Selling / rebalancing algorithm (the opposite of dollar-cost averaging)

[NW-Bound]

This does not seem crazy. But it does expose you to selling in down markets since "as late as possible" could easily be into a huge downdraft. At that point you have no good option.

Sometimes you win, sometimes you lose. But if you win more often than lose, then it's still good.


Take a little chance
It don't mean nothing
Sometimes you win, sometimes you lose

And don't you know that life is just a game
That you play, win or lose, it's all the same
Open your eyes, you better
Look before you leap, take heed

 

[SecondCor521]

This does not seem crazy. But it does expose you to selling in down markets since "as late as possible" could easily be into a huge downdraft. At that point you have no good option.

Well, yeah.

But in this case, the usual cure (of holding cash and dealing with buckets and refilling and sizing and allocation and...) is IMHO worse than the disease.

As @NW-Bound points out, if I follow my approach, over time I may lose sometimes, but on average and over time I think I will win. (That's why it's my strategy.)

I think it's important to note for context that I'm at approximately a 1% withdrawal rate which will likely go even lower in the future because reasons. So even if I sell in a huge downdraft of 50% for two years, that's only 50% of 1% times 2. That's 1%, which really doesn't even move the needle on anything. If I were at a 4% WR I might feel differently.

 

[a60dan]

Saturday morning musings:

This engineer locked in his gains from April 2020-December 2019 as 2-3 years of cash.

Much as I prefer data-driven decisions, I also learned to go with my gut at times.

I first voted in 1978, recalled Reagan apologizing as the national debt exceeded $1 trillion, lived through gas tripling in price, and the ensuing recession in which I had to find my first job.

Now I retired into the best time ever to find an engineering job, and all the same inflation ��*

I vividly recall hearing the definition of inflation in one of my general studies classes “too many dollars chasing too few goods”.

Although I’m losing 8-9% on the cash (less CD rates), I’m not forced to sell anything at a loss right now.

That said, had I been retired in 2010 I still need to guess when it’s over, or just pick my comfort level (years of cash).

Fortunately the depressed equities and bonds are still generating income that is being reinvested.

Thanks in part to this group, I’m not checking my balances daily and enjoying retirement ��

 

[indiajust]

If you are careful in maintaining your asset allocation and sector percentages... here is my selling approach:

Look to rebalance out of sectors that grossly exceed or outperform. You need metrics by sector to really see if a sector is getting far too hot for reality and is beginning to demonstrate herd behaviour.

Look to rebalance out of any individual stocks that demonstrate the most extreme behaviour.

Look to rebalance around cyclic stocks that go with a business cycle. Consider holding those at the start of a cycle up, vs selling those with more downside than upside.

Compare/project current vs future dividends when selling dividend stocks. This interacts with cash from bonds and interest of course.

In order to perform the sellers side of DCA, you need to proportion and sell a bit of everything, not just whacking stuff too far ahead of your risk tolerance. Do that with ETF's to balance the scales.

It's a spreadsheet with relative risks, sector allocation, cash flow. Proportion the columns, spread it over the sectors and stocks. Then use the ETF's as the fudge factor to balance at end.

 

[CRLLS]

Probably not a good idea but here is what I have done the last few years. I know to some degree of accuracy, what my high discretionary and fixed expenses are. I set an auto-monthly dollar sell amount that fills the void between my other streams of income (SS, etc) and my budget. I typically didn't spend as much as I budgeted for. When it was clear that I had enough cash to get thru the rest of the year, I stopped the auto sell order. At first, I took that out across all of my AA. Later I made the choice to sell only from one asset that was too high for my comfort level.

I learned a long time ago that timing the market was not my forte. DCA was a good plan and worked for me. I feel the same way about the withdrawal stage. Periodic dollar withdrawals. That way I don't kick myself when I miss a timed sell. I hate telling myself "I woulda, shoulda coulda".

In a couple of years when RMD's hit, I'll try to wait as long as possible in the year and make 1 sell from my IRAs. Other income sources will be close to meeting my needs. I feel that on average, the year's gains will be higher at the end than the beginning. Some years it will be smart, others not so much.

 

[music-and-ski]

I was watching the a JL Collins interview. For those who don't know him, he prefers buying Vanguard low cost income funds as soon as possible and being fully invested.

In the "wealth accumulation stage" he doesn't recommend dollar cost averaging, except if it happens to coincide with when your investment money comes available (e.g. if you're investing after each paycheque).

In the "wealth preservation stage" (e.g. retirement) he prefers rebalancing against bonds when the market moves.

I suppose a simple way to do that would be if your target is 70%/30% stocks/bonds and you need to sell something (each month?) to have money for expenses, you sell each asset category down to move towards your 70%/30% ratio.

https://youtu.be/T71ibcZAX3I?t=2376

(I know some of you have said basically the same thing above, but I think this explanation is a little clearer, and the video is useful.)

 

[audreyh1]

Yes, some people do that monthly rebalancing after you draw, or using the draw to get closer to a target allocation.

Personally I prefer to do this annually in Jan and rebalance. This timing works logistically too as I usually get larger distributions in December that can cause my AA to get out of whack, as well as generating excess cash at year end. The rest of the year I let my portfolio ride unless the AA gets really out of whack.

 

[lostcowboy]

To the OP question of mathematical formula. This web site has a formula, I think the company is out of business, and I think the patent expires this year. Sacco Company - SACIN®/SACOUT® - To improve dollar cost averaging results



A fairly simple way is to determine the amount of your NEEDS each month, divide that by your average cost per share. That should be the most shares you have to sell on average per month. Divide your total shares by the number of months you plan to live, if that is greater than the number of shares you need to sell to meet your needs you should be good to go.

If one has been DCAing for a long time the stock price should be well above the DCA per share. That means means you should have room to buy wants besides needs.



Wants have a way of getting out of control, so think long and hard on them.



Control impulse buying. I do shop at amazon, I put items in the wish list, and once a week or two weeks I will look at the list and ask myself do i still want it, most of the time the answer is no, at which time I delete them from the list. I then look at what is left and decide if i want to buy it now or wait a bit longer, remember these are most likely WANTS, you can live with out them if you need to. Maybe wait for a super sell like black Friday, cyber Monday, or prime day.