Am I talking about market timing or dollar cost averaging (or both?)

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
Mursili
Posts: 103
Joined: Tue May 15, 2012 8:32 pm

Am I talking about market timing or dollar cost averaging (or both?)

Post by Mursili » Sun Jun 24, 2018 6:27 pm

I recently reviewed my IPS and decided to greatly simplify my holdings and to update my asset allocation to reflect the nearness of retirement. My goal is a 60/40 (equities/fixed income) allocation with approximately 30% of equities as international. I am at this allocation today in equities with FSTVX and FSGDX. I am asking for input on the fixed income allocation.

Right now the vast majority of my fixed income is in a stable value fund in my employers 401(k). This has been purchased over the course of the last several years since I devoted all my new contributions to this fund since I was concerned about what bonds were doing – or going to do. That is all water under the bridge now. I have seen the light and believe that I should have holding in actual bond funds since they should be anti-correlated with equities. I am now directing my new contributions into FBIDX. My belief that all of my fixed income should be in FBIDX is not immediately driving me to pull the trigger and move all of the funds in the stable value fund into the bond fund. I am not certain why. So, I am considering creating a plan to move a fraction of the stable value fund into the bond fund over time.

Now here is where I talk about predicting the future….

I would like to have a traditional 60/40 portfolio, but think I can do “better” over the short term somewhere in the back of my mind. Instead of moving all of the stable value into FBIDX immediately, I will create a model and say something like this. “Since the Fed is going to be raising interest rates in the near future – say two more this year and three next year – then I should space my transfer of funds over that time frame.” I figure that the Fed will eventually stop raising rates, but obviously I have no idea when that will be, but it seems to me that a Fed funds rate of 6% is unlikely in the near future. I will say that there are about 18 months until then and just make sure that I move about 5% from stable value into FBIDX each month.

So am I market timing or dollar cost averaging (or both or neither)? Should I just make the switch immediately?

Thanks for any thoughts.
When it comes to havoc, no one wreaks like me! - Dr. Heinz Doofenshmirtz

User avatar
vineviz
Posts: 5391
Joined: Tue May 15, 2018 1:55 pm

Re: Am I talking about market timing or dollar cost averaging (or both?)

Post by vineviz » Sun Jun 24, 2018 7:35 pm

You’re market timing. Any investment decision that’s based on, or depdendent on, some predicted future action is likely to be some variation on market timing.

If the new allocation is good enough for next year, it’s good enough for tomorrow.

On the other hand, if the new allocation is freaking you out then ask yourself if your risk tolerance is really what you think it is.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

alex_686
Posts: 5155
Joined: Mon Feb 09, 2015 2:39 pm

Re: Am I talking about market timing or dollar cost averaging (or both?)

Post by alex_686 » Sun Jun 24, 2018 7:51 pm

Mursili wrote:
Sun Jun 24, 2018 6:27 pm
“Since the Fed is going to be raising interest rates in the near future – say two more this year and three next year – then I should space my transfer of funds over that time frame.”
I will say they will be raising rates 1.5 this year.
http://www.cmegroup.com/trading/interes ... -fomc.html

The great thing about bonds is that they are math driven and have many different options and futures to chose from. This means it is pretty easy to figure out exactly what market expectations are because they are already priced into the bond market.

If your opinion is mainstream - and it is - then there is no real reason to delay. Those increases are already baked in. Only if you have a strong opinion that is contrarian to the market does it makes sense to bet against the market. In either case it is market timing.

A related question - what is your argument against stable value funds? I am kind of partial to them, in particular in a raising interest rate environment. It depends on the plan of course.

User avatar
sometimesinvestor
Posts: 1250
Joined: Wed May 13, 2009 6:54 am

Re: Am I talking about market timing or dollar cost averaging (or both?)

Post by sometimesinvestor » Sun Jun 24, 2018 7:53 pm

I think your plan is fine and has outperformed all fixed income in bonds over the last year but possibly not over longer periods. Who cares whether it is market timing or dollar cost averaging. Follow your heart and just do it. Worse case you do a little bit worse than a move today . Best case you do somewhat better . The important thing is if you stick to your plan will you have no regrets. Even Buffett makes mistakes.IF you are old enough to remember Disney's Davey Crockett or even if you are not follow his guidance,"Be sure you are right than go ahead. If in doubt follow the board consensus though I suspect a complete poll would show 33% move to bonds now 33% move gradually into bonds and 33% I have no idea what will turn out best.

User avatar
Topic Author
Mursili
Posts: 103
Joined: Tue May 15, 2012 8:32 pm

Re: Am I talking about market timing or dollar cost averaging (or both?)

Post by Mursili » Mon Jun 25, 2018 1:02 am

alex_686 wrote:
Sun Jun 24, 2018 7:51 pm
A related question - what is your argument against stable value funds? I am kind of partial to them, in particular in a raising interest rate environment. It depends on the plan of course.
I guess I would have two arguments against a stable value fund. I may very well not be thinking about this correctly, so please correct me if I am.

The first is that it's value does not fluctuate like a bonds. One value of bonds should be the fact that their values are anti-correlated with equities. When one goes down the other often goes up. This is why the equity/bond split makes so much sense. Stable values funds don't seem to do that.

Second is one of liquidity. In a black swan kind of event, I am not sure that the various counter-parties' agreements associated with a stable value fund will be able to be met.

Thanks for all of the information.
When it comes to havoc, no one wreaks like me! - Dr. Heinz Doofenshmirtz

alex_686
Posts: 5155
Joined: Mon Feb 09, 2015 2:39 pm

Re: Am I talking about market timing or dollar cost averaging (or both?)

