How to invest a lump sum

[lazygood4nothinbum]

also appreciating this thread as we will be settling mom's estate early this year and hopefully house will sell by end of year. my concern has been that the market is still in such record territory. am i being paranoid?

 

[wabmester]

Why stop there, What would happen if earnings reverted to their 1933 levels ? Then P/E levels would be out of this world !

Yes, I should have said *real* earnings. Doubled in the last few years. A lot of it due to oil company and bank profits. Caveat Investor!

 

[Dawg52]

I'm glad I read this thread. I'll be getting a lump sum (2 actually) when I bail out in a couple of months. Both are MUCH smaller amounts than ScaredtoQuit's, but I was wondering about the same thing. The "all at once" or the DCA. After reading all the replies, I like the partial lump sum, and the rest DCA'd.

Thanks to you all for your vast wisdom!

I will probably do the same. I have a chunk to invest in April when I retire. If there is a big correction between now and then, I might go ahead and invest it all. Will play it by ear.

 

[Alex]

In early november I had $140,000 to invest from the sale of an investment property. I lumped it all at once into my AA. Normally, I really could care less what happens in the short term, but was still a bit nervous due to the relatively large sum. But I bit the proverbial bullet and I have not regretted it. My advice is to do what makes you feel safest.

PS: Have you ever heard of 'Value averaging"? You might read up on it a bit and then make your decision. Good luck!!

 

[audreyh1]

Don't you love valuation metrics? P/E seems reasonable, but only because we've had record earnings.

If earnings went back to their 2003 levels, I think that would put the market P/E at around 40....

Let's hope earnings don't mean-revert!

Earnings don't "mean-revert", they grow over time.

Audrey

 

[wabmester]

Earnings don't "mean-revert", they grow over time.

Well, I'm not saying we're going to have a repeat of 2000-2003, but real earnings doubled from 1993-2000. Then they got cut in half from 2000-2003.

Then they doubled again from 2003-2006.

Since we're talking about real earnings, inflation is already factored out, and inflation is responsible for most of earnings growth. What's left is real GDP growth. That sometimes goes negative, especially after an outsized growth run like we had the last few years.

And, of course, the "market" P/E includes all of the high-earnings / low-P/E energy sector and bank stocks, which makes the market look fairly valued when other sectors may be overvalued.

Bottom-line: market P/E doesn't capture the whole picture. We're in good shape if you believe our recent growth is sustainable, and that energy and bank earnings won't revert to more normal levels.

 

[genghis]

Statistically speaking - dump it all in at once and watch it grow (eventually)

Emotionally speaking - dump it all in at once and don't worry about it (see above)

 

[free4now]

To take this discussion in a new direction, I wonder if anyone has seen studies of using limit orders to take advantage of volatility as you are getting in.

Intuitively it seems like limit orders would be a better way to capture the volatility than DCA'ing, at least for relatively short time periods. But I haven't studied it enough to know if it generally works.

I'm thinking something like this for getting into the market over seven days:

On day one place a limit buy order say 7% out of the money.
If that fails to execute, on the next day change it to 6% out of the money.
If that fails to execute, on the next day change it to 5% out of the money.
and so forth until you get to zero in which case you just buy.

I suppose the main risk is that the limit orders prevent you from buying if the price is increasing.

 

[MasterBlaster]

To take this discussion in a new direction, I wonder if anyone has seen studies of using limit orders to take advantage of volatility as you are getting in.

Intuitively it seems like limit orders would be a better way to capture the volatility than DCA'ing, at least for relatively short time periods. But I haven't studied it enough to know if it generally works.

I'm thinking something like this for getting into the market over seven days:

On day one place a limit buy order say 7% out of the money.
If that fails to execute, on the next day change it to 6% out of the money.
If that fails to execute, on the next day change it to 5% out of the money.
and so forth until you get to zero in which case you just buy.

I suppose the main risk is that the limit orders prevent you from buying if the price is increasing.

So if the market goes up 6% on day one you are still out of the market...

If it goes up another 5% on day two you are still out of the market...

If it goes up another 4% on day two you are still out of the market...

and so on. As I see it you just (opportunity cost) lost 15% of your (potential) money playing around with unusual buying statagies.

 

[clifp]

On day one place a limit buy order say 7% out of the money.
If that fails to execute, on the next day change it to 6% out of the money.
If that fails to execute, on the next day change it to 5% out of the money.
and so forth until you get to zero in which case you just buy.

I suppose the main risk is that the limit orders prevent you from buying if the price is increasing.

