Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

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AssetClassJunkie
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Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by AssetClassJunkie »

Although rebalancing and dollar cost averaging (DCA) are discussed often, I've had trouble finding thoughts on a particular question: whether it's better to rebalance with each inflow, or DCA and wait for rebalancing. (Please forgive & direct appropriately if this is already discussed!) Let's ignore taxes for the purposes of the question. Take the following example 5-fund portfolio:

30% VTI | Total US Market
10% AVUV | US SCV (small cap value)
20% VXUS | Total Intl Market
25% BND | US Bond Market
15% BNDX | Intl Bond Market

For those like me* with regular contributions, I can see at least two approaches:
  • 1. DCA with periodic rebalancing. Here I would dollar cost average each paycheck, i.e., amounts contributed to each fund/ETF are exactly the fixed proportions dictated by my desired asset allocation. This is done without regard to what has happened to the proportions of my assets, UNLESS rebalancing is triggered by either a) a specific among of time has elapsed or b) once my allocation has deviated by some predetermined threshold. Example: I simply contribute $1,000 from my paycheck in the specified proportions as $300 VTI, $100 AVUV, $200 VXUS, $250 BND, and $150 BNDX.
  • 2. Rebalance with each inflow. Here I would determine how much money should go to each of my assets in order to bring it in line with my desired allocation. Amounts contributed to each fund/ETF therefore depend on the current values of each asset, every time I contribute. Example: suppose my portfolio of $10,000 is currently at $3123 VTI | $1100 AVUV | $2109 VXUS | $2400 BND | $1268 BNDX. Adding $1000 will bring the total up to $11,000, which if apportioned according to my portfolio would partition as $3300 VTI | $1100 AVUV | $2200 VXUS | $2750 BND | $1650 BNDX. To rebalance with inflows and achieve those desired amounts of each, I'd contribute my paycheck as $177 VTI, $0 AVUV, $91 VXUS, $350 BND, and $382 BNDX.
I can think of reasons for doing either. Focusing just on performance, I'm wondering which would be expected to perform better over the long term? I'm thinking option (1) would be expected do better because keeping the amount flowing to well-performing assets would take advantage of any momentum in the market, whereas option (2) would dictate contributing the smallest amount to whichever asset has performed best since the last contribution. On the other hand, if there's a very large drop in some asset, that might be precisely the time to purchase it, in which case (2) might end up performing better. But then again, if one added a stipulation to rebalance when some threshold deviation is met, approach (1) can be made to react to such drops on occasion.

Very grateful for any thoughts!

*35 years old, just beginning to accumulate, paid monthly and direct about 50% of each paycheck to my Roth, then HSA, then brokerage.
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retired@50
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by retired@50 »

AssetClassJunkie wrote: Wed May 15, 2024 4:12 am
Very grateful for any thoughts!
It sounds as if you're describing value averaging.

If you want to go to the trouble of altering the exact dollar amount of each inflow, then go for it. I certainly wouldn't consider it a mistake, but it doesn't really coincide with "simplicity" either.

Regards,
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by Hydromod »

AssetClassJunkie wrote: Wed May 15, 2024 4:12 am I can think of reasons for doing either. Focusing just on performance, I'm wondering which would be expected to perform better over the long term? I'm thinking option (1) would be expected do better because keeping the amount flowing to well-performing assets would take advantage of any momentum in the market, whereas option (2) would dictate contributing the smallest amount to whichever asset has performed best since the last contribution. On the other hand, if there's a very large drop in some asset, that might be precisely the time to purchase it, in which case (2) might end up performing better. But then again, if one added a stipulation to rebalance when some threshold deviation is met, approach (1) can be made to react to such drops on occasion.

Very grateful for any thoughts!
In essence, you are wondering about the performance of your periodic contributions between the time you contribute and the time that you rebalance your portfolio. The rest of the portfolio is unaffected by your decision regarding the contributions.

Presumably each of your contributions will be a small part of your portfolio after a few years. For example, a biweekly contribution would be about 4 percent of your portfolio after a year. What you do with that contribution won't make much of a difference unless you are rebalancing infrequently.

I would say that you should probably go with your desired allocation when taxes are not an issue.

When taxes are an issue, you might want to rebalance with the inflows in order to reduce rebalancing tax costs.

In a lifecycle approach, you might want to end up with 60/40 at retirement. In that case, you might want to contribute to solely equities for the first half of your investment period in order to give them the maximum time for compounding, then start building up bonds from scratch.

