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Is anyone aware of any alternative mechanical investment plans to simple time-based dollar coat averaging for moving a lump some of money into equities?
Maybe something that involves future investments based on market movement? Maybe a plan where one would invest smaller amounts as the market price rises and larger amounts as the market price falls?
M1 finance and motif investing are online brokers that allow automatic investing in a basket of equities. But I don't think they are able to adjust based on market conditions
Thanks for the links, Crash. Neither of these is quite what I was thinking. I was imagining something that would take a 100% agnostic view of market direction ( other than an assumption that prices will be higher a decade or more from now.) The intent would be to move a lump sum into the market with as little emotional upset, and as little risk of principal depreciation, as is possible.
There may be nothing better than straight dollar cost averaging, but I was wondering what other plans may be viable, or at least well known.
Maybe something where additional increments would be triggered not by an elapse of time, but by market movement.
@Ted@Kaspa I like the idea of Value averaging. Thank you. I may have re-invented the wheel, because in my ruminations I have thought of the same idea.
The problem arises when the value of the investment becaomes so large that you are unable to come up with the required amount. Therefore, I would modify it to require an investment up to a certain maximum amount only. Other than that, i think it's great.
I was imagining something that would take a 100% agnostic view of market direction ( other than an assumption that prices will be higher a decade or more from now.) The intent would be to move a lump sum into the market with as little emotional upset, and as little risk of principal depreciation, as is possible.
The holy grail: maximal return with minimal (dollar, emotional) risk.
Can't be done. If one wants to maximize expected return, one can invest 100% up front. If one wants to minimize nominal risk, one should never invest. For something in between, think about how much risk you're willing to accept for how much risk over various time periods. Something like those awful simplistic brokerage questionnaires: which would you prefer, a chance of 30% gain or 10% loss vs. a chance of 50% gain or 20% loss vs. ... Then find/develop a strategy that tracks your profile.
IMHO DCA is generally used as a rationale for people investing what they have, when they have it, as opposed to a way to invest a lump sum. When you have a lump sum, DCA doesn't tell you whether to invest 1/12 each month for 12 months, or 50% now and 50% next week, or ... But it does tell you that if you've got $100 to invest each month, do it. Same vagueness issue for value averaging.
What I find value averaging more interesting for is lump sum disinvestment. It's like the idea behind an immediate variable annuity or pseudo-annuity (managed payout fund). You target an "assumed investment return" rate and withdraw more if the investment overperforms and less if it underperforms. The mirror image of value averaging into an investment.
Comments
https://www.investopedia.com/terms/m/momentum_investing.asp
Or: https://www.investopedia.com/terms/q/quantfund.asp
(I own just one of these: TRP small-cap PRDSX.)
There may be nothing better than straight dollar cost averaging, but I was wondering what other plans may be viable, or at least well known.
Maybe something where additional increments would be triggered not by an elapse of time, but by market movement.
Here's and example I just cooked up.*** I make no claims that it is a good plan.*** I just made it up as an example.
An investor has $100,000 and he wishes to eventually have 90% invested in an S&P 500 index fund. He invests $10,000 today.
If/when his investment is worth $11,000 he invests an additional $9,000
If/when his original investment is worth $9,000 he invests an additional $11,000.
His investment is now worth $20,000.
If/when its value is $22,000, he invests an additional $9,000
If/when its value decreases to $18,000, he invests an additional $11,000
His investment is now worth either $31,000 or $29,000
(take each of these figures x1.1 and x0.9 to get the new points for investment of either $11,00 or $9,000)
and so on
Something along these lines is what I am looking for -- as an alternative to dollar cost averaging.
All I am asking for are alternative plans to DCA.
https://www.bogleheads.org/wiki/Value_averaging
I do not use it or know enough about pros/cons vs. dca or lump-sum.
Regards,
Ted
https://www.investopedia.com/articles/stocks/07/dcavsva.asp
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2008465
It's a 26 page paper, and I haven't read it -- but this is exactly the sort of thing I had in mind.
Derf
The problem arises when the value of the investment becaomes so large that you are unable to come up with the required amount. Therefore, I would modify it to require an investment up to a certain maximum amount only. Other than that, i think it's great.
Can't be done. If one wants to maximize expected return, one can invest 100% up front. If one wants to minimize nominal risk, one should never invest. For something in between, think about how much risk you're willing to accept for how much risk over various time periods. Something like those awful simplistic brokerage questionnaires: which would you prefer, a chance of 30% gain or 10% loss vs. a chance of 50% gain or 20% loss vs. ... Then find/develop a strategy that tracks your profile.
IMHO DCA is generally used as a rationale for people investing what they have, when they have it, as opposed to a way to invest a lump sum. When you have a lump sum, DCA doesn't tell you whether to invest 1/12 each month for 12 months, or 50% now and 50% next week, or ... But it does tell you that if you've got $100 to invest each month, do it. Same vagueness issue for value averaging.
What I find value averaging more interesting for is lump sum disinvestment. It's like the idea behind an immediate variable annuity or pseudo-annuity (managed payout fund). You target an "assumed investment return" rate and withdraw more if the investment overperforms and less if it underperforms. The mirror image of value averaging into an investment.