Please critique my asset allocation strategy: New accruals + buy the monthly dip

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Topic Author
revhappy
Posts: 266
Joined: Sat Jul 21, 2018 10:09 am
Location: Singapore

Please critique my asset allocation strategy: New accruals + buy the monthly dip

Post by revhappy »

Hello guys,

My current allocation is 40% and I have never had an allocation greater than that. I am pretty much FI, 42 years old, have about a USD1m in networth and my retirement plan is in a low income low cost country; India. So USD1m as long as I dont screw up with my investment decision, I am all set for life.

Now most of my networth has been made by sheer hardwork of high savings rate and I didnt really benefit much from the stock market bullrun over the last couple of decades. Now my aim is not to grow it very fast, but rather to be able to beat inflation and conserve my purchasing power. I have done some reading about asset allocation and 4% withdrawal rule and the book The four pillars of investing so I know how that whole thing works.

Yet, since I didnt really enjoy the whole bullrun on the upside, I am hesitant to deploy a huge amount of my dry powder into the markets at the current valuations.

I am currently comfortable with 40% equity allocation and would like to grow it steadily and I am not sure what % is comfortable for my risk tolerance, whether 50% or 60% or more.

So, I have devised a plan to steadily increase my asset allocation to equities, by deploying any new savings entirely to equities and any growth/accrual in my bond fund portfolio. So I will prevent my bond fund portfolio from growing any further in absolute terms. Also I want to implement a monthly buy the dip strategy. i.e. as of the end of the previous month, during the current month if markets dip, I topup the dip amount from my bond fund portfolio +new savings+ bond fund accruals. At the end of that month, if my equities grow, that will be the base for the next month.

For example Oct end my equities is 100k, if markets fall say 5%, I add back 5k from my bond funds + new savings + gains from bond funds.
Then lets say Nov end market goes up 10% and now lets say my equities is 120k. I use this as the new equity base for December.

So anytime markets rise, I keep allocating my usual new savings + bond fund accruals, but if markets fall, in addition to my usual allocation, I also topup to maintain the previous month end level.

I feel this is a sustainable way of growing my asset allocation steadily, forever. Would like your help in finding out if there are any pitfalls in this strategy.
bloom2708
Posts: 9855
Joined: Wed Apr 02, 2014 2:08 pm

Re: Please critique my asset allocation strategy: New accruals + buy the monthly dip

Post by bloom2708 »

Seems too complicated.

If you have dry powder then you are not 40% stocks. 40% + 60% + dry powder.

I would invest the extra money and keep a 40% stock allocation.

Use 5% rebalancing bands. 10% if there is a large dip.
Topic Author
revhappy
Posts: 266
Joined: Sat Jul 21, 2018 10:09 am
Location: Singapore

Re: Please critique my asset allocation strategy: New accruals + buy the monthly dip

Post by revhappy »

bloom2708 wrote: Wed Oct 27, 2021 8:26 pm Seems too complicated.

If you have dry powder then you are not 40% stocks. 40% + 60% + dry powder.

I would invest the extra money and keep a 40% stock allocation.

Use 5% rebalancing bands. 10% if there is a large dip.
Thanks for you reply.
Sorry for using the term dry powder. It is the same thing, cash, bonds, dry powder, basically safe assets cash like and their real return is 0.

Also please ignore the complexity. I monitor my networth daily in google sheet and I have an elaborate report of forecast v/s actual and I can plug in the forecast values and I get the actuals automatically and it shows me the difference and shortfall that needs to be deployed.

So please do not focus so much on the semantics. I am interested more on how my strategy is going to work eventually. Keeping 40% in risk assets as starting point and then increasing my allocation to equities steadily vs doing a cold turkey 50:50 allocation and staying there.
cacophony
Posts: 1354
Joined: Tue Oct 16, 2007 9:12 pm

Re: Please critique my asset allocation strategy: New accruals + buy the monthly dip

Post by cacophony »

revhappy wrote: Thu Oct 28, 2021 7:59 pm
bloom2708 wrote: Wed Oct 27, 2021 8:26 pm Seems too complicated.

If you have dry powder then you are not 40% stocks. 40% + 60% + dry powder.

I would invest the extra money and keep a 40% stock allocation.

Use 5% rebalancing bands. 10% if there is a large dip.
Thanks for you reply.
Sorry for using the term dry powder. It is the same thing, cash, bonds, dry powder, basically safe assets cash like and their real return is 0.

Also please ignore the complexity. I monitor my networth daily in google sheet and I have an elaborate report of forecast v/s actual and I can plug in the forecast values and I get the actuals automatically and it shows me the difference and shortfall that needs to be deployed.

So please do not focus so much on the semantics. I am interesting more on how my strategy is going to work eventually. Keeping 40% in risk assets as starting point and then increasing my allocation to equities steadily vs doing a cold turkey 50:50 allocation and staying there.
You're essentially asking a variation of the question of whether it's better to dollar cost average (DCA) or lump sum. Based on past market data, lump sum is going to do better on average. But if you're interested in a more aggressive asset allocation and you're very wary of losses on newly deployed funds, then doing DCA is perfectly reasonable. Just pick a time period that's not too long and stick to it. I'd try to avoid overcomplicating the plan. "Buying the dip" may sound good in theory but it rarely seems to work out the way you want.
Topic Author
revhappy
Posts: 266
Joined: Sat Jul 21, 2018 10:09 am
Location: Singapore

Re: Please critique my asset allocation strategy: New accruals + buy the monthly dip

Post by revhappy »

cacophony wrote: Thu Oct 28, 2021 8:12 pm You're essentially asking a variation of the question of whether it's better to dollar cost average (DCA) or lump sum. Based on past market data, lump sum is going to do better on average. But if you're interested in a more aggressive asset allocation and you're very wary of losses on newly deployed funds, then doing DCA is perfectly reasonable. Just pick a time period that's not too long and stick to it. I'd try to avoid overcomplicating the plan. "Buying the dip" may sound good in theory but it rarely seems to work out the way you want.
Thanks, I am not really a fan of the "Age in bonds" allocation method. So it is not like I want to reach a particular allocation and then maintain it. I am more of the belief that after you have a bond floor any extra income you get can go to equities. So mine is a safety 1st approach. I have the safety in place now and now I dont mind increasing my equity allocation to as much as it can go, depending on the markets and my savings power.

So my approach is similar to the ERN's rising equity glide path but I dont want to deplete my bond fund too fast but rather when there are dips from the previous month end, I want to deploy. If there are no dips from the previous month end, I want to stick with deploying only new income + gains from bond fund to equities.

I read Nick Magguilli's analysis about why buy the dip is a terrible investment strategy:
https://ofdollarsanddata.com/why-buying ... -strategy/

So I understand my plan has more likelyhood of underperforming markets. But I dont want to be an all out bull at this stage of my life(I am 42 and pretty much financially independent) and the current market euphoria. Rather I want to be a cautious and sustainable bull. :)
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