Different strokes for different folks.
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by Normchad »

I think you’re way over thinking this. There are dozens of approaches to this, and none is hugely right or hugely wrong. Here is what I did….

Send new money to whatever is “low at the time”. If my desired AA was 80/20, and I had drifted to 83/17, then all new investments go to bonds.

Most of the time, my new contributions were just set to whatever my target AA was. So if I wanted to be 80/20, I just invested all new money at 80/20, and things just kind kept in line.

Then, every January 1, I look at where my actual AA is. And I think hard about my desired AA, and if it’s still appropriate. And at that time, if things are off, I adjust all at once. Some years, when the stock market is booming, this meant selling $100K of stock and buying $100K of bonds. Which was honestly hard to stomach…..but when it’s off by that much, nothing you do with periodic investing will fix it.

And whatever you do, try to do all the fixing in your tax deferred accounts.
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by bertilak »

AssetClassJunkie wrote: Wed May 15, 2024 4:12 am Although rebalancing and dollar cost averaging (DCA) are discussed often, I've had trouble finding thoughts on a particular question: whether it's better to rebalance with each inflow, or DCA and wait for rebalancing.
Ideally, whenever cash is available (each inflow) you should invest it all in a way to maintain your portfolio's AA. This might get complicated if you need to take action to maintain your AA each and every inflow. (paycheck?)

Likely, the most practical way of doing this is to direct automatic paycheck investments at your desired AA rate. Every so often (quarterly, yearly, based on a rebalance band?) rebalance back to your desired AA.

If your inflows must go to some cash fund then consider that fund as the cash part of your AA. Give it a target allocation (with a wide rebalancing band) and rebalance it along with everything else.

BTW, none of this is DCA, which is one (complicated and slightly inefficient) way of dealing with a large windfall.
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makeitcount
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by makeitcount »

Go with option 1.
Keeping it simple will ensure it's a plan you can follow for the long term.
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by eigenperson »

AssetClassJunkie wrote: Wed May 15, 2024 4:12 amI can think of reasons for doing either. Focusing just on performance, I'm wondering which would be expected to perform better over the long term?
That depends on what you believe.

First, imagine your portfolio consists of a 50/50 mixture of two funds: stocks and bonds. Say you believe the stocks will return more than the bonds. If you use strategy 1, half your contributions will always go to stocks, which return more. But if you use strategy 2, eventually most of your contributions will go to bonds, the lower-returning asset. Your final portfolio will therefore be larger in strategy 1. It's important to ask: if you believe stocks will return more than bonds, why do you even own bonds? The answer is probably something like "lower volatility." Regardless of what your actual answer is, it might push you back toward strategy 2. But you asked to focus just on performance.

On the other hand, imagine your portfolio consists of a 50/50 mixture of domestic and international stocks. You believe they have the same expected returns, but there are uncorrelated random factors, so the actual returns will be different. In this case, the strategies perform equally.

Finally, imagine your portfolio consists of a 50/50 mixture of domestic and international stocks. Again, you believe they have the same expected returns, but this time you believe that the difference in performance is mean-reverting. In other words, you believe that domestic stocks can pull ahead of international, but once they get ahead, at that point international stocks will have a higher expected return. In this case strategy 2 will perform better, since it will have you contribute mostly to the asset that has fallen behind, and therefore has a higher expected return.

Personally, I don't think it matters. My actual practice is probably the most common one: I use strategy 1 for a long time, until, one day, I notice that my portfolio is way off my intended asset allocation. Then I think "gee, I'm way off my target allocation." Then I continue using strategy 1 anyway, because I'm lazy and my target allocation is just an arbitrary number.
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by AssetClassJunkie »

