Author Topic: A Simple 'Value' Investment Strategy I want to try - Is this a good idea?  (Read 1905 times)

justostash

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What do you all think of an investment strategy that is something like this:

- For simplicity let's say one deposits $1K per week into a diversified robo account on a normal basis. This allows a reasonably comfortable lifestyle off the remainder of weekly uninvested income.
- Then, if the portfolio ever drops >5% of its most recent peak, increase weekly deposit to $1.1K
- Continuing, if the portfolio is off >10% of its most recent peak, increase weekly deposit to $1.2K
- Etc, you get the picture, increasing weekly deposit $100 for every 5% fall in the portfolio.
- Adjust lifestyle to a less comfortable level (perhaps, eliminate a few luxuries for a while) to accommodate for larger weekly deposits.
- For each 5% rise in the portfolio, reduce weekly deposit by $100 until it reaches the old peak.

My thoughts are, in general, you will be putting slightly more money into the market when it is down. But, perhaps this will have the bad effect of putting extra money into the market when it is near, but slightly off a recent peak.  So, would it actually backfire?  Is this just another lame attempt to time the market?  Or is it a sound strategy for putting a little more in the portfolio at low points?

Look forward to some thoughts. Thanks!

daverobev

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Re: A Simple 'Value' Investment Strategy I want to try - Is this a good idea?
« Reply #1 on: February 03, 2018, 11:57:20 AM »
It will be a slower path to FIRE than putting as much as you can in as soon as you can - time in the market, not timing the market. The market spends most of its time at or close to the high.

It could 'work' but so could any set of rules you might want to make up. Plus... you'll feel silly if you put $1500 in one week, and then zut alors! next week the market crashes by another 20%! If only you'd waited! Best to wait another week...

I would advise just set and forget. With the 'set' amount based on how hungry you are for FIRE/how much you hate your job/how much you enjoy all the little luxuries.

FI4good

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Re: A Simple 'Value' Investment Strategy I want to try - Is this a good idea?
« Reply #2 on: February 03, 2018, 12:12:26 PM »
Personally i do something similar although not as defined, I get tighter on spending in a falling market and save more.

Probably something i'll do in retirement as well, in a falling market spend less and try to conserve my working capital.

I'm not in a desperate rush to FIRE , just live a low impact and satisfying life till about 11 years time give or take a bit then be FI for good .

swashbucklinstache

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Re: A Simple 'Value' Investment Strategy I want to try - Is this a good idea?
« Reply #3 on: February 03, 2018, 01:00:50 PM »
Yeah I think my reaction to this depends on where you're coming from. Are you a market timer / active trader reforming their ways? Or a more typical MMM person looking for a numbers-based strategy around "tighten your belt and invest more when the market is down?"

If the former, if this stops you from active trading I'd recommend you do it and, every few months, evaluate why you aren't following the advice of the people above, as you transition into the latter.

If the latter, I agree with the above posters with one potential exception, and entirely because of the psychology. If doing this is going to make you invest less money than you might otherwise while living your best life, don't do it. If on the other hand this is more saying "I like to keep 10 months in an emergency fund but I'm comfortable going down to 6 months for short periods of time" then I say go for it I guess, but I'd still just do that based on feel rather than any numbers myself (or just not do it at all).

2Birds1Stone

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Re: A Simple 'Value' Investment Strategy I want to try - Is this a good idea?
« Reply #4 on: February 03, 2018, 01:30:25 PM »
If this worked, then many of the hedge funds, and actively managed mutual funds would be doing just that and getting a consistent alpha over their benchmarks.....and they are not.

If folks with billions in assets under management, with teams of analysts, and very expensive trading software can't execute something like this, what makes you think you can?

