Another technique which is similar to timing is to set a goal for a particular investment. If it is a stock fund that might be 10% per year. After a year if the fund hasn’t gone up 10% you put enough money in to bring it up to 10% more. If it has exceeded 10% you sell enough shares to bring it back down to the target. This assures that you buy during downturns and sell during peaks. But the problem with it is that it assumes you have cash on the sidelines available to prop up poorly performing investments.
If you wanted you could do the adjustments on a quarterly basis rather than yearly and the results should be better. This wouldn’t really work with my deferred compensation account since I don’t have cash available and have to make regular rather than lump sum payments. So I might try it with some of my other mutual funds starting on June 1 meaning my first adjustment wouldn’t be until September 1.
Well, I never did try the active balancing approach. I don’t think it would work anyway. I set up a spreadsheet that would analyze how it would work and it seemed to lag just buying and holding. The problem is you have to have enough money in reserve somewhere to cover the gap in bad years. Since you could potentially lose 20% of the value of the investment you might need 30% (20% plus a 10% gain) in reserve. And that’s a lot to have sitting around that could be invested during the good years (and with stocks most years are good). You can have less than that in reserve and not cover the entire loss and/or fine tune your expectation of growth, but it never seems to win.
So I don’t do so much timing anymore though I keep an eye on the 50 and 100 day averages as a signal. I did make a correct guess in August that the market was high, selling some shares and buying them back in November for 5% less (plus they had earned about 1% in the fixed income options).
I still rebalance quarterly though to maintain 60% in Vanguard 500 (VIIIX), 20% in Ariel Growth (ARGFX, small cap), and 20% in American Europacific Growth (AEPGX, foreign). That seems to work pretty well. Ariel had a great year last year but lagged this year compared to AEPGX.
I may yet try active balancing if the market has a really good year. Say if it went up 20% I might sell off 10% to put in a fixed income option to cover a bad year. But I don’t see selling off assets to provide a cash fund.