Cash, cost average, or jump both feet

[roger r]

I just sold a decent portion of my portfolio to harvest some capital loss and reorganize my finances a bit. Today I put the cash proceeds into my money market account and got this warm fuzzy, though I'd thought I'd immediately reinvest. With the market decline plus these proceeds, I'm way below my conservative target equity/fixed income allocation. I know the texts say not to time the market, but I sometimes wonder if we're gong into uncharted territory. I'd like eventually to get back to my target allocation, but am wondering whether to wait for a while, cost average back into things, or jump fully into things with both feet. I guess I'm looking for a little confirmation before going forward. My thought right now is to cost average back over the next three or six months.

In college I had the professor who would always put an extra credit question on the exams. The one I remember most was, define the universe and give three examples. The questions were a bit of a light hearted hoax, but maybe I'm asking about one of these ponderous events.

 

[W2R]

Of course, you can and should do what feels right to you. But, in your position, I would DCA so my instincts are similar to yours here.

 

[GoodSense]

I am also DCA'ing into the market, spread out over the next year, roughly.

There is a Chinese saying about wading across a river by feeling the slippery rocks submerged under water. That appropriately describes my feelings right now.

 

[harley]

I'm with y'all. It's DCA time. Although the little on my left shoulder keeps saying "go for it!" Since the money won't be needed for a number of years you can afford to miss the bottom by a little. Aaagh! Get thee behind me!

 

[haha]

Back when the market was high similar questions were asked from time to time. All the gurus assured us that anything other than put it all in right now according to one's chosen allocation was stupid.

So now, when may equities are half off, if not cheaper, why is suddenly better to DCA?

I am not sure what is best, but this is a curious attitude change. Now, as before, DCA may be better or worse, but it remains safer for one's self image.

Ha

 

[W2R]

Back when the market was high similar questions were asked from time to time. All the gurus assured us that anything other than put it all in right now according to one's chosen allocation was stupid.

So now, when may equities are half off, if not cheaper, why is suddenly better to DCA?

I am not sure what is best, but this is a curious attitude change. Now, as before, DCA may be better or worse, but it remains safer for one's self image.

Ha

That depends on how you define "better" and "worse". I think that DCA in a sense averages the risk between various points of time in a volatile market like this one, but at the same time it also removes the possibility of investing the whole amount at the absolute bottom and gaining substantially from that. Or, the possibility of investing the whole amount at a local maximum and watching your nestegg shrink substantially in the coming months or (heaven forbid) years.

I am sure that in 100 different cases at 100 different times, investing the whole amount would give higher average returns than DCA because more of the money is in the market longer and the market generally outperforms bank account interest. I still wouldn't bet on it and I wouldn't invest the whole amount at once in this severe bear market because you are only choosing a method once, not 100 times.

You're right - - I might change my tune in a strongly rising bull market. I know for a fact that I would at least shorten the DCA period substantially. For me DCA'ing has added a lot of "sleep at night" value for me during the past year of the present bear market. I have lost, but not as much as many here have lost. Even better, I have not been kicking myself unmercifully for choosing an unfortunate day on which to invest everything.

To me, DCA means a little less risk, a little less reward (on average). I'm all for that in a bear market.

 

[harley]

Back when the market was high similar questions were asked from time to time. All the gurus assured us that anything other than put it all in right now according to one's chosen allocation was stupid.

So now, when may equities are half off, if not cheaper, why is suddenly better to DCA?

I am not sure what is best, but this is a curious attitude change. Now, as before, DCA may be better or worse, but it remains safer for one's self image.

Ha

I must not have been here for those discussions. This forum is one of the main places where I learned about DCAing, along with books recomended here. I was lurking for a couple years (good markets) before I spoke up , but I mostly remember DCA advice. Not doubting you, just not the way I remember it.

 

[Nords]

I'd like eventually to get back to my target allocation, but am wondering whether to wait for a while, cost average back into things, or jump fully into things with both feet. I guess I'm looking for a little confirmation before going forward. My thought right now is to cost average back over the next three or six months.

Whatever makes you sleep at night is probably the best choice. You'll either be kicking yourself for calling the bottom too soon or for not recognizing it when it happened.

We did the first part of a tax-loss swap last month and will swap back to our asset allocation this month-- to let the dividends start reinvesting and to avoid having to dither about market timing. 10% down or up at this point pales in significance to the last year's drop.

Besides, when we buy back into our original asset allocation we'll be able to lock in a second loss for this tax year! Oh boy!

 

[Gone4Good]

Back when the market was high similar questions were asked from time to time. All the gurus assured us that anything other than put it all in right now according to one's chosen allocation was stupid.