Post by alex_686 » Mon Jun 25, 2018 9:02 am

Mursili wrote:
Mon Jun 25, 2018 1:02 am
I guess I would have two arguments against a stable value fund. I may very well not be thinking about this correctly, so please correct me if I am.

The first is that it's value does not fluctuate like a bonds. One value of bonds should be the fact that their values are anti-correlated with equities. When one goes down the other often goes up. This is why the equity/bond split makes so much sense. Stable values funds don't seem to do that.

Second is one of liquidity. In a black swan kind of event, I am not sure that the various counter-parties' agreements associated with a stable value fund will be able to be met.

Thanks for all of the information.
I think I can know the first argument away. Stocks and bonds have a positive correlation or around .4 to .6. In the world of investments it is very hard to find anything with a lower correlation, let alone a negative one. I would think that a stable bond fund would have a even lower correlation than a bond fund but I guess it would depend on the stable value fund. 2 more points here. Anything with a correlation of less than 1 adds diversification value. Also, we don't really care about upwards volatility and correlation, just downwards.

I think the second argument is wrong as well. I would think that with the insurance and corporate backstop behind the fund it would be even more robust than bonds. Stable funds did very well in 2008. However there is nuance to this argument so I will leave it to your opinion.

I personally think the best argument against stable value funds is its lower expected returns than against a typical bond fund.

dbr
Posts: 31308
Joined: Sun Mar 04, 2007 9:50 am

Re: Am I talking about market timing or dollar cost averaging (or both?)

Post by dbr » Mon Jun 25, 2018 10:13 am

The presumption that bond funds will be anti-correlated with stocks is wrong. Stock/bond correlations are not large on average and vary over time, positive, negative, or zero. You are overthinking to move from a stable value fund to bond funds for this reason. Note even if bond funds were anti-correlated with stocks it does not help because the volatility is much less. There may be just a bit of a game there to hold long bonds with a high stock portfolio, but even then it is a reach.

User avatar
Topic Author
Mursili
Posts: 103
Joined: Tue May 15, 2012 8:32 pm

Re: Am I talking about market timing or dollar cost averaging (or both?)

Post by Mursili » Mon Jun 25, 2018 10:44 am

Thanks for everyone's input. There is a bit for me to think about here. I am glad that I am taking this slowly.
When it comes to havoc, no one wreaks like me! - Dr. Heinz Doofenshmirtz

User avatar
Earl Lemongrab
Posts: 7270
Joined: Tue Jun 10, 2014 1:14 am

Re: Am I talking about market timing or dollar cost averaging (or both?)

Post by Earl Lemongrab » Mon Jun 25, 2018 2:39 pm

What is the current rate on the stable value? That's a big factor for me on using it.

When I devised my portfolio in 2007, I selected 50/50 bond index and stable value. My theory was that if rates went up significantly then the bond shares would drop in price and their yield go up. I would rebalance money from stable to pick up cheaper shares. What's happened in practice is that there has been little difference between the two. The bond index has been a bit more volatile of course. It's trailing the stable value by around 1.5%, most of which has happened recently.

The Megacorp stable value has a 2nd quarter rate of 2.64%. It's usually close to the TSP G Fund rate. That's at 2.875% this month, so I suspect that my fund will go up a bit next month.

User avatar
Topic Author
Mursili
Posts: 103
Joined: Tue May 15, 2012 8:32 pm

Re: Am I talking about market timing or dollar cost averaging (or both?)

Post by Mursili » Mon Jun 25, 2018 4:47 pm

...That is a good question.

I am looking at what information I can find about this stable value fund. It says things like "calendar-year total returns" were 1.91% for 2017 and have been 0.91% for 2018 as of 5/31/2018. It also says that "average annual total returns" as of 5/31/2018 are 2.10%. These two numbers do not seem to be consistent with each other, but both seem to me to be consistent with returns below 2%.

It also has, under "performance" YTD(Daily) (as of 6/22/2018) of +1.06%.

I have never been completely sure of what this fund is yielding at any given moment. That is also a reason why I would like to go to something that is better documented - like FBIDX.
When it comes to havoc, no one wreaks like me! - Dr. Heinz Doofenshmirtz

livesoft
Posts: 69615
Joined: Thu Mar 01, 2007 8:00 pm

Re: Am I talking about market timing or dollar cost averaging (or both?)

Post by livesoft » Mon Jun 25, 2018 5:00 pm

Your stable value fund has outperformed FBIDX in 2018 and I think over the past 12 months. That's not to say that FBIDX did not outperform the stable value fund prior to that.

Lots of people on this forum invest in fixed income investments that are not Total US Bond Index funds. Examples are CDs, TIAA traditional annuity, stable value funds, other bond funds such as GNMA fund and short-term bond funds, as well as Treasury bills, notes, and bonds, plus some other things.

I would not get too wrapped up in having one's fixed income 100% in a Total US Bond Index fund.
Wiki This signature message sponsored by sscritic: Learn to fish.

User avatar
Earl Lemongrab
Posts: 7270
Joined: Tue Jun 10, 2014 1:14 am

Re: Am I talking about market timing or dollar cost averaging (or both?)

Post by Earl Lemongrab » Mon Jun 25, 2018 8:06 pm

For what it's worth, here's the performance data Megacorp provides for the Bond Index and Stable Value:

Code: Select all

Fund Name      As of      YTD   1 Mon  3 Mon  12 Mon  3 Year  5 Year
Bond Index  06/22/2018  -1.93%  0.45%  0.03%  -1.29%   1.62%   2.25%
Stable Val  06/22/2018   1.23%  0.21%  0.65%   2.47%   2.28%   2.19%
There are also values for 10 years, but that's as of 3/31/2018.
BI: 3.64%
SV: 2.72%

Post Reply