How do people set up their allocations?

[RunningBum]

I am averaging into the US large sector from foreign to avoid buying high.

How does averaging in avoiding buying high? It might, but it might not.

 

[indiajust]

averaging in thirds

Buying in constant dollars gives the advantage of Dollar Cost Averaging. General advice is to buy in thirds. (with proviso that you never pay more than 1/2% in commissions and fees on any transaction) General advice for decent size position is to buy in thirds.

DCA means you buy less stock at higher prices and more at lower prices, pulling your average purchase price down and reducing risk of overpaying in one large transaction.

 

[RunningBum]

No, DCA doesn't mean that. What if the investment steadily rises in price, which is the general trend for most investments? It means you only bought the first part at the lowest price, then as you buy later at higher prices, your average purchase price goes up.


DCA is a psychological method in case the investment drops the day after you make a bulk purchase. But that drop could come anytime, including the day after you make your last DCA purchase, in which case you lost out on some of the gains but fully participated in the loss. Some people can't sleep having made a large active decision that could turn out wrong, so DCA can help with that, but it is a psychological decision, not a mathematical one.


IMO, your better defense against downturns is to have a solid asset allocation and stick to it. The longer you keep yourself from having your desired AA, the longer you are at risk of either missing out on gains or taking more losses, depending on which way your allocation is off.


Besides, in the case you were advising the person is going from one similarly volatile investment to another (foreign to US large cap).


This is all assuming we are talking about all the money being ready to transfer now if desired, as the person you referenced has. DCA in the form of regular paycheck contributions to a 401K or stock plan or regular investment account contributions is different, because that is investing now rather than waiting to accumulate a stash to invest.

 

[indiajust]

more dca

https://en.wikipedia.org/wiki/Dollar_cost_averaging

I was unfamiliar with any psychology behind dca, but wikipedia does mention it. I would ignore it as I doubt most would consider psychology as part of the allocation process.

Yes, there is a longterm rising trend to markets, but I assume you are not spreading a buy decision over months or years, but rather over a few weeks to months in establishing a position.

The minor protection supplied by DCA is strictly against short term volatility, not underlying price movement due to business performance. The more price volatility in the issue, the more utility DCA provides. I would not bother with large caps and high trading volume. Much more relevant with smaller issues and low trading volumes.

 

[pb4uski]

If you have a large amount to deploy and do not want to plunk it in all at once, I think value averaging is the optimal approach... you invest more and buy more shares when prices are relatively low and invest less and buy less shares when prices are relatively high.

 

[indiajust]

I would leave DCA in its intended role, short term averaging to remove noise during a purchase.

Value averaging sounds more like something of an annual ritual. Selling your high flying issues for something less risky. Re-balancing within a given category instead of between categories as in re-allocation.

Note: This would directly contradict growth stock investing of letting your winners run. It is hard to stick with a Netflix or a Monster beverage roller coaster ride for 10 years with any value mentality or sanity intact.

 

[davebarnes]

"How do people set up their allocations?"
I read a lot.
Here. Bogleheads.
I ignore the popular press. Looking at you Money magazine.
Then, after a hundred hours of research, I make/made a decision.

 

[RunningBum]

Well, india, at least you've backed off your claim that DCA will avoid buying high. I've already given my position on DCA enough times in the past, I'm not going to waste the time again.

 

[JoeWras]

If you have a large amount to deploy and do not want to plunk it in all at once, I think value averaging is the optimal approach... you invest more and buy more shares when prices are relatively low and invest less and buy less shares when prices are relatively high.

When I came here 5 odd years ago, I complained that I wasn't invested enough. I think p-before mentioned VA at that time and I executed that strategy for a few years until I got that cash invested. Worked for me.

 

[indiajust]

It does avoid buying high... just in the short term as part of a purchase decision. Short of a crystal ball, no simple algorithm can avoid buying high. Or we would all use it and the concept of overpaying would not exist.

I thought the thread was about allocation, not stock purchasing strategies.

Dollar Cost Averaging is a tiny tool that helps remove a bit of the noise and improve signal to noise ratio. That's why I included the reference. Averaging has been part of control algorithms for just this reason.

Perhaps a new thread on your issues with DCA would be appropriate.