Tranche Investing: How to Reduce Transactions
Based on results from extensive back-testing, there is a degree of luck as to when a portfolio comes up for review and when securities are bought and sold. Did the review come when it was time to buy and the market dipped? Or were ETFs sold when the market was low. Was the trade delayed or missed due to setting a limit order when the market moved in the opposite direction of the order?
Tranche investing is a model designed to mitigate this “luck-of-the-transaction” problem by spreading out the transactions over what are called Portfolio Offsets or Offset Portfolios. The Tranche 1.6 spreadsheet is constructed to help users implement the Tranche Investing Model by allowing as many as 12 different offsets. We can also vary the number of trading days per offset. The default setting is six (6) trading days. A view of this worksheet is shown in the following video.
One of the negatives of the tranche model is the increase in the number to transactions per month. Click on this link to find the “Camtasia” where I put forth an idea that will reduce the number of transactions per month. The overall concept is to keep investors out of low performing ETFs and at the same time invest available cash in the better performing funds. The reduction in transactions comes by way of not paying attention to every buy and sell recommendation that emanates from the Tranche 1.6 spreadsheet.
This idea requires judgment rather than following a mechanical model. As a result, it is nearly impossible to back-test. Discussion is most welcome.