Betterment and "Micro-averaging"

[Honest Abe]

Okay, I just made up the term "micro-averaging." But I was hoping to recruit some smart people for some help with a challenging problem.

I have an account with Betterment that has over $10k, meaning I pay .25% in fees for the account (in addition to the fees the low-cost ETFs in their basket carry.) I'm not a big fan of fees.... who is?? But every week when my automatic deposit goes into my Betterment account, I check the deposit statement, and I see something that I feel makes this service worth it.

My current allocation is 90% stocks and 10% bonds, which is pretty aggressive. Every week, when I make a deposit to Betterment, it figures out how to top off my account to keep it at this level.

Stock market take a dump this week? Betterment will take my $200 deposit and gobble up some Stock ETFs.

Stocks have a great week? Whoa there, buddy, Betterment will buy heavily into bonds until my allocation is leveled out.

Often I think "maybe I should just open a Vanguard account to avoid the .25% fees. But when I realize that B'ment is responding to the market and keeping my allocation right every single week, buying up stocks even when there's a slight sale and then keeping me honest when the market is roaring, I feel like it's worth it.

tl;dr - My question for all the smarties out there: How does this kind of weekly averaging, smoothing out every contour, affect my returns? In my gut I feel that buying every little "sale," week after week adds up to some larger-than-market-average numbers in the long term.

[kyleaaa]

To the extent there exists momentum as a separate risk factor (as distinct from beta, small, and value risk factors), it would likely be beneficial to rebalance less rather than more frequently. It is likely momentum is real, but unfortunately the research on whether or not it's exploitable at the retail level is inconclusive (based on what I've seen. I'm admittedly not completely up to date). The best I can say based on the data I'm aware of is that it MIGHT be better to rebalance less frequently (I rebalance yearly) but whether or not it actually helps by a measurable amount is unknown. And of course, the actual optimal rebalancing period will differ based on market conditions and can only be known in hindsight.

In other words, your gut feeling is not supported by the data I'm aware of. But it's inconclusive so who knows for sure? FWIW, several luminaries such as David Swensen of the Yale endowment disagree and rebalance daily, although I believe he advocates this primarily because real-time rebalancing tends to cost less at the institutional level.

Either way, I don't think the effect is large enough to care about one way or another.

Some reputable links on the subject:

http://www.tdainstitutional.com/pdf/Opportunistic_Rebalancing_JFP2007_Daryanani.pdf
http://www.efficientfrontier.com/ef/100/rebal100.htm

[Joet]

sounds like a vanguard/fidelity/schwab index fund would allow no-fee rebalancing with the click of a mouse if interested

studies suggest the main rebalancing benefit is on the order of 1x/yr or less though. most rebalance [as you seem to suggest] with new contributions

edit: if you're 90:10, it's basically putting you vastly into equities every time. we havent had any good 2% daily drops in a while but even if we did, that wouldn't affect a 90:10 portfolio much