Idea Publication: Investing Automation for improved dollar-cost averaging

Just a quick note to…

Get this idea out into the blogosphere before someone tries to patent it:

Flex-flow deposits that automatically (and dynamically) re-balance a portfolio.  A target asset allocation is set.  Weekly/monthly inflows are initially proportioned account to these ratios.  As time goes on and investments go up and down the inflows are adjusted to help keep to asset allocation close to target.  More $ are invested in under-weighted funds (below tgt funds) and less $ are invested in funds that are over asset allocation targets.

There are lots of neat mathematical/algorithmic implementations.  The simplest contributes to the most under-weighted fund 100% or whatever amount is need to bring into balance.  Then the next most out-of-balance fund… etc.  Another strategy is to perform a linear delta-weighted scaling factor.  Another means is any number of non-linear delta-weighted scalings.  In any case a unit-sum “percentage” vector (M-dimensional , where M is the number of funds in the target).

Buying new Vanguard Funds

I’ve been reading through the prospectus for some of the Vanguard tax-exempt funds.  There are four that generally cover the municipal funds markets:

Comparing Vanguard Tax-Exempt Funds

They all have great expense ratios of 0.2% and credit ratings (for what they’re worth) of AA or AA-.  What is most interesting to me is a comparison of duration to yield.  Duration, in brief, is a standardized measure of bond price sensitivity to changes in interest rates.  High duration bonds (or funds) swing more to a 1% change in interest rates than lower duration bonds.  When I graph the relationship I get a very straight looking line:


In essence this is the current yield curve for this family of funds.  The leftmost point is the short-term tax-exempt bond fund, followed by limited-term, then intermediate term, and finally long-term.

So what was my decision?  I bought into 3 of the 4, the short-term, medium-term, and long-term.  They all look like great funds.  I’ll keep you posted.