Author Topic: Dollar Cost Averaging when Rebalancing?  (Read 4928 times)

HamhockHammock

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Dollar Cost Averaging when Rebalancing?
« on: September 11, 2013, 05:42:48 AM »
My (non-taxable(TSP)) portfolio has drifted  ($30,000) out of my target allocation in the last year, and I'm coming up on rebalancing. Would you recommend dollar cost averaging/value averaging the rebalancing process, or just doing it in one shot? We're limited to two interfund transfers per month in the TSP. I could rebalance using, say, 6 transaction over the next 3 months. Or would that be a lot of squeeze for not enough juice?

Thanks for the advice.

Kazimieras

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Re: Dollar Cost Averaging when Rebalancing?
« Reply #1 on: September 11, 2013, 08:41:39 AM »
Depends how your fees are charged, but overall I'd say one shot. Then again I am not a fan of DCA and find it more of a gimmick than anything else. In "theory" it reduces risk, but as a consequence it also reduces gains.

KingCoin

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Re: Dollar Cost Averaging when Rebalancing?
« Reply #2 on: September 11, 2013, 09:44:32 AM »
One shot. I can't think of any reason to do it in stages.

DCA is usually a suboptimal strategy to protect oneself psychologically. It's a little different in the case of a rebalancing, since you're already fully invested, but given no obvious benefit to a multi-transation rebalance, better to keep it simple and reduce the temptation to engage in some sneaky market timing.

HamhockHammock

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Re: Dollar Cost Averaging when Rebalancing?
« Reply #3 on: September 11, 2013, 06:13:10 PM »
Depends how your fees are charged...

No fees on interfund transfers in the TSP.

Thank you both for the advice!

kyleaaa

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Re: Dollar Cost Averaging when Rebalancing?
« Reply #4 on: September 12, 2013, 09:55:37 AM »
Doing it all in one shot is USUALLY more efficient in the long run.

fiveoclockshadow

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Re: Dollar Cost Averaging when Rebalancing?
« Reply #5 on: September 13, 2013, 04:31:48 AM »
I don't think the standard DCA vs lump sum argument works here (i.e. lump sum gets more returns on average). That logic applies to moving from cash to equities usually. In that case equities return more than cash on average so getting more in sooner leads to more expected return.

Likely in this case since bonds have been falling and equities shooting up the OP is moving from equities to bonds. Exactly the opposite now, moving from high expected return to low expected return. On average DCA would be higher return because more money would stay in equities longer.

But that really isn't the point at all when rebalancing.  Using such logic would say never rebalancing away from equities gives the highest expected return.  MPT says otherwise. You can't consider an asset class on its own, the interaction matters. That's why we rebalance.

There is a good reason to not continuously rebalance and that is the momentum factor (the fourth factor added to the Fama French three factor model). That research implies in general waiting to rebalance will give slightly better risk adjusted returns. How long to wait is a difficult question but empirically it appears somewhere between half a year and two years is a good rebalancing interval. This means letting your unbalanced portfolio ride for a bit before rebalancing. It sounds like the OP has already done so. I don't think we have enough information to predict if rebalancing faster or slower at this point is any better.

Finally there is psychology. Some investors feel better doing it slow. Don't ignore psychology, if you feel nervous you may make a behavioral error in the future.

So I don't see a "correct" answer here since there are no transaction costs in TSP, do what you are most comfortable with!