retired@50 wrote: Wed May 15, 2024 11:45 am It sounds as if you're describing value averaging.
Thank you so much! I may be wrong, but I think this may be distinct from value averaging. My read is:
  • (1) Dollar Cost Averaging: contribute fixed amounts to each asset each period. I've been a little lax by also using this to mean contributing fixed percentages (of some total amount contributed, which may fluctuate) each period. A fixed amount (or proportion of some total) is contributed each period, totally independent of how assets have performed. Allocation is corrected not via inflows, but periodically via rebalancing, which one can choose to do after a) a given amount of time, or b) a given deviation from the target allocation has occurred.
  • (2) Variable Inflows: this is what I described, where inflows are adjusted each period to result in (or move toward) the desired allocation. Here contributions and rebalancing are at least partially achieved together, because contributions do depend on how assets have performed. One could think of this as combining DCA and rebalancing.
  • (3) Value Averaging: this is by far the most complicated. One must estimate the long-term average return expected for each asset in one's portfolio, and use this to chart a 'value path' from some starting amount. For example, suppose an asset starts with $1000 at time 0 and is expected to grow 3% per quarter, and one wants to contribute $500 each quarter. In one common way of applying this technique, one would want the asset to be worth ($1000 + $500) * 1.03 = $1545 next quarter (value of the 'value path' at next time point). If it's worth less than $1545 when the next quarter arrives, one would contribute more to ensure it reaches $1545; if it's worth more, one would withhold the contribution or even sell to bring it down. I think this is the only technique in which the total amount of money contributed each period is subject to change based on performance. There could even be periods, if all assets do splendidly, where the method requires contributing nothing or selling from everything.
The me, because I don't have a windfall, and am contributing as I go with each paycheck, I think DCA and variable inflows may be the only practicable techniques. In other words, I don't have money lying around to contribute way more cash when the market tanks, and I'm not sure I want to refrain from putting my money into the market just because it does well. (I could of course define some threshold for rebalancing which would cause me to move lots of money into stocks — 'buy low' — in the event they really crash.) I think value averaging also has more 'degrees of freedom' in that one is introducing additional uncertainty through one's estimate of expected returns. For a portfolio with e.g. 9 stock index funds, one might even want to have a different expected return and value path for each (domestic vs. intl vs. emerging; total vs. scv vs. reits?), which introduces complications with maintaining asset allocation.

Just my thoughts, would love any feedback!
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by AssetClassJunkie »

Hydromod wrote: Wed May 15, 2024 12:09 pm Presumably each of your contributions will be a small part of your portfolio after a few years.

...

In a lifecycle approach, you might want to end up with 60/40 at retirement. In that case, you might want to contribute to solely equities for the first half of your investment period in order to give them the maximum time for compounding, then start building up bonds from scratch.

Different strokes for different folks.
Thanks for these great points! Indeed, this is probably an instance of a 'tiny portfolio problem' — with any luck, contributions will become infinitesimal relative to the total soon! :D In which case, the only implementable option will really be to contribute ~fixed amounts and rebalance periodically anyway. Still, something appeals to be about 'buying low' (i.e. whichever has performed poorest) by rebalancing with inflows — perhaps it could lead to real basis points of boost over the long term? But then again, in harnessing volatility, one might might sacrifice harnessing momentum. Since it seems a wash, maybe simplest is best.
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by AssetClassJunkie »

Normchad wrote: Wed May 15, 2024 12:29 pm Then, every January 1, I look at where my actual AA is. And I think hard about my desired AA, and if it’s still appropriate. And at that time, if things are off, I adjust all at once. Some years, when the stock market is booming, this meant selling $100K of stock and buying $100K of bonds. Which was honestly hard to stomach…..but when it’s off by that much, nothing you do with periodic investing will fix it.
Thanks for this great feedback! I think that fixed contributions and periodic rebalancing (whether once per year like you, once per two years, or when some threshold deviation is reached) is the way I will go!
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by AssetClassJunkie »

bertilak wrote: Wed May 15, 2024 12:41 pm Ideally, whenever cash is available (each inflow) you should invest it all in a way to maintain your portfolio's AA. This might get complicated if you need to take action to maintain your AA each and every inflow. (paycheck?)

Likely, the most practical way of doing this is to direct automatic paycheck investments at your desired AA rate. Every so often (quarterly, yearly, based on a rebalance band?) rebalance back to your desired AA.

If your inflows must go to some cash fund then consider that fund as the cash part of your AA. Give it a target allocation (with a wide rebalancing band) and rebalance it along with everything else.

BTW, none of this is DCA, which is one (complicated and slightly inefficient) way of dealing with a large windfall.
Thanks for these wonderful insights! I really like the idea of using a threshold / rebalancing band. I also heard Jim Dahle in a YouTube video say that historically, rebalancing once every 2 years or so may have been best for returns, if one chooses a time-based strategy.