An alternative strategy to purchase a stock you want to own but aren't happy with the current price is to write a put option at the price you are comfortable owning the stock. (remember the put gives the other guy the right to sell his stock to you at certain price for a specific length of time (2 weeks 2 months, 6 months). If the stock goes up the put you sold expires worthless and you collected free money (but don't own the stock). If the stock goes down you have purchased the stock at price you were happy with. Of course it may have dropped a lot making you quite unhappy.

I don't necessarily recommend this strategy, but I think it is better than trying to catch a stocks intraday swings.

 

[dmpi]

I would just put it all into the market at once. However I must confess I never put 700K into market at once, so I would be a bit scared too. There is almost a 100% chance that you'll see the market lower than the point where you bought in. Hopefully after a year or two you'll be well past your buy in price.
Also by looking at P/E & market participation (of the masses), I think the market is underpriced right now.

 

[Meadbh]

I would just put it all into the market at once. However I must confess I never put 700K into market at once, so I would be a bit scared too. There is almost a 100% chance that you'll see the market lower than the point where you bought in. Hopefully after a year or two you'll be well past your buy in price.
Also by looking at P/E & market participation (of the masses), I think the market is underpriced right now.

I did this after receiving an inheritance. It went down a bit, then up a lot.......I'm cool.

 

[cute fuzzy bunny]

I dumped ~500k in once, while thinking things were a little over priced.

That was about 3.5 years ago.

That worked out pretty well.

 

[audreyh1]

Interesting chart from PIMCO shows that after tax corporate profits are at the highest percent of GDP in the last six decades.

And companies are using these profits to buy back stock like crazy.

Of course PIMCO's Bill Gross sees it all coming to no good:
http://www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2007/IO+February+2007.htm

Audrey

 

[wabmester]

Interesting chart from PIMCO shows that after tax corporate profits are at the highest percent of GDP in the last six decades.

So, after looking at the chart, do you still think that earnings don't mean revert?

 

[scrinch]

I had the same decision to make last spring with a little over $1 million. It can drive you crazy worrying about what if's. What if the equity market tanks, what if the bond market tanks, what if inflation flares up, what if Japan sells all its US Treasury debt? In the end I just went on a buying spree one day at Vanguard after deciding on my AA. Then I watched the market closely and sweated for a few weeks while the whole process was fresh in my mind and the markets bobbed up and down. After that I pretty much forgot about the whole thing, and the world wasn't so full of scary what-ifs any more. Life was good. How did it work out? I don't know if DCA would have done better, but the account has grown $120k since late March, so I am satisfied.

I think the bottom line is that you've got to make a decision based on the information that you have today about the investment climate and investor characteristics, and then don't look back. A year from now the difference between a lump sum investment and a DCA investment will probably be less than a few percent. In ten years it will only be a fraction of a percent of difference in average returns. It will be more important to have chosen a low-fee brokerage than to have guessed right about where the market is going over the next few months.

 

[audreyh1]

So, after looking at the chart, do you still think that earnings don't mean revert?

The GDP grows over time, so no, I don't think earnings mean revert over the long term.

Audrey

 

[Nords]

So, after looking at the chart, do you still think that earnings don't mean revert?

Wab, I'm sure that if you beat the snot out of the data you can get earnings to do anything you want!

I'm not sure how a ratio between earnings & GDP proves your reversion jihad point.

 

[wabmester]

The GDP grows over time, so no, I don't think earnings mean revert over the long term.

OK, I guess it depends on which mean we mean.

In terms of % of GDP, it's pretty obvious that earnings revert to the mean. What isn't so obvious from the graph is that GDP growth tends to mean revert on the same cycle, so earnings tend to correct even more than the graph shows.

Semantics aside, market P/E obviously doesn't tell the whole story, especially when we're at the peak of the earnings cycle. I have no idea when earnings will retreat, but it seems certain that earnings growth is limited for the next few years.

 

[JustCurious]

You should max out every retirement plan available to you. If you are over 50, and you can probably contribute over $20k a year to your qualified retirement plan, plus 5k to a Roth. If you have a spouse, you can double those figures. Then if necessary, use some of your windfall to make up the difference in income. This way, you will essentially convert some of the windfall into tax deferred money.

 

[cute fuzzy bunny]

The GDP grows over time, so no, I don't think earnings mean revert over the long term.

Ding! Ding! Ding!

 

[wabmester]

Ding! Ding! Ding!

Would you please stop playing with the door bell and stay on topic?

 

[cute fuzzy bunny]

I thought I was the one staying on topic...you mean it was you?