So now, when may equities are half off, if not cheaper, why is suddenly better to DCA?

I am not sure what is best, but this is a curious attitude change.

I agree.

My approach is to pick a plan and stick to it. The whole point of asset allocation and rebalancing (a topic of another thread) is to take human emotions out of the investing equation. We (meaning humans) are notoriously bad investors because we are fearful when we should be greedy and greedy when we should be fearful. The AA/RB approach is supposed to combat those self-destructive tendencies. But they only work if you follow the rules.

The relevant question is whether or not your asset allocation target is still appropriate for your risk tolerance. You've just received a truckload of new information about your own tolerance for risk, so I wouldn't be ashamed to admit if I've discovered that my old assumptions were a little too aggressive. But once I decide on an appropriate AA, the question then becomes . . . why is my current AA so far away from my target?

 

[Coach]

I came into a nice hunk of cash in August and went all in.

Oh well, I guess if you could see the future you'd always get the right answer.

Fortunately it's long term investment.

Coach

 

[haha]

I must not have been here for those discussions. This forum is one of the main places where I learned about DCAing, along with books recomended here. I was lurking for a couple years (good markets) before I spoke up , but I mostly remember DCA advice. Not doubting you, just not the way I remember it.

Here is one of several discussions. Attitudes are varied- but in the current discussion I don't remember anyone suggesting to lump it in.

The academic opinion that was cited was always "Returns are higher in equities, so get it all in as quickly as possible."

I don't pay any attention to any of this, but I was interested in the change. Which IMO proves once again that recent events dominate attitudes.

http://www.early-retirement.org/forums/f28/lump-sum-to-invest-dca-in-or-go-lump-26129.html

Ha

 

[yakers]

AFAIK DCAing reduces risk but does not maximize return. It is what I have always done simply because that is how my money came in from paychecks so I never had to actually decide between DCA and lump sum. Now psychologically I prefer DCA especially in times of high volatility but I understand the academic research that lump sum has a greater prospect for return.

 

[Gone4Good]

That depends on how you define "better" and "worse". I think that DCA in a sense averages the risk between various points of time in a volatile market like this one, but at the same time it also removes the possibility of investing the whole amount at the absolute bottom and gaining substantially from that. Or, the possibility of investing the whole amount at a local maximum and watching your nestegg shrink substantially in the coming months or (heaven forbid) years.

True but DCA can also be an excuse to delay doing something you previously thought you should be doing . . . that is holding a certain amount of your investments in stock. If you are talking about DCAing over the course of a couple of months, I hardly think it will matter in the long run. But if you are going beyond that, I'd suggest it is probably time to be honest with yourself and revisit the risk tolerance assumptions in your asset allocation strategy.

 

[W2R]

If you are talking about DCAing over the course of a couple of months, I hardly think it will matter in the long run. But if you are going beyond that, I'd suggest it is probably time to be honest with yourself and revisit the risk tolerance assumptions in your asset allocation strategy.

I think it is quite logical, for quite a few reasons some of which are discussed and explained more clearly than I could manage in Bernstein's Four Pillars of Investing, pp 282-284, where he recommends DCA or even better DVA. I have done quite well this year due to my considered decision to DCA.

 

[Bestwifeever]

Personally I would let it sit in a MM until at least February and then see where you're at--that is the scaredy cat investor's advice.

 

[haha]

Not really - - if you can see that a bear market is happening, it is simply logical! I have only lost 17% this year due to DCA, and believe me, that wasn't by accident or because I "didn't like" my asset allocation somehow.

No, it was because you hadn't yet achieved your planned asset allocation.

And as for [when you] "see that a bear market is happening", I am pretty sure that the logical problems in that statement are clear enough.

The benfit of DCA is that you feel much better when you DCA into a falling market rather than go all in right before one. Very few will lump into a falling market, it just goes against human nature.

Ha

 

[W2R]

Haha, before I could edit it you quoted part of my post which I deleted because you are right - - I DCA'd into a volatile bear market which I think is probably a good/fortuitous thing to do in a volatile bear market. I think that with all the whining going on about a bear market clear back into 2007, we all had a pretty good idea that it was happening. However, I have never claimed to be a prophet (or at least, I shouldn't have because I am not a good one!! )

Bernstein explains several good reasons to DCA or DVA pretty clearly on pp 282-283 of Four Pillars. Everything I have read in a number of sources has confirmed to me my own analysis (some mathematical but mostly logical in thinking about what makes mathematical sense) and has led me to the conclusion that in my case, DCA was the best approach. Those articles I have read insisting that lump sum is better for individual investors appear to me to have some flawed logic, goals, or assumptions that I do not agree with. I think that a lot of people can't understand why something that averages better may not be better for them to do, especially when in the middle of a hugely bull market such as we had earlier this decade, when everybody wants to hop on the train as fast as possible to enjoy the ride.