I may well be wrong, but I was under the impression that DCA describes any instance in which one makes regular fixed contributions? For example, Malkiel's Random Walk Down Wall Street states "If, like most people, you will be building up your investment portfolio slowly over time with the accretion of yearly savings, you will be taking advantage of dollar-cost averaging." I took this to mean that it describes periodic fixed investments — whether it's of necessity (e.g. each paycheck like me) or choice (e.g. windfall is received but one doesn't want to lump sum into the market)? Would love to confirm whether that's a misunderstanding!
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by AssetClassJunkie »

makeitcount wrote: Wed May 15, 2024 4:45 pm Go with option 1.
Keeping it simple will ensure it's a plan you can follow for the long term.
Thank you! I think you're probably right :D plus it might be better for returns anyway!
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by AssetClassJunkie »

eigenperson wrote: Wed May 15, 2024 5:56 pm
AssetClassJunkie wrote: Wed May 15, 2024 4:12 amI can think of reasons for doing either. Focusing just on performance, I'm wondering which would be expected to perform better over the long term?
That depends on what you believe.

First, imagine your portfolio consists of a 50/50 mixture of two funds: stocks and bonds. Say you believe the stocks will return more than the bonds. If you use strategy 1, half your contributions will always go to stocks, which return more. But if you use strategy 2, eventually most of your contributions will go to bonds, the lower-returning asset. Your final portfolio will therefore be larger in strategy 1. It's important to ask: if you believe stocks will return more than bonds, why do you even own bonds? The answer is probably something like "lower volatility." Regardless of what your actual answer is, it might push you back toward strategy 2. But you asked to focus just on performance.

On the other hand, imagine your portfolio consists of a 50/50 mixture of domestic and international stocks. You believe they have the same expected returns, but there are uncorrelated random factors, so the actual returns will be different. In this case, the strategies perform equally.

Finally, imagine your portfolio consists of a 50/50 mixture of domestic and international stocks. Again, you believe they have the same expected returns, but this time you believe that the difference in performance is mean-reverting. In other words, you believe that domestic stocks can pull ahead of international, but once they get ahead, at that point international stocks will have a higher expected return. In this case strategy 2 will perform better, since it will have you contribute mostly to the asset that has fallen behind, and therefore has a higher expected return.

Personally, I don't think it matters. My actual practice is probably the most common one: I use strategy 1 for a long time, until, one day, I notice that my portfolio is way off my intended asset allocation. Then I think "gee, I'm way off my target allocation." Then I continue using strategy 1 anyway, because I'm lazy and my target allocation is just an arbitrary number.
Thank you so much for this brilliant explanation! When you say "half your contributions will always go to stocks, which return more" — I think that may be yet another aspect in addition to momentum. Using option (2) variable inflows, on the average month I would be contributing less to stocks and more to bonds. So not only would I be missing out on potential momentum in specific stock asset classes, I'd be missing out on market return as a whole (?). Another more complicated approach might be to contribute fixed amounts to stocks (e.g. 60%) and bonds (e.g. 40%), but then make variable the flows to particular funds within each asset class.

Regarding valuations, I suppose one could also simply tweak allocations to reflect one's beliefs about reversion to the mean, e.g. right now I might change my domestic/intl stock ratio from 65/35 to 55/45.

"Then I continue using strategy 1 anyway" — makes me think of Jack Bogle; I read somewhere he might not have believed in rebalancing?

At any rate, I think fixed contributions (with allocations tweaked based on my beliefs) is the way I will go!
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by JWooden10 »

Send new money to whatever is “low at the time”. If my desired AA was 80/20, and I had drifted to 83/17, then all new investments go to bonds.

Most of the time, my new contributions were just set to whatever my target AA was. So if I wanted to be 80/20, I just invested all new money at 80/20, and things just kind kept in line.

Then, every January 1, I look at where my actual AA is. And I think hard about my desired AA, and if it’s still appropriate. And at that time, if things are off, I adjust all at once. Some years, when the stock market is booming, this meant selling $100K of stock and buying $100K of bonds. Which was honestly hard to stomach…..but when it’s off by that much, nothing you do with periodic investing will fix it.

And whatever you do, try to do all the fixing in your tax deferred accounts.
I’m 25+ years into the accumulation phase and followed a path similar to the above quoted post. You’ll find that the larger your portfolio the less new contributions move the needle relative to AA.

