Wednesday, October 25, 2006

How to move into a new asset allocation model

When discussing my experience with my investment advisor with a friend, he asked me if the model was different from my current model - I said it was.
He then asked me how I would move assets from my old model to the new one. Especially into asset classes I am not currently invested.
It was a very good question.
Would you move everything all at once, or would you dollar cost average the transition?
As I have not reached this point with my advisor, I'm curious what others have read, heard and done. Please share.


Anonymous said...

This topic comes up frequently on the Vanguard Diehards forum. If you are a true believer in a particular asset class and plan to hold it for the long term, it doesn't really matter whether you lump sum or DCA in the long run (there have been some academic studies suggesting that lump sum might actually produce better results). The answer for most people depends on how they would react if they lump summed and the asset tanked. If that would cause you to abandon the asset class, you will never make up the loss over the long run, and thus you are better off with DCA. If you have the stomach to stick it out, lump sum is good for you.

makingourway said...

Great and very interesting point about DCA and lump sum.
I suppose one might also argue that as the money is already invested in the market - doing lump sum wouldn't really be a true lump sum.
On the other hand, I would be changing the investments significantly.
One thought might be to DCA ver 6-12 months, but would that really make a difference?

ps thanks for the comments. you've got a great blog. loved the dialogue between the man and the woman.

Anonymous said...

Depends if it is a taxable account and CGT implications. Certainly makes sense to direct new savings to the under-represented asset classes...

makingourway said...

moom, dear friend, what are CGT implications?

YeOleImposter said...

Taxes would have a lot to do with the answer. If they were of no consequence I would move the money right away out of the old asset class.

I have a question at Money & Investing Dogberry Patch asking if the cash in a Emergency Fund should be counted as part of the 'Bond' portfolio or if it should be invested somehow.


makingourway said...


I have a feeling that people under invest their emergency funds. Often credit cards and lines of credit are not considered as part of their emergency funds when they really are.
The more I think about it, the more credit can be used to reduce the size of emergency funds. Non-emergency investments can be sold to cover short term emergency debt.
Perhaps the key issue is deciding if your investment portfolio has sufficient assets that could be liquidated quickly compared to their overall volatility.
I have to do this assessment on my own.