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big chunk, dollar cost average?
Old 11-21-2009, 12:14 PM   #1
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big chunk, dollar cost average?

I'm leaving for FIRE in a month. Will move $500,000 out of maturing/CD's and other money markets into a very well diversified portfolio of domestic, foreign, reit, and bond funds...all index funds.
My question is, do I insert this $500,000 over a 12 month period on a dollar cost average method to protect against the downside?
Couldn't I also be missing out on the rise of the bull if I do dollar cost average?
Also will need my 4% or so SWR out of this, so dollar costing won't allow me much div/interest payments as I'd get by socking it all in there at once.
If I had 5 or more years to go, I'd dollar cost average it. But, I only have a month to go, then will need to tap into this money.
What would the rational pros say?

Any thoughts would be greatly appreciated!
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Old 11-21-2009, 12:22 PM   #2
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Here's a link I'm reading now on dollar costing
http://www.ifa.com/Media/Images/PDF%...ngtoInvest.pdf
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Old 11-21-2009, 12:27 PM   #3
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I'm in a similar spot, inasmuch as I ended up with a large chunk of cash from the sale of a couple houses and some other investments just before the downturn. All I can say from my own experience is that the only way I could get the money into the market is to DCA. I was too scared to go all in at the bottom, because I couldn't recognize a bottom. Now I'm too annoyed to go all in at what I think is a high price, because I think the market will drop significantly again in the next year or two. A perfect example of analysis paralysis. So, in my case, I'm DCAing into the asset classes I'm short on for the next year or so (quarterly), and when I get my percentages right I'll continue to DCA in quarterly until I'm all out of investable cash. It's the only way I can break my inertia.

I think a lot depends on your situation. If you need 4% of $500K and you toss it all in, then the market drops 20%, what are you going to do? Most of the talking heads and TV economists I see all agree the overall market is overvalued right now. I think DCAing in over a set period of time is probably safer for you. JMO, though.

PS - I'm an irrational amateur.
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Old 11-21-2009, 01:08 PM   #4
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wouldn't lump sum be better than dca? given long term...
also, to avoid the downside risk, to control the standard deviation swing, isn't ASSET ALLOCATION the ACTUAL controller of risk, not a timed market?

just a random though by a lowly amateur...
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Old 11-21-2009, 01:18 PM   #5
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Only time I had a sizable lump sum was when we sold our house in 2003 and had $225k to invest. I just dropped it all into my Wellesley account in a lump sum.

I am very much an amateur and like things simple so I'm thinking about being in your situation and here is what I would do.

You say you want a 4% SWR, so I personally would keep $100k in safe investments - CD's MMF's etc. and plonk the remaining $400K into Wellesley. I would reinvest the capital gains from the account and have the dividends provide an income stream, topped up by the $100K cash fund.
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Old 11-21-2009, 01:25 PM   #6
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wouldn't lump sum be better than dca? given long term...
Not necessarily. If you had invested a lump sum in late 2007 / early 2008, you would probably wish you had DCA'd over the following 12 months... When you invest a lump sum, you really have to time your purchase very carefully IMO.
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Old 11-21-2009, 01:32 PM   #7
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Timing a lump sum investment is just that - market timing. Some are skilled lucky at it, many of us are not.

If it were me, I might split the difference and stick half in the market now and DCA the rest over a year or two. Of course the next question is where do you park the cash so that it will earn something yet maintain the liquidity to invest over time...
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Old 11-21-2009, 02:05 PM   #8
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if investing for the long term, wouldn't AA be the "risk controller" in the equation, not time?
been looking at this site:
Time Pickers, Market Timers - Index Funds Advisors, Inc.
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Old 11-21-2009, 03:00 PM   #9
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When I FIRE'd I had a similar situation. I asked my Financial Planner (fee only) who helped me during that time that in order to reallocate to my target percentages, should I DCA to avoid risk? The FPs answer, to my surprise was that "studies show that DCAing really doesn't work, but if it makes you feel better, go ahead and DCA to the target percentages."

I've always been a DCA investor. I can't say if it really works better than lump sum investing but I feel safer that way.

Here are some links showing each point of view:

Does Dollar Cost Averaging Really Work?