Radagast

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Re: A Simple 'Value' Investment Strategy I want to try - Is this a good idea?
« Reply #5 on: February 03, 2018, 01:56:34 PM »
If the latter, I agree with the above posters with one potential exception, and entirely because of the psychology. If doing this is going to make you invest less money than you might otherwise while living your best life, don't do it. If on the other hand this is more saying "I like to keep 10 months in an emergency fund but I'm comfortable going down to 6 months for short periods of time" then I say go for it I guess, but I'd still just do that based on feel rather than any numbers myself (or just not do it at all).
Having a 10 month emergency fund, and moving 1 month into the market after every 10% total decline might work, followed by placing 1 month back in after it had again passed its old top by 10% total, might be acceptable. The most likely result is you will spend a lot of time for similar (or less if you wouldn't otherwise have had so much cash) ending money than if you never did anything, but hey if it makes you happy.

swashbucklinstache

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Re: A Simple 'Value' Investment Strategy I want to try - Is this a good idea?
« Reply #6 on: February 03, 2018, 05:06:46 PM »
If the latter, I agree with the above posters with one potential exception, and entirely because of the psychology. If doing this is going to make you invest less money than you might otherwise while living your best life, don't do it. If on the other hand this is more saying "I like to keep 10 months in an emergency fund but I'm comfortable going down to 6 months for short periods of time" then I say go for it I guess, but I'd still just do that based on feel rather than any numbers myself (or just not do it at all).
Having a 10 month emergency fund, and moving 1 month into the market after every 10% total decline might work, followed by placing 1 month back in after it had again passed its old top by 10% total, might be acceptable. The most likely result is you will spend a lot of time for similar (or less if you wouldn't otherwise have had so much cash) ending money than if you never did anything, but hey if it makes you happy.

I agree. This is also just market timing or re-balancing, except you're using your EF (so it is either risky because you're using your EF for a not-emergency or your EF is actually too big for you).

Full disclosure, I kind of do this just for fun, limiting to what I can replenish in 1 paycheck. E.g. if the market is down this week and I don't get paid til next week, I'll buy enough today to put myself under my EF amount until I get paid next week rather than buying after I get paid. My recurring barebones expenses are very small, it's just me, stable job, etc. etc. etc. This is a waste of time, but it is fun :).

Indexer

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Re: A Simple 'Value' Investment Strategy I want to try - Is this a good idea?
« Reply #7 on: February 03, 2018, 05:36:23 PM »
Save as much as you can all of the time seems like a better route. If the market does drop then you are buying more shares with the some contribution so you already benefit from the market going down.

Side note: " diversified robo account on a normal basis."  Why bother? Robos are just over priced rebalancing tools. Unless it's free, don't bother. Even their TLH tools are over hyped. There is a benefit, but I doubt it's enough to justify the cost of the robo.

justostash

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Re: A Simple 'Value' Investment Strategy I want to try - Is this a good idea?
« Reply #8 on: February 04, 2018, 12:58:06 PM »
Thanks again for all the input... It sounds like for most of you the consensus is my plan is on the dumb side.  I should just pick a deposit amount that makes sense for me as long as I am working, and do not waiver from that plan unless for some reason my income increases or decreases.

So Indexer asks 'Why bother?' with the robo investment account?
Well, I have definitely read MMM's posts regarding robo accounts... such as this one:
http://www.mrmoneymustache.com/2017/02/01/betterment-cranks-up-features-and-costs-is-it-still-worthwhile/
And his analysis is that their tax loss harvesting alone makes up for the fee.  I currently pay 0.25% fee for Wealthfront.  But I also have direct indexing, which allows me to own many types of equities without using an ETF or paying the ETF fees.

Here's the Wealthfront marketing speak:
Quote
Instead of using a single ETF or Index Fund to invest in U.S. stocks (such as VTI), Direct Indexing purchases up to 500 individual stocks from the S&P 500 Index and a completion ETF of smaller companies. This allows us to take advantage of the countless opportunities for tax-loss harvesting presented by the movement of individual stocks, to further improve your investment performance.
Do you think MMM's analysis is wrong Indexer?  I know I could probably perform all these TLH and rebalancing functions myself, but would I be doing it optimally?  Would I want to spend the time on it?  I guess I would have to analyze the cost-benefit of my time, but then I would need to account for how much time the cost benefit analysis took... oh no, recursion!

