stone wrote:I'm unsure about is whether dollar cost averaging makes sense with the HBPP.
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I'm also not that taken with the nominal safety of cash especially since in the UK we had a 30% devaluation or something like that in 2008.
That uncertainty poses a really good question.
TL;DR : I believe in dollar cost averaging (DCA).
The long version...
Analysis:
Assuming a single asset (e.g. gold), over your desired timeframe, with respect to cash, DCA:
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makes no sense in a steady uptrend (but when will that ever the case?)
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is beneficial but not ideal in a steady downtrend (again, when is that?)
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Is likely beneficial when the price varies unpredictably up and down over time (seems typical)
Given I cannot predict future price with respect to cash, and 2/3 of the scenario are beneficial, I'm probably going to pick DCA when buying a single asset.
But what about the PP?
The way I see it, the typical simple PP is just 4 assets. At any given time the price of any of those assets will be randomly different with respect to each other than it was the last time you looked. Or in other words, cash will be varying randomly with respect to any other asset as they all vary randomly with respect to each other.
Now your perspective re. cash devaluation throws a little bit of a twist into it. If you look at cash with respect to an average of the other three assets, and you assume cash is then in a steady downtrend (or subject to a significant (30%!) devaluation at any time), obviously DCA would make no sense. But if cash really does vary randomly then DCA is likely beneficial. And if cash is rising in value then DCA is beneficial but not ideal.
Again, without foreknowledge of a steady trend, 2/3 of the scenario result in DCA being beneficial.
Given that I cannot predict the future in the short term (month to month say, for six months or a year out), I have to assume that cash will be varying randomly in regards to the other three assets or that each asset will be varying randomly with each other.
Thus I think DCA is likely to be beneficial and is the safest approach UNLESS you can predict cash to be in a steady downtrend with respect to the other 3 assets.
(Now if you have no choice (e.g. this is not a lump sum conversion but rather accumulating assets over time) then DCA is really your only choice. It's nice to know that it is likely to be beneficial.)
My experience:
I went thru a similar decision process with a lump sum and did about a 90-day DCA when I created my PP in a rollover IRA. My plan was to keep it as its own account and manage it as a self-contained PP. I already had a sizable allocation to precious metals and stocks in other accounts, but no treasuries other than whatever was held in various bond index funds in my 401(k) (which totaled about 50% of my investable assets, mostly cash and bonds, about 30% stock index).
I did a rollover of that 401(k) to an IRA. It came out of that mix of investments and as soon as it hit the IRA I purchased about 1/3 my desired final allocation in TLT, VTI, and IAU (and SHY). About 1 month later I brought each class to 2/3's my final allocation. And about 2 months after the IRA was opened I invested the last portion to bring each class to 25% each. (So in essence, each non-cash class went roughly to 8%+/-, 16%+/-, 25%+/- over 3 months.)
When I did a rollover of a company pension into an IRA I did a DCA of approximately 8-10 months. (It got a bit confusing because most of the pension money was invested about 8 months out, but some other money had been added to the account (commingled) and there were some significant dividends, and a couple of asset sales... It didn't reach my desired steady state for almost a year.)
My Conclusion:
The pension => IRA was not so good. I started investing the first week in April 2009. Less than one month previous turned out to be the stock market bottom and that became the beginning of a sustained uptrend for about the next 18 months. I would have been better off to have dumped in everything on day 1. But I'm not as bad off as the stock index would suggest. I was buying individual stocks. And by the end of the year my cost on most of them was way closer to the April 2009 value than to the March 2010 value because they were not individually each in a steady uptrend.
That 401(k) => IRA => PP DCA was a good thing. Or at least not bad. I know I got some better prices the 2nd and 3rd times than if I had purchased all at once. In the end it boosted my return a low percentage.
I did the 401(k) rollover starting in March 2011 so I knew that DCA had not been ideal in 2009. But it turned out to be a good thing in 2011. (But I didn't drag it out so long the second time... of course the money had been invested before so it wasn't as 'new' as the pension rollover.) (BTW, that PP account is about 20 months old, up over 7% YTD, up over 22% since origination, for a CAGR over 12%. FWIW it currently has individual stocks and VBK instead of VTI, and it holds CEF instead of IAU and it has about 40% of the treasuries as EDV.)