Principal.com - Does Dollar-Cost Averaging Really Work? - Plan Ahead. Get Ahead. Article

That said, when I reallocated, I didn't DCA. I just reallocated in lump sums because it was just easier to keep track off -- get the reallocation over and done with. But I still DCA...for example, I DCA my annual HSA contributions instead of investing a lump sum.
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Old 11-21-2009, 03:02 PM   #10
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if investing for the long term, wouldn't AA be the "risk controller" in the equation, not time?
Yes, if the term is long enough and your intestinal fortitude sufficient.

As FIREdreamer posted above, had you invested your lump sum in October of 2007, in March of 2009 you would likely have been questioning the wisdom of your actions. If that scenario doesn't concern you, lump sum is the way to go.
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Old 11-21-2009, 06:49 PM   #11
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I would take this year's 4% (or whatever you have decided on), and leave it in cash.Then, I would dollar cost average (DCA) or dollar cost value the remainder over about a year, give or take a few months. What I like about gradually moving into investments is that I am not betting the farm on market conditions at one particular time. It's sort of like averaging in that respect. I "put my money where my mouth is", as the saying goes. I DCA'd a large lump sum from February to November, 2008. The DCA strategy turned out pretty well given 2008 market events.
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Old 11-21-2009, 08:59 PM   #12
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I pretty much agree with W2R's approach. I'd keep a year or two of your 4% in cash now. DCA the rest in during the next year or so. If we get a big move down, say 15 to 20%, go ahead and put it all in. You don't know for sure what the market will do, but you will know when it is substantially down from current levels.

However, Morningstar just said they feel the market is roughly fairly valued, and on average you're losing out on market gains when you're holding cash out. In this case DCA is mainly a strategy to help get you moving and doing something instead of freezing and waiting for the market to decrease and then wondering if it still has more to go. Or just watching it go up, wondering when to get in. Kind of tough when you only get one shot at it. If this was something you did every few years I'd say go all in for sure and the results will average out over the years.
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Old 11-21-2009, 10:05 PM   #13
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It's a tough decision, no doubt. I do like the idea of holding 3-4% back in cash, then maybe dca over 5-6 months, just to take the "edge" off of any downturn, but conversely, wouldn't like to miss an all in chance on an upturn.
Aren't most people believing though the market is overvalued? It sure feels that way based on the bad news we hear every day, yet the dow keeps on truckin'.
bubble?
might sleep better being defensive....sort of a "bird in the hand."""
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Old 11-21-2009, 10:08 PM   #14
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Quote:
Originally Posted by Spartacus View Post
I'm leaving for FIRE in a month. Will move $500,000 out of maturing/CD's and other money markets into a very well diversified portfolio of domestic, foreign, reit, and bond funds...all index funds.
My question is, do I insert this $500,000 over a 12 month period on a dollar cost average method to protect against the downside?
Couldn't I also be missing out on the rise of the bull if I do dollar cost average?
Also will need my 4% or so SWR out of this, so dollar costing won't allow me much div/interest payments as I'd get by socking it all in there at once.
If I had 5 or more years to go, I'd dollar cost average it. But, I only have a month to go, then will need to tap into this money.
What would the rational pros say?

Any thoughts would be greatly appreciated!
The stock market is up over 60% this year already so you've probably already missed the "rise of the bull". It may yet run a while but it may also retreat somewhat.

If you need to start your 4% SWR in a month on this money and it is essential to cover your base expenses then you need more than 1 or 2 years in cash equivalents because drawing from depreciating assets could be a devastating blow.

Is this it? or do you have pensions etc to cover your basic needs?
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Old 11-21-2009, 10:23 PM   #15
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The stock market is up over 60% this year already so you've probably already missed the "rise of the bull". It may yet run a while but it may also retreat somewhat.

If you need to start your 4% SWR in a month on this money and it is essential to cover your base expenses then you need more than 1 or 2 years in cash equivalents because drawing from depreciating assets could be a devastating blow.

Is this it? or do you have pensions etc to cover your basic needs?
Gonna w/d 4%/yr. Semi retire, work somewhat at little things. House and two new cars paid for. Kids' college covered. Super frugal. The 4% and other "work" money will be enough, just want to start off on the right footing with that principal amount.
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Old 11-22-2009, 12:10 AM   #16
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A well-researched way to add money to the market is Edleson's Value Averaging approach (also called "Dollar Value Averaging", or "DVA"). It is similar to DCA, but in this method you deposit more dollars when the share prices are lower. It does work, and typically produces better results than DCA. Details:
-- Wikipedia
-- Journal of Finance and Strategic Decisions: DCA vs DVA

To implement this, you'd keep you stash in CDs and MM accounts and put in more whenever the share prices of your various asset classes were lagging behind their expected returns (it's more complicated than this). When the assets get beaten down, you are buying cheap shares. If they go above your trend line, you may even sell some off.