TomTX

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Indexer

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Re: A Simple 'Value' Investment Strategy I want to try - Is this a good idea?
« Reply #10 on: February 05, 2018, 04:04:03 PM »
So Indexer asks 'Why bother?' with the robo investment account?
Well, I have definitely read MMM's posts regarding robo accounts... such as this one:
http://www.mrmoneymustache.com/2017/02/01/betterment-cranks-up-features-and-costs-is-it-still-worthwhile/
And his analysis is that their tax loss harvesting alone makes up for the fee.  I currently pay 0.25% fee for Wealthfront.  But I also have direct indexing, which allows me to own many types of equities without using an ETF or paying the ETF fees.

Do you think MMM's analysis is wrong Indexer?

In short, yes, I think his analysis might be leaving out a very important detail. When you harvest a loss you are also harvesting your own cost basis. When you sell the new holding in the future at a gain your capital gains will be greater than they would have been if you hadn't harvested the earlier loss. The benefit is that you can reinvest the tax savings between now and the future date where you sell the holding. Your benefit will be inflated during the time between harvesting the loss and realizing the larger gain in the future. If you only report the initial benefit then you are distorting TLH and making it look better than it really is.

If you dig into Betterment's disclosures you will see what I mean.  https://www.betterment.com/tax-loss-harvesting/  (Click on "About this data" under the chart.)

According to Betterment, if you TLH and never sell the holding in the future, then TLH can increase annual returns by 1.4%.
If you TLH and only sell 50% of the holding then TLH can increase annual returns by 0.77%.
They don't share data on the returns if you sold the entire position. Seriously, why? The one scenario they never disclose is the most important one. However, let me point out that selling half of the position decreased the benefit by 0.63%(1.4-.77), which is almost half of the original benefit. Following that trend, selling 100% of the position would remove 1.26% of the benefit. That only leaves 0.14%(1.4-1.26). 0.14% is a far cry from their advertised benefit.

I believe the benefit is greater than that, but I'm having a hard time finding any data on the final benefit of TLH after accounting for selling the holding. I also question why both Betterment and Wealthfront chose 2000 as their starting point for their backtests. They chose the start of a market crash for measuring the benefits of TLH. I imagine the benefit wouldn't be as great if they started the test in 1995.

TLH is also most beneficial after a big drop, but once the market recovers it becomes less and less beneficial. If you harvested losses in March, 2009 then it's highly unlikely you are ever going to harvest a loss on those holdings ever again. However, if Betterment is managing that account then you are still paying them a management fee.

Conclusion: I see a benefit to harvesting a loss, but I don't think these robo TLH programs are nearly as beneficial as they pretend to be. If the market crashes I can harvest losses. I don't need to look at it everyday. It's normally pretty clear when we are experiencing a correction. Pay attention to it then.


Side note: I didn't realize you were referring to Wealthfront's account that mimicks the SP500. I thought you were talking about Betterment or Wealthfront's standard TLH. That account that mimicks the SP500 is pretty nifty and I haven't decided how I really feel about it yet. It might be my exception to the earlier complaints about TLH return reporting.


Other considerations: If someone never sold the holding they would see a bigger benefit, but a tax efficient spending strategy in FIRE(especially if you FIRE before 59 1/2) would involve spending taxable accounts first. You could also sell at a 0% LTCG bracket if that applies. The Government could put an end to TLH or raise capital gains taxes. Versions of the recent tax bill including FIFO only rules for investment trades which would have made TLH much more difficult.
« Last Edit: February 05, 2018, 04:05:52 PM by Indexer »

justostash

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Re: A Simple 'Value' Investment Strategy I want to try - Is this a good idea?
« Reply #11 on: February 07, 2018, 04:14:51 PM »
Very nice analysis Indexer.  Thank you!  I had not thought about that.  In essence you are saying that TLH reduces your short-term tax liability while increasing your long-term tax liability. The robo investors sure are doing their best to justify their premium. And it's definitely hard to tell for sure if it will benefit you. I think what many have concluded is that the main benefit of the robo investors is that they lower the mental barrier for entry for a wide swath of people.  In theory I can just set-up an auto deposit, and 'trust' that this mechanism will make fairly efficient investment moves on my behalf. Perhaps not the absolute most efficient considering the fee, but better than that if I invested less due to being unsure or lazy about the maintenance tasks.

Wealthfront just released a new premium (extra fee) tool that I'm about to write a new post on and ask if folks think it's a scam. This one sounds dubious to me.