How to invest a lump sum

[ScaredtoQuit]

Sometime later this year (whe I pull the trigger), I will receive a lump sum distribution of about $700K from my employer which I will roll over into a tax deferred account. Here's the question... what's the best way to get that into the market. Do I DCA over the course of several months or do I bite the bullet and invest it it all at once?

The rest of my tax deferred funds are invested according to a modified version of the asset allocation recommended by ESRBob. I expect to do the same with this $700K.

Just wanted to get some other thoughts on this. (My inclination is to DCA in three separate lumps about a month apart)

 

[Empty Pockets]

Do it all at once.

 

[rmark]

Yes, just do it all at once. If you want less volatility, then invest more conservatively.

 

[ScaredtoQuit]

Yes, just do it all at once. If you want less volatility, then invest more conservatively.

What are the advantages of investing all at once? What if the exact moment that I invest I hit a peak?

 

[wabmester]

Do it whichever way feels better to you.

People will tell you that the odds favor all-at-once, but the odds don't matter if the market takes a dump on you right after you commit.

Which will make you feel worse: losing a chunk after comitting all-at-once, or missing out on a run if you DCA?

 

[LOL!]

If the market indices are 7% below where they are now, then do it all at once.

If the market indices are 7% above where they are now, then DCA $70K each month for the next 10 months.

Otherwise, DCA 20% of what you have every month, but pick the asset class that has dropped the most.

Lump-sum investing is better 60% to 65% of the time. That means that DCA investing is better 35% to 40% of the time. You could then lump-sum 60% of it and DCA the other 40%.

 

[rmark]

"What are the advantages of investing all at once? What if the exact moment that I invest I hit a peak?"

What if you hit a trough?

You pay your money and you take your chances.

 

[ScaredtoQuit]

LOL, is that your judgement or is there an authoritative source making that recommendation.

Your recommendation does "feel better"

 

[cute fuzzy bunny]

Historic evaluations show that a lump sum does better than a DCA simply because all the funds are engaged at once, and overall markets go up rather than down. Due to the net positive flow, you are more likely to be delaying gains by dcaing rather than avoiding losses.

That having been said, if you feel the market is richly valued, you might do better to dca and hope for a downdraft.

A lot of money has been lost waiting for the downturn.

 

[ScaredtoQuit]

Warning*****Warning******Warning

To all members on this Board. I am receiving a lump sum later on this year. You should all pay very close attention to what I decide to do with it. The answer will give you the ULTIMATE market timing opportunity!!

If I invest it all at once, the Market is guaranteed to go DOWN.

If I DCA over 10 months, the Market is guaranteed to increase by 15% or more during the first six months!!

How do I know? Because that's how things always go for me!!

 

[wabmester]

Could you please invest a lump today? I am getting tired of waiting for the inevitable correction.

 

[FinanceDude]

Warning*****Warning******Warning

To all members on this Board. I am receiving a lump sum later on this year. You should all pay very close attention to what I decide to do with it. The answer will give you the ULTIMATE market timing opportunity!!

If I invest it all at once, the Market is guaranteed to go DOWN.

If I DCA over 10 months, the Market is guaranteed to increase by 15% or more during the first six months!!

How do I know? Because that's how things always go for me!!

So...........invest HALF NOW, and DCA the remaining 50%, 10% a month for 5 months.........and you're done..........

 

[Meadbh]

Wow! A $700K lump sum! Here's how I would handle this:

1. Ensure my financial planning is up to date and that I'm comfortable with my asset allocation.
2. Allocate the lump sum according to the same asset classes.
3. Relax.

 

[cute fuzzy bunny]

Could you please invest a lump today? I am getting tired of waiting for the inevitable correction.

Me too. I hate this market going up stuff. We're still accumulating, not selling. Hell, I still have to fund our Roths for this year.

My wife still doesnt get it when I get happy that we've had a couple of down days.

 

[Goonie]

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!

 

[wabmester]

The wisdom of Solomon prevails once again.

If all else fails, cut the baby in half!

