Dollar cost averaging to exit a portfolio?

The Coffee Shop
1

It’s the time of year to be thinking about kids & college around here, it looks like.

I have dutifully been putting money in stock funds every month since my kid was in diapers, and she’s a high school junior this year. I have about 90% of her savings in a couple of value and equity-income mutual funds. Given the fact that I’m going to start needing some of the money in two years, and also given the recent market whiplash, I’m just wondering what advice the Slowtwitch Brain Trust has about making a graceful exit to shorter-term holdings. Do I move all of it over to a money market fund over a year in 12 equal installments? Over 2 years in 24? Do I only move half of it and let the other half continue to ride until she’s part way through college?

2

As you already know, Trey, it depends on how much risk you can handle.

Me, I would keep it in the whole time and just take it out as needed. That is a dollar cost exiting if you think about it.

On the other hand, if a market fluctuation could literally stop you from being able to pay the bills, you need to get more conservative.

If you think you need to pull it out to a MMF, right now is not a bad time. There is a real recession risk out there, so the market could easily tank for a couple of years. I don’t think so, but I ain’t betting the kids college money on it either.

3

Since the markets are near their record highs right now(not sure how your funds have done of course), it’s not a bad time to move a 1/3 or 1/2 to some CD’s. I think I just saw somewhere where some are at 6+% now, not too bad, and it looks like rates will be going down, rather than up in the next couple years. It’s an old saying, but still holds true to this day, buy low, sell high… NOt often followed by the masses becuse of frenzy’s, but you seem calm and calculated in your approach, and it is high right now…Good luck, by the way, for full disclosure, I’m 1/3 money market, 2/3 stocks right now, but have no kids to put through school. If it goes up 4% more, then I’m out all together, until after the next big plunge. You can always count on them, just not when, but I don’t mind sitting on the sidelines when strange things are happening…

4

The Iowa College Savings Plan is run by Vanguard. Their age-weighted portfolios would have a minimum of 40% in bonds for a 16yr old.

http://collegesavingsiowa.uii.upromise.com/content/invest/ageBased.html

5

Well I hope those bonds aren’t mortgage backed CDOs! Art is correct that what I should do depends on my risk tolerance. It’s getting harder and harder to tell where the risk is these days.

6

Just give some thought to “Trading Places.” One minute you are up $500,000 in pig’s bellies, the next minute they are foreclosing on the house in Poughkeepsie and your kids aren’t going to college.

Maybe you need to roll the money into the OJ futures market.

7

Maybe I could broker the carbon futures on those trees you’ve got going in at your new development.

8

It’s the time of year to be thinking about kids & college around here, it looks like.

I have dutifully been putting money in stock funds every month since my kid was in diapers, and she’s a high school junior this year. I have about 90% of her savings in a couple of value and equity-income mutual funds. Given the fact that I’m going to start needing some of the money in two years, and also given the recent market whiplash, I’m just wondering what advice the Slowtwitch Brain Trust has about making a graceful exit to shorter-term holdings. Do I move all of it over to a money market fund over a year in 12 equal installments? Over 2 years in 24? Do I only move half of it and let the other half continue to ride until she’s part way through college?

If I were you I would have my daugher get low interest student loans (some of these even have deferred interest) and keep the money in the market.

There is no correct answer to your question though, and it depends mostly on how bad you will feel if you lose, say, 20-30% of this money. The amount of money you should put in to safe investments should be about equal to how bad you would feel (wish you could crawl into a hole and die = 100% in safe investments, wouldn’t care at all = 0% in safe investments).

9

Huh. Well that’s an interesting idea. It would sorta be like a 4-year deferred interest margin loan with no calls. I am so conditioned not to borrow money that would never have occurred to me.

10

It’s the time of year to be thinking about kids & college around here, it looks like.

I have dutifully been putting money in stock funds every month since my kid was in diapers, and she’s a high school junior this year. I have about 90% of her savings in a couple of value and equity-income mutual funds. Given the fact that I’m going to start needing some of the money in two years, and also given the recent market whiplash, I’m just wondering what advice the Slowtwitch Brain Trust has about making a graceful exit to shorter-term holdings. Do I move all of it over to a money market fund over a year in 12 equal installments? Over 2 years in 24? Do I only move half of it and let the other half continue to ride until she’s part way through college?

If I were you I would have my daugher get low interest student loans (some of these even have deferred interest) and keep the money in the market.

There is no correct answer to your question though, and it depends mostly on how bad you will feel if you lose, say, 20-30% of this money. The amount of money you should put in to safe investments should be about equal to how bad you would feel (wish you could crawl into a hole and die = 100% in safe investments, wouldn’t care at all = 0% in safe investments).

I would take this approach as well, depending on the financing available. For example, Stafford loans have very low interest rates relative to what one could expect to make in equities, or even some longer dated CD’s. I’m in grad school now and was able to get loans a few years ago that I consolidated at 2.875%. I maxed those loans out and used the excess to pay down my 6.25% fixed rate mortgage.

Student loans from companies such as Citigroup–Direct Loans–have variable rates that are capped relatively high, maybe around 7%, so if you need to get into one of these then paying with savings might make sense. Again, a lot depends on your risk tolerance and the return assumption you use for the capital you have invested today.

And I agree with what Art said, recession risk has increased and markets could go lower, a lot will depend on how the consumer holds up given the housing collapse. We will get a better read on that after back to school(early reads are that things are not too bad), which is a precursor to what we can expect for the xmas selling season.

So with that in mind, I think its prudent that your mindset is one of capital preservation rather than capital appreciation. Given this market environment, nobody would look down upon you for taking a few–or many–chips off the table.

11

If dollar cost buying is a good thing, then isn’t dollar cost exiting a bad thing? On the buying side, you’d buy more shares when the prices are low. But, on the exit side you’d sell more shares when prices are low and fewer when prices are high.

Anyhow, I’d base this more on tax considerations (unless the account is not taxable) – trying to match sales with high cap gains with sales that have cap losses.