Value Averaging into stocks at ER

[Charles Abbott]

Hi everyone,

This is my first post but I have been lurking for 2 wks
and have read most of the threads. Thanks for everything. I will tell you about myself later but
first I have a question.

FIREcalc demonstrates that the first few years of ER
are critical. Has anyone seriously considered starting
with 100% cash and value averaging into a diversified
fund like Vanguard's Total Stock Market over a period
of 5-10 years until your desired mix is reached?

 

[wabmester]

considered it. did it. missed most of the pain of 2000-2002, but also the gain of 2003. historical market data mavens will tell you the right thing to do is jump right in and hope the current carries you along.

 

[Cut-Throat]

Charles,

This is really no different than Averaging into stocks while you are working. In other words, if the market kept rising the whole time you were buying and then dropped when you got your asset allocation, you'd essentially be in worse shape, because you bought at a higher price and missed out on rebalancing during this period.

If you have a lot of investments already, I would decide on an asset allocation for the long term and rebalance into that now.

If you are sitting with a Pile of cash and need to invest it. I have heard a lot of experts say to get it invested within a year. Put half in now and then half in 6 months. If the market goes up, at least you had some in. If it drops in 6 months, you'll be buying at a cheaper price.

 

[WilliamG]

I think there is a lot of wisdom in Cut-Throat's suggestion; invest to your planned allocation over a finite length of time (probably a year max) with disciplined timing of when and how much you will invest over the period. If the market goes up, you will be glad you went ahead and got in. If the market goes down, you'll be glad you held some back for the lower price. Psychologically you will have something to feel good about!

 

[Charles Abbott]

considered it.  did it.  missed most of the pain of 2000-2002, but also the gain of 2003.  historical market data mavens will tell you the right thing to do is jump right in and hope the current carries you along.

Webmester,

It looks like you avoided the big loss. That's the name
of the game in the first few years. Right?

 

[Charles Abbott]

Cut-Throat,

Thanks for your comments. Bernstein in his "Four
Pillars of Investing" on page 285 recommends at
least 2-3 years to reach your desired mix. He says
about value investing "This method is about the best technique available, in my opinion, for establishing
a balanced allocation." I suggested 5-10 years in my
original post to cover at least one business cycle.

It seems to me that the way to win in ER is not to lose
in a bear market like we had from 2000 to 2002 at the beginning of your move into stocks. I know this is not a good strategy for maximizing your gains, but it seems to avoid the big loss at the beginning.

I am sure that you know about "value averaging", but
for the benefit of others who might not, it is simply a
method that forces the asset to grow at a fixed rate.
You add to or subtract from the asset the amount needed, on a periodic schedule, to force the asset to
grow at the selected rate. This is "dollar cost averaging" on steriods.

You are right iin saying that the "experts" recommend
plunging in. I think that is good advice for a person
in the accumulation phase who would not need the
money for several years. Maybe it is not good for a
person in the distribution phase.

Anhway, thanks again for your wise comments on this
subject.

 

[Hyperborea]

Bernstein in his "Four
Pillars of Investing" on page 285 recommends at
least 2-3 years to reach your desired mix.  He says
about value investing  "This method is about the best technique available, in my opinion,  for establishing
a balanced allocation."  I suggested 5-10 years in my
original post to cover at least one business cycle.

Well, most of us have already been slowly building the portfolio we are going to retire with over 5-10 (or more) years. We already have it in the asset allocation we want in retirement or close to it. You're recommending that folks take that slowly built portfolio and sell it out into cash and then slowly build the portfolio again.

Hyperborea

 

[haha]

I am sure that you know about "value averaging", but
for the benefit of others who might not, it is simply a
method that forces the asset to grow at a fixed rate.
You add to or subtract from the asset the amount needed, on a periodic schedule, to force the asset to
grow at the selected rate.  This is "dollar cost averaging" on steriods.  

