Do I not need to sell outperforming assets if I add money to pp

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metta2006
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Do I not need to sell outperforming assets if I add money to pp

Post by metta2006 » Fri Apr 12, 2013 1:36 am

I'm planning to keep adding money to pp. Will I not have to sell outperforming assets if I can rebalance by buying the worst performing asset? Would that decrease return as I never sell. I'm tempted to sell some stocks to capture gain. Thanks!
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Re: Do I not need to sell outperforming assets if I add money to pp

Post by craigr » Fri Apr 12, 2013 1:39 am

I would buy the lowest performing asset and not sell the winners myself. For one, if these are taxable funds you will pay extra in taxes you can avoid. Secondly, there could be transaction fees when you move in and out of assets (commissions, bid/ask spreads, etc.). Finally, there could be some momentum in the assets you are sacrificing if you are constantly whittling them down instead of leaving them be until they hit an upper band.
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Re: Do I not need to sell outperforming assets if I add money to pp

Post by Pointedstick » Fri Apr 12, 2013 1:53 am

Seems like you're asking if you can avoid rebalance bands by always buying the lagging asset. I believe Sophie did an extensive backtest one time and determined that buying the lagging asset produced slightly lower returns compared to buying all four equally and letting them hit their rebalance bands, but better returns than putting new contributions in cash and waiting to hit rebalance bands.

I say do it if it makes you comfortable, especially in a taxable account where Craig is absolutely right that increased selling can generate more taxes, which could wipe out the advantage compared to buying the lagging asset.
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Re: Do I not need to sell outperforming assets if I add money to pp

Post by dragoncar » Fri Apr 12, 2013 12:26 pm

Yes historically buying the lagging asset underperformed other strategies.  I suspect this is because (investment mumbo jumbo) the volatility timeframe was long / momentum effects were strong.  The question is: will this continue in the future?  If going forward there is a lot of short term volatility but, for example, little drift and long term fluctuation, then buying the lagging asset (which is conceptually similar to more frequent rebalancing) could be a winner.  Since I can't predict the future like this, I just do what is easiest and
Buy the lagging asset.  I have never hit a rebalance band (in about two years).
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Re: Do I not need to sell outperforming assets if I add money to pp

Post by Xan » Fri Apr 12, 2013 1:08 pm

I still prefer the truly neutral approach of buying the assets in their current proportions.
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Re: Do I not need to sell outperforming assets if I add money to pp

Post by dragoncar » Fri Apr 12, 2013 1:38 pm

Xan wrote: I still prefer the truly neutral approach of buying the assets in their current proportions.
How is that neutral?  It predicts that momentum will continue.
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Re: Do I not need to sell outperforming assets if I add money to pp

Post by Xan » Fri Apr 12, 2013 1:51 pm

I disagree; doing it this way isn't a prediction of anything.  With any other scheme, the amount and frequency of your contributions affects the performance of your portfolio.  This way it doesn't.
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Re: Do I not need to sell outperforming assets if I add money to pp

Post by dragoncar » Fri Apr 12, 2013 3:15 pm

Xan wrote: I disagree; doing it this way isn't a prediction of anything.  With any other scheme, the amount and frequency of your contributions affects the performance of your portfolio.  This way it doesn't.
Wut?  The amount and frequency of contributions affects performance either way.
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Re: Do I not need to sell outperforming assets if I add money to pp

Post by Xan » Fri Apr 12, 2013 3:45 pm

...how?  If, when I buy, I buy in proportion to what's already there, then the performance isn't affected at all.  Neither is the timing of any rebalancing.

I believe that my contributions should be disconnected completely from the rebalancing timing and from the performance (or else I'm engaging in market timing).  That's why I do it this way.
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Re: Do I not need to sell outperforming assets if I add money to pp

Post by Tyler » Fri Apr 12, 2013 4:02 pm

No need to over think it.

I personally simply buy the lagging asset(s) for a few reasons - both practical and psychological.

Practical : it's the easiest way to avoid rebalancing events (important in my taxable account)
Psychological : always buying low is good mental exercise for me, and keeping the assets at 25% weightings reduces volatility

Perhaps I could make slightly more money with a different scheme, but at some point you have to stop splitting hairs and move on to bigger problems.
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Re: Do I not need to sell outperforming assets if I add money to pp

Post by BearBones » Fri Apr 12, 2013 5:08 pm

Sounds like most people ignore Sophie's data. As I recall the difference was not trivial.

Want to create a poll? It may be like my gold insurance poll. Everyone suggests buying insurance, but very few actually do it.
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Re: Do I not need to sell outperforming assets if I add money to pp

Post by dragoncar » Fri Apr 12, 2013 6:51 pm

BearBones wrote: Sounds like most people ignore Sophie's data. As I recall the difference was not trivial.

Want to create a poll? It may be like my gold insurance poll. Everyone suggests buying insurance, but very few actually do it.
It's an interesting area for exploration but as I recall Sophie provided results rather than data.  In others words it was not clear to me if outperformance was due to picking a particular entry date (were multiple entry dates used?).  How many rebalances were there and what would the tax implications be?  Did it affect volatility?
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