younger people under 25?). They refuse payment on order flow, as does Fidelity, IIRC. Like I said I'm out of that game (minus small speculation on BTC for currency hedging purposes). I've found the love of index funds and low expense ratios.
- icelancer 9y ago
  If the desire is to fill index-type ETFs at the market price, yeah, Robinhood is probably not smart. Vanguard is simply better for that. I wonder how the fills are at limit stops? Slower? Don't know who they clear through. Robinhood seems like a great fit for the person who has maxed a Roth and wants a brokerage to hold on to ETFs across low-ER providers, like Charles Schwab and iShares ETFs + Vanguard ETFs as they accumulate capital. Beyond that I can't see using it for trading or anything. If I was slanging options or speculating long/short through retail brokers, I'd be doing it on Interactive Brokers and nowhere else. (And yes, I know Robinhood doesn't do short-side work.)