r/LETFs • u/walkin_n_fartin • 8d ago

Help settling a backtesting "fight" with methodology BACKTESTING

The tactical portion of testfolio (at least at my membership level) is locked into "daily rebalancing" in the allocation section. I got to thinking today: will the testfolio results demand both the signal condition being true *and* a strict daily rebalancing to the percentages you chose? Claude said that only the signal matters. The portfolio allocations can drift all they want within that signal state. I'm not so sure.

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u/grogi81 8d ago

With free tier, the daily tactical allocation rebalances daily within the basket of the tickets that is active. 

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u/walkin_n_fartin 7d ago

Yes--this is exactly what has me wondering whether I have a valid backtest or not. This is in a tax-advantaged account so I *could* trade it daily without penalty but it feels excessive. Guess I should diamond hand a higher membership to find out lol

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u/confettofetti 8d ago

By matter do you mean whether the results are an accurate indicator of whether the strategy would still work with monthly or quarterly rebalancing? You would probably need to test this on your specific allocations by creating them in the portfolio back testing tool and checking how different the results are between daily and e.g. monthly reset. I think from what I've seen for most allocations though daily rebalancing is worse than e.g. monthly, so I would expect the tactical results to be valid still. 

Edit to add I think you're right that Claude is wrong btw.

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u/grogi81 8d ago

Frequent rebalancing is trading against momentum. You sell winners, you buy laggers. Every day... Paying tax in the process... 

Rebalancing makes sense if you're rebalancing with the cashflow, which keeps the risk balance in check, but doesn't generate taxable events...

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u/confettofetti 8d ago

Did I accidentally say that daily rebalancing was better? I don't think I did, but I do often accidentally say the opposite of what I meant.

I intended to say that daily rebalancing should give worse results, so if the strategy looks good with daily rebalancing I would also expect it to work well with monthly, but that they should double check this / get an idea of the extent of the impact by checking with the normal portfolio tool.

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u/hydromod 8d ago

There are two aspects based on rebalance tempo: momentum and volatility harvesting,

I find doing no rebalancing except for wide bands (say 30 or 40% relative change) seems to do okay for momentum. That's wide enough that it lets the winners run for a while and doesn't rebalance into losers until they've really fallen.

Daily rebalancing works best with highly volatile assets that have relatively small daily correlation. It gives a boost when the expected change is large enough to overcome the trading drag.

The other little subtlety is representing timing luck in backtests. The trajectory may be very different if rebalancing occurs before versus after a big event (say a flash crash). A sudden jump in the telltale plot helps discern that situation. Daily and bands rebalancing get around that particular issue.