Charles,

I agree with you that value averaging is probably the best strategy for establishing an allocation, unless stock prices are clearly low on an historical comparison at the time that one has a lump sum to invest. Since stocks are historically expensive right now, my approach would be to value average, if I bought stocks at all. Actually, personally, if I did not have legacy holdings that would cost me too much in CG tax to sell, I would have at most 25% in stocks today. In fact, if I take my total stock allocation minus energy stocks minus gold, the remainder is largely hedged by QQQ puts. This is not a popular way to go about doing things on this board, but I have been ERd over 20 years, and I have a nest egg considerably greater than all the non investment earnings that I have ever earned in my life. Plus I raised 2 kids with a non-working wife. So overall, I think my method is pretty good. What it tells me is that since I have standards about what I will pay for everything else I buy, wouldn't it be ridiculous not to have standards about what I will pay for stocks?

How can it possibly be true that stocks are the one thing that should be bought without regard to price?

Also, regarding value averaging, I bought and read Michael Edleson's book that first popularized this stategy. But I have a question. Isn't it a bit tricky to choose the right portfolio growth rate? If you choose a rate that is much higher than what the market is able to achieve, then you have sunk a wad at what might turn out to be very high prices. Conversely, if your growth rate is too conservative, you may wind up with a smaller portfolio than you would have had, and even wind up selling stocks when they are still relatively cheap, though maybe less so than when you bought them.

However you decide to proceed, best of luck to you.

Mikey

 

[Charles Abbott]

Hyperborea,

Thanks for your comment. I was thinking about the
people who take a lump sum retirement check. They
have to decide what to do with a wad of cash. I would never suggest changing a balanced portfolio into cash
and starting over.

 

[Charles Abbott]

Mikey,

Thanks for your comment. I started this thread as
an academic exercise. Personally, I ER'd in '89 and
after a long strugle trying to sellect stocks and managed funds, I saw the Bogle/Bernsteom light and
adopted the balanced index approach. All my
IRA is now in Vanguard's Target retirement 2025
fund. The 60/40 mix with about 12% foreign exposure
seemed good to me. Also, I like the way the fund will
gradually become more conservative over time.
I will be selling a small business within the next 5
years and will probably plunge the proceeds into
stocks if my IRA is still holding up OK and if I feel comfortable with not needing the money for at least
10 years.

Cheers

 

[unclemick]

I too count on balanced index Vanguard funds for the bulk of my ER - Lifestrategy and I've been reading their target retirement package.

But as I've said in other posts, my male ego still has 'hobby stocks'.

My (left handed, INTJ) version of value averaging is DRIP stocks which left on autopilot will DCA but I haphazardly try to throw in some extra money when Moneypaper's invest% says they're in the value range. Since I bought my DRIP stocks via Moneypaper I've kept my subscription up for the last 14 yrs.

 

[wabmester]

It looks like you avoided the big loss.  That's the name
of the game in the first few years.  Right?

Yes, I'm a HUGE fan of capital preservation, but that doesn't keep me from feeling envy when I see the market go up 30+%. I have to do the masochistic calculation of what my portfolio value would have been if I had a bigger piece of those gains. It would have meant absolutely worry-free retirement whereas I may have a bit of a stretch to make my pile last 50 years.

And it's very difficult for me to imagine much upside left in stocks for the next decade or so, so I'm even more reluctant to increase my stock allocation after the last year's run.

I'm a patient guy, though. It seems like the markets have a lot of balls in the air right now. I plan to wait to see how they land before I change my investment strategy.

 

[John Galt]

Re. "masochistic calculations", you gotta stop that man!
I am a terrible second guesser, but even I don't figure
what I might have made on a different allocation of investments. Yesterday is gone and we can't get it back.

John Galt

 

[Bob_Smith]

My (left handed, INTJ)...

Hey Unclemick! I'm also a left handed INTJ. And I almost always agree with, and enjoy your posts. Great minds (and left-handers) think alike!