If L funds rebalance every day, is that daily dollar cost averaging?

[flalaw97]

I think in another thread we agreed that the TSP rebalances the designated percentage of C, S, I, G and F for each L fund daily. Does that mean that every day a person's funds would be rebalanced resulting in buying new shares of C, S and I when the price is low(er) and selling when the price was high(er) unless all funds went up or down evenly? I was thinking that normally rebalancing only happens monthly or less frequently because of the cost of the moves to rebalance doesn't make sense to do more often than that. But the cost of the L funds is relatively low and set. So is it therefore an advantage of the L-funds that they buy more shares of the lower priced funds and sell shares when they are (relatively) higher?

 

[Bullitt]

L funds is daily rebalancing.

Rebalancing is a means to manage risk, not to produce outsize gains. Lets say you strive for a 60 stock, 40 bond portfolio. If you rebalance when bonds outweigh stocks, lets say 50 stocks, 50 bonds, you'll sell bonds to buy stocks to return to 60/40. But what happens when the market returns (2020) and you're sitting at 70 stocks, 30 bonds? You'll be selling stocks to buy bonds to return to 60/40.

Dollar cost average is, "I have $100,000 and don't want to invest today", despite all the data saying that the best way to do it is lump sum today. You could put in $20,000 every month for five months and get the average cost spread over time. Since markets have an upward bias, chances are your average cost will be higher than if you lump summed it.

In TSP, we do what some call, "opportunity" investing. We don't have any choice but to buy every other week when our paycheck contributions kick in. This is how the overwhelming majority of people invest, through bi-weekly contributions to a 401k.

 

[flalaw97]

TSP website says this:

"Every quarter (three months), the target allocations of all the L Funds except L Income are automatically adjusted, gradually shifting them from higher risk and reward to lower risk and reward as they get closer to their target dates. ...


One of the important things about the L Funds is that they stick to their target allocations for a full quarter regardless of what the markets do. Every trading day, some of the core funds in an L Fund will do better than others. At the end of the day, the core funds that did better will make up a higher percentage of the L Fund than the ones that did less well. To maintain each L Fund’s target allocation, we rebalance it at the end of every trading day. We do this by buying and selling the core funds that make up the L Fund so that the percentages go back to what they were at the beginning of the day. In effect we’re buying low and selling high at the end of every trading day."

So, in theory, the L fund should do better than an account which has the exact same mix for that quarter, especially during a volatile period? e.g. If my account was 50% C, 15% S and 35%I (same distribution as the L2060) and I did not buy or sell anything, would the L2060 fund perform better than my account over that quarter?

 

[flalaw97]

Dollar cost average is, "I have $100,000 and don't want to invest today", despite all the data saying that the best way to do it is lump sum today. You could put in $20,000 every month for five months and get the average cost spread over time. Since markets have an upward bias, chances are your average cost will be higher than if you lump summed it.

In TSP, we do what some call, "opportunity" investing. We don't have any choice but to buy every other week when our paycheck contributions kick in. This is how the overwhelming majority of people invest, through bi-weekly contributions to a 401k.

I always learned that dollar cost averaging was a way of not having to worry about buying in at a high point -i.e. that spreading the buys (equal amount each buy) over a period of time meant that you were buying more shares when the cost was lower and fewer shares when the cost was high, resulting in more shares per dollar invested. I guess what I am saying is, without adding any money into the system at all, doesn't rebalancing every day result in having more shares of C,S, and I?

 

[Bullitt]

So, in theory, the L fund should do better than an account which has the exact same mix for that quarter, especially during a volatile period? e.g. If my account was 50% C, 15% S and 35%I (same distribution as the L2060) and I did not buy or sell anything, would the L2060 fund perform better than my account over that quarter?

You won't know until hindsight, but if you just keep a 100% stock portfolio your expected returns will be higher than a portfolio with bonds. It doesn't guarantee anything, it just means you should make out better as compensation for the risk you're taking. The risk could be something like an extra year or two to get back to even if you have 100% stocks compared to a 60/40 portfolio.

Rebalancing sells whatever has a higher allocation to buy what is underallocated. It doesn't let the winners run. Just because stocks are being rebalanced from high to low doesn't mean they are getting ready to drop.

Buy low sell high is one of the most ridiculous messages in all of investing. In hindsight it appears so simple and is best ignored. Asset allocation is about risk management not return maximization.

Let's say your stock portion takes off and 60/40 becomes a 90/10 portfolio. Your expected returns in the 90/10 will obviously be higher than 60/40, but that is not without increased risk. You will lose more money when the market turns down. When you rebalance to the 60/40, your expected returns will be lower, as will your risk. The story that "stocks return 10% over the long run" doesn't mean returns are linear.

L funds rebalance every day. The allocations become more conservative on a quarterly basis.

 

[Bullitt]

I guess what I am saying is, without adding any money into the system at all, doesn't rebalancing every day result in having more shares of C,S, and I?

No, it's all relative. When bonds drop, you'll sell C, S, I to buy G or F.