Now, you've said before that you want a simple approach, and this is not the simplest approach. You'll need to buy Edleson's book (assuming it is back in print) or another source of info to help you execute this DVA. There's also risk that you'll have a bunch of money sitting on the sidelines when the market takes off.

Maybe you should read up on it and see if it appeals to you. If so, maybe consider splitting your pile in a way that makes you comfortable. I'd recommend at least 10% in "cash" to help you ride out three bad years of equity returns, then maybe deposit 30% - 50% of your money in a lump sum in your selected investments (this has the practical benefit of letting you meet the min balance requirements of many funds), then DCA and/or DVA the remainder over some reasonable period (1-3 years). Just me--I'd be more comforable DVAing over 3 years and DCAing over about 1 year, but I have absolutely no statistical backup for this gut feel.

There's lots of potential to be banging your head over missed opportunities with any approach you take. If the market takes off and you've got a lot on the sidelines, you'll feel like you missed a great chance. OTOH, if stocks dive and you've kept your powder dry with a bunch of cash, you'll be able to buy a lot of cheap shares with DCA or especially DVA (IF you've got the stomach to buy when the papers are full of gloom and doom) and you'll be better set up for future growth.

No one can foretell the future. Read up on the options and place your bets. Even if your bet comes out wrong, it will feel a little better in retrospect if your decision was based on a thorough analysis of the possible approaches.
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Old 11-22-2009, 01:16 AM   #17
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Read: Money Magazine, October 2009. Page 104.

Article about Professor Zvi Bodie, Boston University.

First time I read an article about investing that matched my style. Goes counter to most everything you read.

I'm retired, and doing fairly well. If I had followed what is "common wisdom", I would be in big trouble.

Read the article, it is well worth a trip to the library, if you don't the the magazine.
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Old 11-22-2009, 10:35 AM   #18
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I don't have the article anymore (recycled), but as I remember he was suggesting putting all your money in TBills and working until you die. Assuming you are rich like he is, this will definitely will keep you out of trouble. However, I don't see how it works as an ER stategy. How are you implementing it?
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Old 11-22-2009, 10:39 AM   #19
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I was once in the same position (with a lot less $$). worried, I dribbled it into my IRA over a year. It was a PITA to keep track of.

Then I learned about asset allocation and developed a stronger stomach.

If I were in your situation today, I would pick an asset allocation I was happy with (I have one and it looks like you do, too) and commit all the money all at once. Remember, it is hard to predict the future. You really don't know which way things are going to go. That is why we pick an asset allocation that will do different things in different climates. Set and forget.

In your case, I would hold 4% in cash for the coming year's expenses and also set up a CD ladder (I like a 5-year ladder, but you may want 7...or 10, even--that way you lock in 5x4%=20% or 7x4%=28% or 10x4%=40% of your pot) at the same time. Maybe you might want to buy only a single one-year CD now and gamble on the future of interest rates. (Why not? They are so low today anyway. Unlike stocks, they can't go negative.)

("rational pro"?? Not even close. But sticking to my AA has worked very well for me. I hung on through the Crash of '87 and the most recent debacle without flinching and it worked for me. The size of the pot went up and down, but overall it is way up. Even now, it is where it was only 4 years ago--after having to take out a chuck for expenses during a long stretch of unemployment earlier this year.)

BTW, earnings are smoother and more reliable than valuations. At 4%, you shouldn't be eating any of your seed corn. Just send the dividends to a MMF and watch that MMF. It gives great comfort when valuations are diving. oh, yes--look at rebalancing every year. (Or not. There are some studies that suggest that you never need to rebalance. But I look at it once a year and maybe I twiddle it and maybe I don't.)

Best of luck.
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Old 11-22-2009, 11:01 AM   #20
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Back in my mega corp days my boss (a analyst math-guru) spent a lunch hour explaining why a lump sum drop into the market was better than DCA. Left that meal convinced of his method

But - of course - if the market DROPS over your DCA period you're better off .... if the market moves higher you'll wish you lump summed .... now I am confused - again.
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