A back of envelope calculation of dealing with draw-downs more effectively …

Further to our study of mi50 performance since 2008 (https://weekendinvesting.wordpress.com/2016/09/05/an-eye-opening-exercise-looking-back-in-the-past/), lets see if adding capital in draw down years helped us.

Say we had 200 Rupees on Jan 1 2008. We deployed 100 in mi50 and a 100 in fixed income.

Case I : If we assume no taxes world, Rs 100 deployed in 2008 Jan would have become Rs 723  by Aug2016 and the other 100 in fixed income would have generated some interest say if we assume 8% average then maybe it would cumulate to about 195 rs for a total of Rs 918 ..about 4.59x of initial capital

Case II : Still assuming no taxes world, 100 deployed in 2008 Jan would be 76 by end of 2008. Say we move Rs 24 from the fixed income to mi50 and make it 100 again.
At end of 2008 the amounts are : mi50 = 100, fixed income 108-24 = 84

In 2009 mi50: 136 and Fixed income 84@8%= 91. Now after a good year mi50 returns the borrowed 24 from the other pocket.
At end of 2009 the amounts are : mi50 =136-24= 112, fixed income 91+24 = 115

You get the hang of it…add in DD years and return back on gain years.
After going through drawdowns in 2008 and 2011 and capital returned in years 2009 and 2012, the final figures for 2016 Aug are 793 and 189 for a total of Rs. 982..about 4.91x of initial capital.

Thus by reallocation of funds after draw down years we have seen that the final outcome has improved by 32% of initial capital.

Is this an exercise worth doing ? Do comment.







3 thoughts on “A back of envelope calculation of dealing with draw-downs more effectively …

  1. We would need a benchmark for when to return the money and when to add. In a hindsight scenario we can be sure when reallocation can be done. Also the 08-09 scenario is a case of worst drawdown, not known untill the moment passes us by. Is it a valid strategy on every say 20℅ below the top and 20℅ above the earlier top? 20℅ being an arbitrary number. For the sake of illustration. What benchmark would you use for reallocation?
    Interesting post by the way 🙂



    1. Tks Abhishek. I guess the benchmark would depend on the specific strategy. In my case back test deep DD have always ranged between 12 to 25% at worst to date. So my sense is if you end the year in this range, get in more capital. Regarding capital outflow, I would say give it back if you return to where you were before the draw-down….I agree there is no right or wrong answer here.


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