Advice on Allocating 401(k) Contributions

[John Matrix]

This is for all the 401(k)ers out there. How do you allocate your biweekly or monthly contributions into your respective PPs? To maintain balance do you contribute evenly to all assets held in your 401(k) accounts? Or do you treat your contributions akin to dividends and place them in the cash portion of your PP and later use the inflated balance to buy other assets that are at, or below, the 15% rebalancing band?

If you use the former approach, does it impact the performance of your portfolio if you're, in effect, constantly rebalancing? Of course much of this depends on the type of assets held and in what type of funds. Contributing constantly to a zero commission fund would make more sense than in an ETF that commands a commission.

Or is it better to wait when your assets reach the 35/15 rebalancing threshold?

If it's pertinent to the discussion I'm thinking my PP breakdown will be as follows:

Roth IRA: 1) Stocks; 2) Bonds; 3) Cash

401(k): 1) Stocks; 2) Bonds; 3) Cash

Traditional IRA: 1) Stocks; 2) Bonds

Brokerage: 1) Gold

Any advice is greatly appreciated!

[sophie]

Check out this thread:

http://gyroscopicinvesting.com/forum/ht ... ic.php?t=2

Assuming you have a 401K plan with no fees for new contributions, it's probably easiest to allocate contributions equally among the assets, setting aside a budget for gold elsewhere and then buying quarterly or when you accumulate enough to order coins with minimal overhead.

[flyingpylon]

I might not be doing it "right" but I let my contributions go into cash, then rebalance when needed.  Depending on the size of your portfolio, the size of your contributions, and the fluctuation of other assets, you might not have to rebalance as often as you might think.

I realize that some folks like to get their funds "invested" in other assets more rapidly, but the hands-off approach of the PP strategy appeals to me, so I'm trying to stay true to that.  And who knows... since we can't predict the future, it might just turn out that having a little extra cash will be the right call anyway.

[notsheigetz]

What I do is put all of my 401k contributions into the only PP friendly investment available in my plan which is an S&P 500 index fund. I then balance the rest of the portfolio around it. Fortunately I can do in-service rollovers because of my age so if I get too stock heavy because of the 401k I can pull it out and re-invest it in my IRA.

[John Matrix]

A much appreciated "thank you" to everyone that responded. I quite like the idea of allocating all my future contributions into PRPFX and then using that to rebalance as needed. Of course this opens me up to the possibility of rebalancing while PRPFX is in the red, but at least I'll be giving my dollars a good shot at appreciating in a (somewhat) correlated way with the rest of my PP!

[beafet]

I have my biweekly contributions going into the moneymarket account attached to my Roth IRA, and once that hits a certain dollar amount, it automatically purchases an even amount of each fund. It's essentially an automated DCA.

[RuralEngineer]

I have my biweekly contributions going into the moneymarket account attached to my Roth IRA, and once that hits a certain dollar amount, it automatically purchases an even amount of each fund. It's essentially an automated DCA.

This seems to me like the best option by far and I'm jealous because I don't think my SDBA is advanced enough to allow this (I have to call to buy bonds still).

What I don't understand about other methods such as accumulating a large cash position or buying the lagging asset is that they seem to work against the way a PP is supposed to function.  Unless I'm missing something, buying the lagging asset would prevent rebalance events that force you to sell high and buy low.  Essentially you're buying low, but not selling high.  The same goes for accumulating a cash position and then rebalancing from cash into your other assets.  You'd still be missing locking in gains in the other assets by selling high.

If I'm looking at this wrong, I'd appreciate it if someone could explain it better, but for right now it looks like anything other than DCA limits the PP's ability to harvest volatility.

[Pointedstick]

I'm coming to agree with you on that, RuralEngineer. It's been my observation that when I buy the lagging asset, I distort the sizes of the assets relative to each other, although this is probably exacerbated by the fact that by balance is low but my contributions are high. I'm slowly transitioning to a more neutral strategy that buys equal amount of each assets so they they can rise and fall on their own.

[Tortoise]

What I don't understand about other methods such as ... buying the lagging asset is that they seem to work against the way a PP is supposed to function.  Unless I'm missing something, buying the lagging asset would prevent rebalance events that force you to sell high and buy low.  Essentially you're buying low, but not selling high ... [You're] missing locking in gains in the other assets by selling high.

I guess it depends on how you define "locking in gains." If you agree that a penny saved is a penny earned, then buying the lagging asset is just a different way of locking in gains. You're buying the asset "on sale," and therefore saving money in the long run. Penny saved, penny earned.

[sophie]

Try this little thought experiment:  Choosing a PP asset to buy works in your favor (better than DCA) if it is going up, but not if it's the asset that is dropping in value.  50% of the time, one would expect the lagging asset to be the one that's dropping in value more than the other 3 - so you're actually concentrating your investments into the worst performing asset.  Because you need better performance in order to overcome investment losses (e.g. if you lose 10%, you need more than 10% gain to get you back where you started), the 50% of the time where the lagging asset is increasing in value won't make up for the losses.

It still might be a good idea to stick with the lagging asset strategy in taxable, to minimize rebalances and therefore tax hits.  Similarly if commissions are a big concern.

[sophie]

Try this little thought experiment:  Choosing a PP asset to buy works in your favor (better than DCA) if it is going up, but not if it's the asset that is dropping in value.  50% of the time, one would expect the lagging asset to be the one that's dropping in value more than the other 3 - so you're actually concentrating your investments into the worst performing asset.  Because you need better performance in order to overcome investment losses (e.g. if you lose 10%, you need more than 10% gain to get you back where you started), the 50% of the time where the lagging asset is increasing in value won't make up for the losses.

It still might be a good idea to stick with the lagging asset strategy in taxable, to minimize rebalances and therefore tax hits.  Similarly if commissions are a big concern.

sophie,
so you're saying you think it's better to just divide a contribution to PP evenly between the assets rather than trying to spread the money across to bring as close to 4x25 as possible with the amount you have to invest?

Yup.  Backtest comparison showed that DCA (dividing contributions equally) outperforms the lagging asset strategy, depending on the size of contributions relative to the PP.  (Apologies about repeating this a few times....the question does seem to come up frequently).