There are lots of legit ways to rebalance your portfolio so don’t get too hung up on it. What will have a bigger impact at your stage is the % of your income you can invest and having the discipline to stick with a solid plan in times of market swings.
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by CyclingDuo »

AssetClassJunkie wrote: Wed May 15, 2024 4:12 am

30% VTI | Total US Market
10% AVUV | US SCV (small cap value)
20% VXUS | Total Intl Market
25% BND | US Bond Market
15% BNDX | Intl Bond Market

For those like me* with regular contributions, I can see at least two approaches:
  • 1. DCA with periodic rebalancing. Here I would dollar cost average each paycheck, i.e., amounts contributed to each fund/ETF are exactly the fixed proportions dictated by my desired asset allocation. This is done without regard to what has happened to the proportions of my assets, UNLESS rebalancing is triggered by either a) a specific among of time has elapsed or b) once my allocation has deviated by some predetermined threshold. Example: I simply contribute $1,000 from my paycheck in the specified proportions as $300 VTI, $100 AVUV, $200 VXUS, $250 BND, and $150 BNDX.
  • 2. Rebalance with each inflow. Here I would determine how much money should go to each of my assets in order to bring it in line with my desired allocation. Amounts contributed to each fund/ETF therefore depend on the current values of each asset, every time I contribute. Example: suppose my portfolio of $10,000 is currently at $3123 VTI | $1100 AVUV | $2109 VXUS | $2400 BND | $1268 BNDX. Adding $1000 will bring the total up to $11,000, which if apportioned according to my portfolio would partition as $3300 VTI | $1100 AVUV | $2200 VXUS | $2750 BND | $1650 BNDX. To rebalance with inflows and achieve those desired amounts of each, I'd contribute my paycheck as $177 VTI, $0 AVUV, $91 VXUS, $350 BND, and $382 BNDX.
The latter option (#2) is called dynamic rebalancing and is a feature of certain online brokerages (M1 uses it as an example). It is automatic, so the AA remains the same with each additional contribution as one uses the strategy of periodic investing out of each paycheck/or set recurring investment.

Rebalance over time through dynamic rebalancing
With auto-invest on, each deposit made goes towards the underweight Slices in your Portfolio to bring those Slices closer to their target percentages.

With this strategy, there are no taxable events as there are no sells in the account.

You can automate these deposits by setting up recurring deposits.

When removing cash from a portfolio, the algorithm identifies Slices that are most relatively overweight and removes money from those first.

https://help.m1.com/hc/en-us/articles/2 ... st-Account


For a taxable account, this particular feature prevents taxable events during accumulation. So your AA would remain as close to the percentages as possible with each recurring investment - all set on automatic pilot.

30% VTI | Total US Market
10% AVUV | US SCV (small cap value)
20% VXUS | Total Intl Market
25% BND | US Bond Market
15% BNDX | Intl Bond Market

In a retirement account with the dynamic rebalancing feature not being available - such as a 401k/403b/457b/IRA account - I would just use your (#1) first approach and manually rebalance once your rebalance bands have reached the level that would trigger a rebalance.

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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by dcabler »

AssetClassJunkie wrote: Wed May 15, 2024 4:12 am Although rebalancing and dollar cost averaging (DCA) are discussed often, I've had trouble finding thoughts on a particular question: whether it's better to rebalance with each inflow, or DCA and wait for rebalancing. (Please forgive & direct appropriately if this is already discussed!) Let's ignore taxes for the purposes of the question. Take the following example 5-fund portfolio:

30% VTI | Total US Market
10% AVUV | US SCV (small cap value)
20% VXUS | Total Intl Market
25% BND | US Bond Market
15% BNDX | Intl Bond Market

