Gyroscopic Investing

Pointedstick wrote: I'm getting ready to add some more money to my fledgling PP and thinking about what my monthly contribution strategy will look like. It's all in a taxable account, but 3 out of four of the ETFs are commission-free. I'm considering putting everything into whichever asset is lagging when I make the contribution. I figure it will make re-balancing a less frequent event, which is intentional since it's in a taxable account. Does this sound sane?

1NV3ST0R wrote: Do you keep accumulation in the cash position until you either hit the 35% band of cash, or do you wait until stocks hit 15%...?

1NV3ST0R wrote: ...do you sell off the loser stocks, take the tax-loss, and then load into stocks again with cash (making sure to avoid a wash sale)?

christina wrote: I have been accumulating into cash and plan to do a once-a-year re-balance out of cash into my other positions.

I do this for two reasons:

1. My employer forces me to use Manulife funds, and Manulife only lets me take money out of their funds once a year. If manulife offered all the necessary funds for the PP to work, I'd leave it in at Manulife, and rebalance when any one position hit a band. However, Manulife doesn't offer any good bond and gold funds, so I'm forced to take the money out and put it into my own investment account i hold at my bank. 2. I don't have much in the way of savings, so the trading fees are quite high in proportion to the amount of money I have. All the gains made by the PP would be eaten away in trading fees if I rebalanced too often, so I seek to minimize them by only doing a yearly re-balance.

I'm currently 40% cash, 19% stock, 19% gold, 21% bonds.

1NV3ST0R wrote: I'm wondering this question myself. If let's say you had VTI or something for the stock-component of the PP and let's say it tanks by 5% of your rebalancing bands (went from 25% to 20%). You keep making money every few weeks from your job and this money just goes towards your cash position.

Do you keep accumulation in the cash position until you either hit the 35% band of cash, or do you wait until stocks hit 15%, or do you sell off the loser stocks, take the tax-loss, and then load into stocks again with cash (making sure to avoid a wash sale)?

Pointedstick wrote: I'm getting ready to add some more money to my fledgling PP and thinking about what my monthly contribution strategy will look like. It's all in a taxable account, but 3 out of four of the ETFs are commission-free. I'm considering putting everything into whichever asset is lagging when I make the contribution. I figure it will make re-balancing a less frequent event, which is intentional since it's in a taxable account. Does this sound sane?

Storm wrote: I've been having very good luck by just adding to the lagging asset.  I get 401k money every paycheck in my Brokerage Link account and every quarter I sell my long term company stock.  Holding my nose and buying whichever one has been the biggest loser lately seems to be paying off.  I was buying bonds several months ago and I just bought gold right before the pop on Friday.  Last year I think I was buying stocks in the Fall right before the nice ride they had in Dec/Jan.

You can do it either way and it will probably be the same, but I feel like my money is doing more for me if it isn't sitting in cash.  Of course, it's also at greater risk, so that's something to consider.

sophie wrote: I was curious about this too, so before I set up the PP I ran some simulations.  I used ETF data from Yahoo Finance going back to 1993, took  transaction costs into account, and tested 3 strategies head-to-head.  I got this order of performance, best to worst:  1) dividing new income equally among all 4 investments, 2) buying the lagging asset, and 3) socking the money into cash and rebalancing at 15/35 bands - and the performance differences were significant.  If anyone is interested I could post the results....I'd have to rerun the simulations though.

I was surprised by the results - I'd thought that buying the lagging asset would be the best strategy, and that there wouldn't be much difference between that and letting cash contributions pile up.  In practice, I wonder if you could improve the lagging asset strategy by waiting a bit and buying at a support level, instead of at a random time.

BearBones wrote:

Storm wrote: I've been having very good luck by just adding to the lagging asset.  I get 401k money every paycheck in my Brokerage Link account and every quarter I sell my long term company stock.  Holding my nose and buying whichever one has been the biggest loser lately seems to be paying off.  I was buying bonds several months ago and I just bought gold right before the pop on Friday.  Last year I think I was buying stocks in the Fall right before the nice ride they had in Dec/Jan.

You can do it either way and it will probably be the same, but I feel like my money is doing more for me if it isn't sitting in cash.  Of course, it's also at greater risk, so that's something to consider.

Sounds like yours is tax deferred while Pointedstick's is taxable, and this could make a difference when tax loss harvesting, etc. Other advantages for going to cash are (as has been said by others above and elsewhere):
More convenient and hands off. This is akin to the recommendation for keeping PP simple and not looking at it too much.
Lower transaction costs.
Less likely to continually buy into a down-going asset. In many ways this is akin to the recommendation for rebalancing only at bands rather than continuously.

sophie wrote: I was curious about this too, so before I set up the PP I ran some simulations.  I used ETF data from Yahoo Finance going back to 1993, took  transaction costs into account, and tested 3 strategies head-to-head.  I got this order of performance, best to worst:  1) dividing new income equally among all 4 investments, 2) buying the lagging asset, and 3) socking the money into cash and rebalancing at 15/35 bands - and the performance differences were significant.  If anyone is interested I could post the results....I'd have to rerun the simulations though.

I was surprised by the results - I'd thought that buying the lagging asset would be the best strategy, and that there wouldn't be much difference between that and letting cash contributions pile up.  In practice, I wonder if you could improve the lagging asset strategy by waiting a bit and buying at a support level, instead of at a random time.

sophie wrote: OK, I redid some simulations and reviewed my code just to make sure.  I got similar results with different test runs, but here's what's probably most relevant:

start date 1/1/2006, end date 4/1/2012
start with $10,000 portfolio, add $500/month
transaction costs:  $7.95/trade for gold (stock and bond asset trades cost me nothing in either taxable or tax-deferred)
25x4 portfolio, yahoo finance data for TLT used for bonds.  For gold & stock I used data from a gov't online database (blanking on the name right now).  For cash, I used average 6 month CD yields from that same database.  Dividends and interest were included in the simulation.

1) Dollar-cost averaging:  2 rebalance events triggered by the 15/35 bands (late 2008 and 2011).  End balance $69,796.
2) Buy lagging asset:  No rebalance events.  End balance $67,967.
3) Accumulate contributions in cash portion:  8 rebalance events (all out of cash).  End balance $66,682.  

OK so the differences aren't THAT big (4.6% difference between the best and worst strategies at the end of the 6 years).  The thing that struck me was that this is greater than the entire return of the TIAA-CREF target date retirement fund that I'd been saddled with, for the that same time period.

If there are significant tax consequences of rebalancing (thanks for that point Craig), then buying the lagging asset is better than putting contributions into the cash portion.  The DCA strategy could also be kind of annoying unless it can be set up automatically.  You could automate the stock, bond, and cash contributions at 25/25/50, then buy gold from the cash portion every 3 months.