Value Averagers - How much dry powder you got left?

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oneleaf
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Value Averagers - How much dry powder you got left?

Post by oneleaf »

I know there are a few Value Averagers in this forum (i'm one of them). Last year and a half, I accumulated a lot of cash as the markets kept going up and up.

I'm curious to hear if the other Value Averagers on this forum are keeping up with their "value path" with the current downturn? Since December, I have been taking chunks of my cash reserves and putting it into the market (did another major chunk this week). I think I should be able to keep up with my value path for another 10% decline or so, after which, the value path may finally experience a little bump.

It looks like this kind of volatile market works really well with value averaging.
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gbs
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Post by gbs »

I have invested only 1/3 of the amount I usually do over last year mostly maxed out 401k's and Roth. Recently my value path has flat lined.

Image

I can't stay on the path due to portfolio size and the fact that I started VA about 18 months ago.

I can keep it flat-lined though for another 20% drop from this point. I am gradually increasing the investment amounts as the market is going down. Double the amount I invest for every 10% drop in portfolio size.

Regards, gbs
Eric White
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Finally close to target asset allocation; VAing soon

Post by Eric White »

I finally got all our accounts close to my target asset allocation. I expect to start a value averaging process soon.

I read the Value Averaging book but am a little unclear about how to properly set my initial cash level. Any rules of thumb or references you guys can give me? I've been worried about how to PLAN this since I'm early in accumulation and do not have a larged allocation to fixed as a result yet. It seems like you're screwed at the beginning because of a low fixed allocation (a.k.a. not much powder to start) and it seems like you're also screwed at the end because of the large swings inherent in a large portfolio (a.k.a. not enough powder to fight the whole Spanish armada).

Thanks!
-Eric White
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Post by diasurfer »

Just curious gbs, is the magenta line based on what you expect the market to do, or your growth goals, or both?
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gbs
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Post by gbs »

diasurfer wrote:Just curious gbs, is the magenta line based on what you expect the market to do, or your growth goals, or both?
Both: includes expected growth rate (slightly on conservative side for my AA) + periodic monthly investments.

Example: start with a $100K portfolio assume 8% per year growth and $1K per month periodic investment and you have your value path.

Regards, gbs
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oneleaf
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Post by oneleaf »

gbs,
cool chart! I wish I had kept track of my portfolio value on a monthly basis. Might start doing it now.

Eric White,
I started off with about 5% of portfolio value in cash. Over the subsequent year or so, due to high portfolio growth, my cash accumulated to slightly over 10% of portfolio size.

I use VA against my entire portfolio (which is around 60/40 equities/bonds). Due to high equity returns in 2006 and early 2007, I put almost all of my money into cash reserves and TIPS/bonds. Second half of 2007, bonds started kicking butt, which actually kept me from having to use too much of my cash reserves (as it held up the portfolio so as not to go too far below the value path). It wasn't until December (last month) that I started injecting large cash into my portfolio, all of which was pumped into small-caps, mid-cap value, and REIT's. So far this month, I have continued pumping money into all asset classes (international, domestic large caps, etc.) as all equity classes have been going down.

Experiences will be vary depending on when you started. Obviously if I started VA'ing in spring of 2007 with a 5% cash reserve, i would have long used it up, and my portfolio would have flatlined by now. But since I had a good year of solid above-average returns, my cash built up.

VA has been a very nice strategy for me. I find it suitable to my personality as it gives me slightly more control over risk than simply throwing money into my portfolio and rebalancing.
INDUBITABLY
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Post by INDUBITABLY »

Well, while we're on the topic, I would like to toss out a few questions on VA. I haven't been able to get my hands on the book yet, but I have read the Marshall paper on VA and its superiority to DCA. Here are my questions:
  • * What sort of growth rate do you set for your portfolio?
    * What % of your investment money do you initially invest in the market?
    * Doesn't holding all the excess cash start to drag on your investment returns?
Right now, I'm trying to figure out some way I can combine VA with the technique recently outlined in the opportunistic rebalancing paper posted here a few days ago.
Last edited by INDUBITABLY on Tue Feb 26, 2008 11:30 am, edited 1 time in total.
Eric White
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5% cash initial starting point

Post by Eric White »

oneleaf,

Thanks for your data point of 5% starting cash. I actually targeted that in my AA, so I hope I'm ready...

Now I just need to setup the Excel file for tracking and execution. I'll have to see if the file provided with the book is very easily expandable for multiple accounts with slice-n-dice portfolios. Any advice is appreciated.

Thanks again!
-Eric
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Post by oneleaf »

Indubitably,
1. Growth rate is estimated. That in itself is its own category and beyond the scope of VA.
2. I did not initially start with VA, so I am using it with my income stream (i'm working full time). All I did was let cash pile up to about 5% of my portfolio before I started VA. The author explains that VA is not only for investing a large windfall but can be used by an accumulator as an ongoing strategy.
3. In some cases, cash will be a drag. But that is ok with me, because I am also taking less risk (larger cash holding equates to a lower equity allocation). Think of it as a systematic way of taking less risk when you are ahead of your goals. The goal is not to maximize returns but to control risk.

Eric White,
I treat my entire slice-n-dice portfolio as if it is one mutual fund. So I just use the VA spreadsheet pretty much as-is, and simply track the value of my portfolio. When I need to inject money (when the entire portfolio is below target), it is injected into my entire portfolio. Where it goes specifically depends on my asset allocation, but at that point, the VA strategy doesn't care, because all it is taking care of is injecting cash away from the cash account into the "portfolio".
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Got it!

Post by Eric White »

oneleaf,

Got it. That makes a lot of sense. I was dreading preparing that monster of a spreadsheet that implemented both VA and AA rebalancing. Make the AA rebalancing static and inject cash per the VA path requirements.

