Is there a sell-side version of dollar-cost averaging?

Question

I understand the theory behind dollar-cost averaging on the buy-side, and there are many articles about why it does (or doesn't work). But I can't find much, if anything, about its value when selling. So here's my situation:

Say it's Monday morning and I have a block of 500 shares currently worth $10000 that I must completely sell by the end of the week (therefore I can't set a market limit and try to sell on an uptick). I have no idea which way the stock price is going to move or what its volatility is. Is any one of these three strategies better than the other two?

1. Pick a day at random and sell all 500 shares at noon on that day, regardless of the price.
2. Sell 100 shares every day at noon, regardless of the price.
3. Every day at noon, sell $2000 worth of shares, regardless of the price. On Friday, sell everything (assuming there is anything left).

With #1, I have one commission to pay; with #2 and #3, I pay 5 commissions. It seems to me that the only advantage to the latter two strategies is to reduce my risk a little, but doesn't increase my expected return. And the extra commissions would actually reduce it. Am I missing something?

Answer 1

None of your options or strategies are ideal. Have you considered looking at the stock chart and making a decision? Is the price currently up-trending, or is it down-trending, or is it going sideways?

As Knuckle Dragger mentions, you could just set a limit price order and if it does not hit by Friday you can just sell at whatever price on Friday. However, this could be very damaging if the price is currently down-trending. It may fall considerably by Friday.

I think a better strategy would be to place a trailing stop loss order, say 5% from the current price. If the stock starts heading south you will be stopped out approximately 5% below the current price. However, if the price goes up, your trailing stop order will move up as well, always trailing 5% below the highest price reached. If the trailing stop has not been hit by Friday afternoon, you can sell at the current price. This way you will be protected on the downside (only approx. 5% below current price) and can potentially benefit from any short term upside.

Answer 2

Is there a sell-side version of dollar-cost averaging?

Yes, it's called scaling out of a position.

There's a simple answer to your question. The direction of price determines the benefit.

If share price is rising, scaling out is better than selling all shares immediately. If share price is dropping, selling immediately is better than scaling out.

If you knew what share price would be in the future, you'd know the best exit strategy. No one knows that.

Answer 3

If you frame buying and selling as exchanging asset A for asset B, I think the sell-side becomes obvious.

DCA is for buying (A is $, B is stock). The generalized concept would be that by exchanging a constant amount of A over time regardless of how much B that equates to, you'll smooth out volatility as you transition your portfolio to B.

So, the sell-side would have A as stock and B as $: Choose a fixed number of shares and sell them on a fixed schedule until they're all gone. When the price is high, you'll cash in, and when the price is low you'll avoid divesting too much.

So in your 1-week scenario, you'd count the shares not $ amount of the stock and divide it by 5 and sell each day. Notice you don't have the "whatever's left" problem like when you subdivide the $10k.

Answer 4

To answer the title of your question.

Is there a sell-side version of dollar-cost averaging?

Yes, there is. There's actually a spreadsheet out there that compares value averaging to dollar cost averaging for both buying and selling.

That spreadsheet is linked in this article.

https://seekingalpha.com/article/4285823-value-averaging-alternative-to-dca-lump-sum

Download an Excel copy to modify the highlighted parameters. You can select if you’re buying or selling, your time horizon, and how much you want to buy or sell.