Lump sum investing - DCA or invest all at once?

[Lisa99]

DH receives an annual bonus which this year will be about 5% of our total investment portfolio. The bonus is deposited into our bank account tomorrow (Friday, October 1)

We have no debt and have six months of emergency funds so will put the full amount into our long-term investments. I also know based on AA which Vanguard funds the money will go into.

So to my question - would you dollar cost average the investment or would you make the investments into the targeted funds in a one-time transaction?

 

[Nords]

So to my question - would you dollar cost average the investment or would you make the investments into the targeted funds in a one-time transaction?

Hoo-boy, let the debate begin!

I've read that DCA loses out to lump-sum investing about two-thirds of the time, so history is on your side. OTOH the market may be at a local peak right now, so if you dump in your lump sum and it promptly drops 15% then you won't really care as much about long-term history as you do our short-term recommendations.

The real value of DCA is the enforced discipline (or autopilot) of making routine investments instead of finding other applications for the "excess" cash. So perhaps you should invest it all whenever you get it.

But let me introduce a new dimension to the discussion-- what about value-cost averaging? You could put it all into your long-term investments now, and put most of the lump sum into the lagging performers. Or you could incrementally invest it over the next year, each month putting the larger amount into whatever's lagged the most that month.

Of course first we have to settle the debate of whether or not to pay off the mortgage. Luckily you said you have no debts.

 

[Lisa99]

Thanks for the thought-provoking ideas Nord.

We do have a mortgage but are still working. We FIRE on Sept 1, 2016. We're also in a high tax braket so we'll retain a mortgage until we retire and downsize to a house that we pay cash for. Our mortgage interest rate is 4.5% so we aren't putting any extra funds into the house, about 40% of our gross income goes to investments.

We DCA avg today with bi-weekly investments into the Vanguard funds and this question of DCA vs lump will come up at least twice yearly (we sell ESPP and options as they mature).

My preference is to invest in a lump sum, using the money to rebalance if needed. But I wanted to see what you guys thought since I'm still pretty green at this having just fired Ameriprise last month

 

[REWahoo]

Lisa, you might do a forum search on the subject as there have been several "warm" discussions about this over the years.

One compromise I''ve seen proposed is split the difference: invest half as a lump sum, then DCA the other half either quarterly or monthly over the next year as a 'hedge your bets' strategy. Might be worth consideration.

 

[Lisa99]

I'll do that. Thanks for the tip.

and I like your 'warm' euphemism.

 

[Nords]

We do have a mortgage...

Eh, I tried to give you an excuse but you went there anyway...

So let me ask you the next question into tap-dancing this minefield: I understand your mortgage interest allows you to itemize your deductions (at least until your itemized deductions drop below the standard deduction). However the savings is only the difference between those two deduction levels so the dollar value of the savings may be much smaller than it seems.

Second question: Is your asset allocation currently holding any bonds or CDs that are yielding less than your 4.5% mortgage is costing you? If so, how much are you paying for the privilege, and is it costing more than you're saving on taxes?

Another way to look at the lump sum is whether you expect its investment in your AA to earn more than 4.5% after taxes for the duration of your mortgage.

FWIW we have mortgages on our residence and our rental property. But we don't invest in bonds, we significantly exceed the standard deduction, and after a few tough years we're working back up to a long-term CD rate that exceeds the mortgage rate.

We've also had our thoughts and our math scrutinized through several blistering years of those "warm" discussions.

 

[Lisa99]

OK Nords, now you're really making me think, which is a WONDERFUL thing.

40% of our investments are in intermediate term bonds (DHs 401k). The bond fund in his 401k has a 1-year rate of return of 9.24 and a return of 6.6 over the life of the fund (inception 2001). The ER is .06.

We just bought the house in March and have a 30-year note. I've seriously considered paying down the note so we can put more into investments (I'd like to get to 50% of gross income), but I didn't really know until you framed your bond return question how to analyze the best place for our money.

At first blush, looking at the bond return, we're better off continuing on the current path. However, we're selling three of our rentals next year. While the proceeds won't pay off our current mortgage, they would make a substantial dent. Lots to think about.

 

[RunningBum]

Not going to touch the pay off the mortgage question, but I do have opinions on DCA vs. lump sum. My priority is to keep my asset allocation in balance, so I will lump sum, using the funds to correct my allocation if needed.

Looking at it another way, how is that money any different at all from the money you already have invested? It's not, so why treat it any different? IMO it's just an emotional thing, people will feel bad if they put more money in and see the market tank, but it could just as easily tank a year later the day after they DCA the last bit. Implementing an asset allocation strategy consistently takes the emotion out of it. Don't forget, the market could just as easily take off upwards the day after you invest more money.

 

[Lisa99]

Agree completely with your thought process Running.

The thing that has really stuck with me in my reading is that investors who try to time the market miss big gains and big losses. And overall it hurts their portfolio. However, since my reading is in it's infancy I wanted to see what others think.

On the 'pay off the mortgage' path the idea is noted and I will do my due diligence and search the other threads on the topic.

 

[Nords]

On the 'pay off the mortgage' path the idea is noted and I will do my due diligence and search the other threads on the topic.

From the FAQ Archive:
http://www.early-retirement.org/for...f-the-mortgage-or-invest-the-money-30644.html

 

[Tractor guy]

I'm exercising some stock options that will generate a similar question for me. I'm trying to spread out the trades so that I'll have 3 investment opportunities over the next 6 months. This isn't really DCA in the traditional sense. More of a chance to check, double check, and fine tune the strategy. But thats driven more by my decision making style than any hard numbers on what is the best process. I've never been a plunger.

Tractor guy

 

[DblDoc]

Lisa99 - as mentioned above by RunningBum it is an emotional decision. Your expected returns with lump sum are greater than DCA but we are wired to suffer our losses more than we are pleased by our gains. The Boglehead Wiki does a good job of covering this topic Lump sum vs DCA - Bogleheads

DD

 

[easysurfer]

I sorta do both DCA and Lump Sum.

When I put $ into my HSA, I do that monthly (DCA). But when I rebalance come January, usually I just reallocate in one large chunk for each asset class (lump sum).

This isn't a self-made strategy, this approach just seems the most convenient for me.