Buy Now Or Buy Gradually Over Time?

A reader asked a question in the comments to my previous post Bought REITs Again. I’m answering it in a new post because the question is quite common.

“If you were to set up a new IRA and pour some cash into it (200K), would you go ahead and dive right in or wait and time? For example, VTI is way down now, so is EEM and other ETFs. Would you consider gradually moving in (say 10% each month?)”

Let’s take a look at two scenarios.

Scenario A, if I have $200,000 in an IRA already invested in the funds and asset allocation I like, would I sell all of them for cash now and re-establish my positions gradually over the next 10 months? I would not and most people probably will not either. The funds are fine. The allocation is fine. There is no reason to redo it.

Scenario B, if I’m setting up a new IRA with 200K in cash, would I dive right in or buy gradually over time? What’s the difference between Scenario B and Scenario A? Just a few mouse clicks and some small brokerage fees if any. If I use the $200,000 cash to buy the same funds right away, I’ll be in exactly the same position as in Scenario A. Therefore I would buy the funds now and keep the funds.

This has nothing to do with whether the funds I will buy have been up or down lately. It all depends on what your answer is in Scenario A. If the answer for Scenario A is hold, to be logically consistent, the answer for Scenario B must be buy now. If the answer for Scenario A is sell and re-purchase over time, the answer for Scenario B must be buy over time. If the answer for Scenario A is sell half and re-purchase half over time, then the answer for Scenario B is buy half now and buy half over time.

The decision is based on the fact that money is fungible. In an IRA with no tax implication, cash, mutual funds, and ETFs can convert to one another at minimum or no cost. Here’s the TFB Buy Hold Parity Theorem: 🙂

Hold = Buy + Transaction Cost

It means that if you are going to hold an asset if you already have it, you should also buy it if you don’t have it, unless the transaction cost is too high.

The logically equivalent corollary is:

Will Not Buy = Sell – Transaction Cost

It means that if you don’t have an asset already, and you will not buy it or not buy as much, then if you already have the asset, you should sell it or sell down to the level you would otherwise buy immediately, unless the transaction cost is too high.