Author Topic: Allocation by shares  (Read 1854 times)

mrgrump

  • 5 O'Clock Shadow
  • *
  • Posts: 77
Allocation by shares
« on: March 01, 2014, 12:32:35 AM »
I am going to preface this question as potentially being a stupid question deserving of a face punch. But here it goes.

If market timing should be avoided then one should ignore prices. In that case wouldn't it be better to allocate via number of shares in mutual funds and etfs? For example if you wanted a 60/40 split of VTI and say VWO shouldn't you allocate your 10 shares 6 into VTI and 4 into VWO and never rebalance?

I agree rebalancing makes sense if you are using allocation of money but isn't that just timing the market just less sporadically? I also don't think this question holds much weight with individual stocks. So I am mostly asking in regards to etfs and mutual funds.

wtjbatman

  • Handlebar Stache
  • *****
  • Posts: 1313
  • Age: 35
  • Location: Missouri
Re: Allocation by shares
« Reply #1 on: March 01, 2014, 05:26:38 AM »
Without re-balancing, your portfolio won't stay 60/40. If your asset allocation falls too far out of your accepted parameters, you will no longer be following your investing plan.

Basically, you're choosing an AA with a comfortable level of risk/reward, and you rebalance to keep your portfolio within that level of risk. It's not market timing, it's the opposite of that. You have a predetermined plan (asset allocation) and you rebalance your portfolio periodically to assure that you're following that plan. You don't even need to know how the market is doing, you just need to pay attention to your own portfolio's percentages.

matchewed

  • Magnum Stache
  • ******
  • Posts: 4322
  • Location: CT
Re: Allocation by shares
« Reply #2 on: March 01, 2014, 07:30:15 AM »
I've never seen a study on AA done via shares. It, to my knowledge, has always been done using % of portfolio. Given that and what the impact of your AA has on your risk tolerance, performance over the long term, and performance volatility; why would allocation be done via shares?

Read up on the performance of various AA and how they perform. That may give you a better idea as to why it's done as  % of portfolio rather than the way you're proposing.

mrgrump

  • 5 O'Clock Shadow
  • *
  • Posts: 77
Re: Allocation by shares
« Reply #3 on: March 01, 2014, 08:47:35 AM »
 wtjbatman, correct this investment plan would eventually fall out of a 60/40 balance if you calculate those percentages via dollars I am asking why not balance based on shares?

Matchewed, correct again. I have never seen one allocated this way due to diversity risks. I also have no good reason to allocate via shares other than just to ask the question.

matchewed

  • Magnum Stache
  • ******
  • Posts: 4322
  • Location: CT
Re: Allocation by shares
« Reply #4 on: March 01, 2014, 10:14:00 AM »
wtjbatman, correct this investment plan would eventually fall out of a 60/40 balance if you calculate those percentages via dollars I am asking why not balance based on shares?

Matchewed, correct again. I have never seen one allocated this way due to diversity risks. I also have no good reason to allocate via shares other than just to ask the question.

Well one of the reasons it is not allocated via # of shares is that shares cost different amounts and are arbitrary valuations of a fund/stock/whatever. While your portfolio amount is decidedly not arbitrary. So doing it via share will get you all sorts of weird numbers for your given AA because not all funds are priced the same.