Are there any methods/techniques that cover distributing cash into a specific percent of a portfolio asset class while gaining the best average price?

As a simple example, a portfolio starts with 100k cash. It eventually disburses its cash into four asset classes. This means 25k goes to purchase assets in each class. If one of these classes is the SP500 index, you might decide to divide the 25k into four purchases, getting a better price with each purchase. For example, assuming the SP500 is dropping, purchase might be made at:

    $6250 buy 1350
    $6250 buy 1325
    $6250 buy 1300
    $6250 buy 1275

For an average price of 1312.50 in your SP500 allocation of the portfolio. However, in the real world, you will not be so lucky. You might buy 1350, the SP500 drops to 1339, then bounces to 1362 and remains above 1350 for the next few weeks. You only made one purchase and was not able to take better advantage of gains in the SP500. Or, it may continue dropping to 1225. You spent all your 25% allocation for this class at 1275 and are not able to take advantage of a much better average price.

Funds are available upfront. Shorting isn't allowed.

What area covers techniques that deal with this topic?

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    $\begingroup$ If the S&P is currently at 1350 and you believe it will fall to 1275 in the near future, wouldn't you rather short the index?! $\endgroup$ – chrisaycock Jul 7 '12 at 22:30
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    $\begingroup$ This is called dollar cost averaging, but it just says that if you do not have all the money at the begining and if you do not have any view on the evolution of the market, you should not worry and invest progressively, as the money arrives: the market fluctuations will more or less even out. But if you have all the money at the begining and/or know how the market will change, this is suboptimal. $\endgroup$ – Vincent Zoonekynd Jul 8 '12 at 0:27
  • $\begingroup$ @chrisaycock - let's say you are buy side only. $\endgroup$ – 4thSpace Jul 8 '12 at 0:59
  • $\begingroup$ @4thSpace Buy side doesn't mean that you're buying securities. It means you're consuming liquidity. That's why broker-dealers are called sell side; they "sell" liquidity, even if they buy an asset while making markets. $\endgroup$ – chrisaycock Jul 8 '12 at 1:15
  • $\begingroup$ @chrisaycock - buy side meaning majority of mutual and pension funds. Most do not short. I think this is wondering off topic. I've updated the question with a little more context. $\endgroup$ – 4thSpace Jul 8 '12 at 1:51

Even if some buy side funds are not allowed to short sell it does not mean they must buy. They could long sell, they can do nothing and stand on the sidelines and they can hedge, selling index futures or buy put protection on broad indexes or on the underlying of core holdings. Why this is an important point becomes apparent when you start to think about your question.

You are basically asking what a fund should do when it thinks prices go down and what a fund should do when it thinks prices go up. You may disagree but in the end this is what every fund, every trader, portfolio manager has to ask him/herself. Most of the times when market move in your favor you will not be as fully invested as you wished and often times markets simply trade against your position. Dollar cost averaging is one of the worst investment techniques and lead to the poor house, long term, no matter what some academic papers have to say. Its simply stupid to bet against the market. If you believe markets will ease and you cannot short then simply do nothing or buy protection but DONT BUY. So, I am not sure what further guidance beyond what I mentioned you really look at.

It's funny but academicians love to make things very complex and complicated, maybe because they are partly forced to do so by remaining generic in their research. However, trading and investing has not much to do with complexity. In the end it is very simple math and a very keen interest in human psychology that made a very small group of traders incredibly rich over time. I do not know of a whole lot of quant desks which did not blow up in a 10 year period. I know only less than 10 very successful traders personally in my 13 years in this industry who scored consistent but high returns at very manageable draw downs and return volatility.

So, my friend I think you are asking the right question but in the completely incorrect context. There is a reason that most "long-only" (sorry Chris ;-) traditional buy-side guys have very little to show for, one big reason being that successful hedge fun managers buy into strength and sell into weakness, while a lot of traditional buy side guys love to play their dollar cost averaging game and believe cheap stocks are not cheap for a reason.

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