By the way, did you notice that the thread you cited only had 5 posts, and I dunno, 1-3 of them were reasonably accepting of DCA?

 

[haha]

I would appreciate your mathematical analysis that shows the superiority of DCAing a lump sum.

I think the DCA advantage is very clear, but that it is entirely psychological.

I don't read widely, but I do not remember seeing anyone on this board cite academic evidence that DCA is a superior deployment of a lump sum.

Furthermore, I do not believe that we all knew pretty clearly that a bear market was happening in 2007- else why didn't we all sell out?
ha

 

[roger r]

I've appreciated the time taken and the different perspectives. I think at least some of the arguement against cost averageing vs lump sum investing is based on the fact that over the long run a few months here and there won't matter. But in today's market we're seeing 10% fluctuations in periods of just a few days. Maybe on my dead bed this won't matter, but 10% of a larger investment seems like a lot right now. I'm just not sure how the old rules and any statistical analysis of past data will help on this one?

 

[Gone4Good]

I think it is quite logical, for quite a few reasons some of which are discussed and explained more clearly than I could manage in Bernstein's Four Pillars of Investing, pp 282-284, where he recommends DCA or even better DVA. I have done quite well this year due to my considered decision to DCA.

Yes, Bernstein is a student of both history and investor psychology and as such he does suggest DCA for those "not used to owning risky assets" while acknowledging that "from a purely financial point of view it is usually better to put your funds to work right away." (source 4 Pillars, pg 282)

However, I doubt Bernstein would argue that a strategy that delays investing long-term money in stocks when they are going down and accelerating stock purchases when they are going up is really in the investor's best interest, even though it may feel more comfortable to do it that way.

It is also worth keeping in mind that the 4% "safe" withdrawal rate is back tested using a very strict rebalancing formula. If one were to deviate from that formula in a way that "reduces risk", it should also be acknowledged that the resulting "safe" withdrawal rate is probably lower.

 

[Texas Proud]

I would appreciate your mathematical analysis that shows the superiority of DCAing a lump sum.

I think the DCA advantage is very clear, but that it is entirely psychological.

I don't read widely, but I do not remember seeing anyone on this board cite academic evidence that DCA is a superior deployment of a lump sum.

Furthermore, I do not believe that we all knew pretty clearly that a bear market was happening in 2007- else why didn't we all sell out?
ha

Agreed..... any study that I have read shows that lump sum is 'better' (there are more positive outcomes than negative outcomes) vs DCA... and one of the problems is that nobody actually defines what is DCA... I mean so that it can be studied... is it putting in every day, week, month, quarter, year? Do you put equal installments? Do you slow down you investments in a down market and speed them up in an up market?


My question is do you think that the economy is fundamentally different than it was a couple of years ago? If not, then this will pass and stocks are cheap.... if you think that a lot of the econmy has been destroyed and will not come back anytime soon... then I would not invest in stocks at all.... just my view...

 

[Gone4Good]

My question is do you think that the economy is fundamentally different than it was a couple of years ago?

In some important ways, yes. The world is about to find out how much "wealth" was created through the application of leverage. Some of that "wealth" will not return, at least not quickly.

But over the longer term I have faith that the economy will adapt, and grow. Notwithstanding the challenges we face currently, the world still seems to me a more agreeable place for investors than was true for many, many, periods during the past 100 years.

 

[Texas Proud]

In some important ways, yes. The world is about to find out how much "wealth" was created through the application of leverage. Some of that "wealth" will not return, at least not quickly.

But over the longer term I have faith that the economy will adapt, and grow. Notwithstanding the challenges we face currently, the world still seems to me a more agreeable place for investors than was true for many, many, periods during the past 100 years.

Maybe I should say it different.... since I was not quite referring to the market but the 'main street' economy... we are still going to buy hard goods at some point in time... washer/dryers, cars, etc. etc... maybe not this month or next (or the next 12), but has main street changed so much that we will be different? We will consume less as a country in the long term?

I don't think we have... and companies that survive will be making money... the question is who survives...

 

[haha]

We will consume less as a country in the long term?...

I think the only way that happens is a resource squeeze. Current commodity quotes suggest that is not high on the list of public concerns.

Ha

 

[Gone4Good]

I think the only way that happens is a resource squeeze. Current commodity quotes suggest that is not high on the list of public concerns.

Ha

I would also include either the availability of credit or the necessity for increased savings as potential resources that could squeeze out some of the consumption we've come to see as our birth right.