I need to update my contribution definitions next. Thanks again!

Cheers,
Eric
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Post by czeckers »

My experience has been similar to Oneleaf's over the past year. Cash building up early on. I have a large chunk of international that has kept the portfolio up so have been increasing cash throughout the year until December. Now am at about 9% cash but will likely end up injecting most of it on Feb 1st if things keep at the current rate. I too treat the portfolio as one large fund, with new money and the cash injection going to reset the AA every month... mostly going to SV, REITS lately. It fits my style too.
The Espresso portfolio: | | 20% US TSM, 20% Small Value, 10% US REIT, 10% Dev Int'l, 10% EM, 10% Commodities, 20% Inter-term US Treas | | "A journey of a thousand miles begins with a single step."
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Post by Petrocelli »

My side account was about 27% at the end of last year. I added some cash to my portfolio recently, so the side account is now at about 22%.

I value average quarterly, and expect to add more cash on April 1, 2008.

[Edited to correct numbers.]
Last edited by Petrocelli on Fri Jan 18, 2008 9:23 pm, edited 1 time in total.
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matt
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Post by matt »

Thank you, GBS.

I was one of several (along with Travis Morien, I believe) to have pointed out in some of the Morningstar discussions on Value Averaging (and, similarly, Stein & DeMuth's market timing system) that these systems do not offer the excess returns claimed by the authors. The reason is now shown ever so clearly in GBS's chart: the only way for GBS to stay in the value path right now would be to apply leverage.

Edelson and Stein & DeMuth calculated the returns of the strategies only on the money invested in equities and found that higher returns could be achieved than buy and hold. They did not, however, account for the fact that sometimes the investor simply does not have the money to keep buying on the way down, especially if the value of the portfolio is substantially larger than the new money. They did not apply leverage costs in their calculations.

The way to make sure you have the money, you would need to set aside a very large cash position which creates a drag on overall portfolio performance.

There are other problems, such as the arbitrary nature of your selected return. The market doesn't know or care what number you choose and its returns will be whatever they will be, meaning you may end up either chronically under-invested (if you shoot to low with your number) or fully invested at all times (if you shoot too high).
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GBS

Post by Petrocelli »

Not to get too far off-topic, but how do you insert a chart like that in to a post?
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gbs
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Re: GBS

Post by gbs »

Petrocelli wrote:Not to get too far off-topic, but how do you insert a chart like that in to a post?
Petro see this:

http://www.diehards.org/forum/faq.php#24

You upload an image with tinypic (google it) and then place the link between IMG tags.

Regards, gbs
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market timer
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Post by market timer »

For those Value Averagers with bonds, you should consider keeping equity exposure on the value average path by selling bonds and buying stocks. In fact, use any excuse to sell bonds and buy stocks that you can find.
Trebor
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Any follow up?

Post by Trebor »

How is the "value average" crowd doing? Have they been able to stay the course? While I don't use the technique, I find it intersting. Has it been more difficult in a down trend?
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oneleaf
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Re: Any follow up?

Post by oneleaf »

Trebor wrote:How is the "value average" crowd doing? Have they been able to stay the course? While I don't use the technique, I find it intersting. Has it been more difficult in a down trend?
Still staying the course, and met my March quarterly contribution.

My ability to meet the necessary contributions to maintain the path has been a result of:
- the VA technique: for the past couple of years, I built up quite a bit of money in my MM account as equity returns exceeded my value-path. So that money can finally be put to good use.
- a flexible savings rate. I simply saved more this past half a year due to the continued down-market.

As far as difficulty, I have not had any problems with it. I have been looking forward to finally "using" VA. It is actually harder to VA during a strong bull market, as you keep having to direct savings into boring money-markets.
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Post by Phil DeMuth »

matt wrote: Stein & DeMuth calculated the returns of the strategies only on the money invested in equities and found that higher returns could be achieved than buy and hold. They did not, however, account for the fact that sometimes the investor simply does not have the money to keep buying on the way down, especially if the value of the portfolio is substantially larger than the new money. They did not apply leverage costs in their calculations.

The way to make sure you have the money, you would need to set aside a very large cash position which creates a drag on overall portfolio performance.
This is not the Stein & DeMuth position. Emphatically, there is no Stein & DeMuth "system." The demonstrations in the Yes, You Can Time the Market were intended to show that valuations are relevant to investment decisions, and were not intended as a market-beating money machine to be mechanically followed. Note that we say that the conservative investor should always remain highly diversified both among and within asset classes (p.139) and that one should always strive to have holdings in each major asset class, even at the risk of overpaying (p. 154). Our approach might be more fairly described as a guide to tactical asset allocation, along exactly the same lines presented in Bogle on Mutual Funds, pp.244-252.

RE: borrowing costs. In some cases, we had investors buying when the market was either high or low by common metrics, with no way of knowing in advance where these years or months would fall. It does not seem like this gives an unfair advantage to either side. I'm not sure how or why borrowing costs would be assigned in this illustration, but certainly one would want to apply them to all parties equally.

In other cases, we had a dollar-cost-averager buy monthly or yearly, and the market timer buy only when the market is low, but invest 2X as much on these occasions (on the presumption that the market would be below average about half of the time). There seems to be no inherent borrowing advantage here. In practice, the market timer found fewer than half the opportunities suitable for investing, and so ended up spending significantly less money than the dollar-cost averager. Nevertheless, he wound up with more money, less risk, and dramatically better total long-term returns, even before adding back the interest from the money he kept in the bank (or, possibly, the bond market) -- see p. 28, for example.

Thanks for giving me an opportunity to clarify some common misconceptions about this book, which are undoubtedly my fault for not being sufficiently clear in the first place.
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