For those like me* with regular contributions, I can see at least two approaches:
  • 1. DCA with periodic rebalancing. Here I would dollar cost average each paycheck, i.e., amounts contributed to each fund/ETF are exactly the fixed proportions dictated by my desired asset allocation. This is done without regard to what has happened to the proportions of my assets, UNLESS rebalancing is triggered by either a) a specific among of time has elapsed or b) once my allocation has deviated by some predetermined threshold. Example: I simply contribute $1,000 from my paycheck in the specified proportions as $300 VTI, $100 AVUV, $200 VXUS, $250 BND, and $150 BNDX.
  • 2. Rebalance with each inflow. Here I would determine how much money should go to each of my assets in order to bring it in line with my desired allocation. Amounts contributed to each fund/ETF therefore depend on the current values of each asset, every time I contribute. Example: suppose my portfolio of $10,000 is currently at $3123 VTI | $1100 AVUV | $2109 VXUS | $2400 BND | $1268 BNDX. Adding $1000 will bring the total up to $11,000, which if apportioned according to my portfolio would partition as $3300 VTI | $1100 AVUV | $2200 VXUS | $2750 BND | $1650 BNDX. To rebalance with inflows and achieve those desired amounts of each, I'd contribute my paycheck as $177 VTI, $0 AVUV, $91 VXUS, $350 BND, and $382 BNDX.
I can think of reasons for doing either. Focusing just on performance, I'm wondering which would be expected to perform better over the long term? I'm thinking option (1) would be expected do better because keeping the amount flowing to well-performing assets would take advantage of any momentum in the market, whereas option (2) would dictate contributing the smallest amount to whichever asset has performed best since the last contribution. On the other hand, if there's a very large drop in some asset, that might be precisely the time to purchase it, in which case (2) might end up performing better. But then again, if one added a stipulation to rebalance when some threshold deviation is met, approach (1) can be made to react to such drops on occasion.

Very grateful for any thoughts!

*35 years old, just beginning to accumulate, paid monthly and direct about 50% of each paycheck to my Roth, then HSA, then brokerage.
First, you're not going to find any sort of consistent rebalancing bonus. Rebalancing is only to maintain the risk profile that you decided you'd have when you first came up with your AA. Things can swing pretty far from your desired AA before your returns start to be affected in any meaningful way.

Good 3 part series on this by siamond: https://www.bogleheads.org/blog/2020/08 ... us-part-1/

Because things can swing pretty far from your desired AA before noticeable changes in returns can happen, this implies that rebalancing doesn't need to be done all that often anyway. If that's the case, then simplicity rules.

And that would be #1 in your options above. It's easy and it's auto-pilot. Just deposit in proportion to your AA. Apply your rebalancing rules per your IPS (which I assume you have by now). Siamond's 3 part series above also discusses rebalancing rules as well. If your investments include both taxable and tax advantaged accounts which we would be rebalanced, then I'd suggest using one of the "band" approaches siamond discusses rather than a calendar approach. Over time, this can result in fewer taxable events due to rebalancing.

Cheers
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

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When I had new money coming in back in the day I directed it to lagging sectors so I very rarely sold anything for rebalancing.
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by seajay »

placeholder wrote: Fri May 17, 2024 12:43 am When I had new money coming in back in the day I directed it to lagging sectors so I very rarely sold anything for rebalancing.
Ditto, and now out of the day :) (drawdown/retirement) each month I draw from the leading.
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by exodusNH »

AssetClassJunkie wrote: Wed May 15, 2024 4:12 am Although rebalancing and dollar cost averaging (DCA) are discussed often, I've had trouble finding thoughts on a particular question: whether it's better to rebalance with each inflow, or DCA and wait for rebalancing. (Please forgive & direct appropriately if this is already discussed!) Let's ignore taxes for the purposes of the question. Take the following example 5-fund portfolio:
I contribute at my desired allocation and rebalance periodically.

I haven't had to rebalance in a couple of years even though my contributions are small relative to my balance.

If you're just starting out, your new contributions will have more of an effect and so contributing at your desired allocation will naturally nudge you to the desired allocation.

I target 80/20 and don't fret if it moves to 78/22 or 82/18. Regular market movements cause that level of shift.
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by AssetClassJunkie »

CyclingDuo wrote: Thu May 16, 2024 5:28 am The latter option (#2) is called dynamic rebalancing and is a feature of certain online brokerages (M1 uses it as an example). It is automatic, so the AA remains the same with each additional contribution as one uses the strategy of periodic investing out of each paycheck/or set recurring investment.
Thank you so much, 'dynamic rebalancing' is a very useful term! Wondering, does it always mean via inflows?
“The best criticism of the bad is the practice of the better.” —Richard Rohr
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Re: Rebalance with Every Inflow vs. Dollar Cost Average with Periodic Rebalancing

Post by AssetClassJunkie »

dcabler wrote: Thu May 16, 2024 5:45 am Good 3 part series on this by siamond: https://www.bogleheads.org/blog/2020/08 ... us-part-1/
Thank you so much for sharing this tremendous resource! Indeed those results do seem to suggest little if any consistent benefit. Given its elusiveness, it seems just plain old fixed-proportion DCA, with waiting as long as comfortable between rebalancing, is the best bet!
“The best criticism of the bad is the practice of the better.” —Richard Rohr
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