 

[Helen]

I can't believe the market hasn't tanked yet. I lumped summed a good chunk of my 401k money into the market the first week of January. I think it gets easier the longer the money has been in there. I promise myself I am not going to pull it out again.

I've got 60% in stocks with another 10% to move in during the next correction. I also have not moved my 2007 Roth money in yet.

 

[Empty Pockets]

I tried waiting for the market to go down a few times. Then I realized, why do I own any equities at all if I think they're going to go down ?

From now on I invest in my allocated funds as soon as I can write a check.+

 

[free4now]

I think the OP's question is a good razor for looking whether you are an emotional investor or an analytical investor.

The analytical answer is pretty clear that history favors the person who puts the lump sum in, because the sooner it's in the better your results.

But I must admit I'd feel safer DCA'ing over a few months. I'm going to be investing a six digit lump sum soon, and it just doesn't feel right to put it all in at once.

Just to run some ballpark numbers, assume the stock market rises 9% per annum, and your cash account pays 5% per annum. Then DCA'ing over three months will on average lower your balance by one month, which is 1/12 of (9-5), or about a third of a percent. In the original poster's case, that's about $2300 lost by DCA versus lump sum.

So now I need to ask myself how much volatility reduction I will get for that $2300. I can't give a quantitative answer, but my feeling is that whatever it is, it's not worth $2300.

Maybe I'll DCA over seven days instead... that reduces the cost to about $230 plus extra comissions (for the OP case), and there is still enough volatility within a week to perhaps make it worthwhile.

 

[donheff]

Maybe I'll DCA over seven days instead... that reduces the cost to about $230 plus extra comissions (for the OP case), and there is still enough volatility within a week to perhaps make it worthwhile.

Wait until you need to withdraw a big chunk - you can second guess the timing for that six ways from Sunday also.

 

[MasterBlaster]

Here's the real answer...

If you believe that the market always rises in a ramp like fashion but with some minor fluctuation then pop it in all at once. There is no sense in waiting cause the market will only go up.

If you believe that the market is flat but with some minor fluctuation then dollar cost average your lump sum in. There is a case for dollar cost averging to your advantage over flat markets.

If you believe that the market has peaked in the short run, then by all means hold on to your stash and wait until the market bottom.

If you believe that the market has peaked for the long run, then keep all of your money, perhaps you should buy gold or precious stones. Don't even think about getting into the market.

 

[LOL!]

LOL, is that your judgement or is there an authoritative source making that recommendation.

Your recommendation does "feel better"

I just made that up. A few years ago, my wife received an inheritance. We read up on this lump sum vs DCA. Everyone said lump sum does better, but did not give the probability which has been published. I think many people take that "lump sum does better" to mean it does significantly better at least 80% of the time. That is simply not true. LS averages just a percent or two better than DCA over 3 month or 6 month period. Thus folks are making much ado about nothing.

The main danger is that if you are waiting for a correction, then you really lose because you do nothing. So have a plan to put it in when you get it -- no matter what.

http://www.fpanet.org/journal/articles/2004_Issues/jfp0604-art11.cfm

 

[audreyh1]

Hey I like that half-n-half approach!

For me, DCAing saved my butt!! But I also started investing in late 1999 , and spread it out over 2 years. By late 2001 I slowed down my DCAing because the market just kept dropping!

This, however, was an extremely unusual situation. 3 years down was unprecedented.

Oh yeah - and then I recovered it all and then some in 2003!

Market valuations today are NOWHERE NEAR what they were in 1999/2000. So that shows how even if a market appears to be somewhat overvalued or it's been a long time since a correction - markets can still get a lot more overvalued. It's just impossible to time these things.

Audrey

 

[wabmester]

Market valuations today are NOWHERE NEAR what they were in 1999/2000. So that shows how even if a market appears to be somewhat overvalued or it's been a long time since a correction - markets can still get a lot more overvalued. It's just impossible to time these things.

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!

 

[MasterBlaster]

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

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

Lions, and Tigers, and Bears !

Oh My !