Lump sum to invest, DCA in or go lump?

[Olav23]

I know there is a general sentiment that you should just lump into an investment when you have years to wait, but with the shakey-ness of the market lately, I'm wondering whether I should go all in now, or DCA over a period of a year or so?

Just an example of why I'm a bit nervous.

I finally started to get my finances in order and moved some money around, dumping a lot of my "crappy" funds that were at least allocated properly among asset classes. My plan was to clean shop and move into indexes from active funds. So, I dumped all the funds and moved this portion of the money into the vanguard intl fund. Well, the VERY NEXT day was 2/27! This seems to be a common occurence for me. I am not too upset since I have 20 years to invest, but still... what timing, as usual

Do you ever get the thought that no matter how random your actions, 10000 people must be doing the same thing at the exact same time? Or maybe some type of butterfly effect, who knows... Maybe I am paranoid. (doesn't mean they're not after me!)

 

[LOL!]

The studies that show that lump sum is better have more info under the hood. LS is better only 60% to 65% of the time and the degree of "better" is only 1% to 4% over the first year. In other words, "better" is just barely better.

If you had not dumped your funds, you would have lost the same amount as you did in your new fund.

Anyways, LS if you like or DCA if you like. It won't really matter what you do.

 

[rockyj]

I'm wondering whether I should go all in now, or DCA over a period of a year or so?
<snip>
dumping a lot of my "crappy" funds that were at least allocated properly among asset classes. My plan was to clean shop and move into indexes from active funds. So, I dumped all the funds and moved this portion of the money into the vanguard intl fund. Well, the VERY NEXT day was 2/27!

I'm sure many of us can empathize. Our household now makes roth contributions for wife, I and each of working children. For the last couple years we generally dump it all in in early year as opposed to DCA. Admittedly Roth contributions may not be a big deal in terms of percentage of portfolio, but nevertheless the same question applies (immediately in versus DCA). Last year and (so far) this year both have been cases where the markets went down relatively shortly after deposits were made. Last year they recovered nicely, but DCA likely may have been at least a marginally better deal. This year is too soon to tell.

My personal opinion, though I can't say if it's supported by historical or statistical case, is that if I now came into a relatively large pot of cash that I wanted to trasfer to vanguard, I would stick it first VG money market account and then start to relatively aggressively DCA into the asset classes I had predetermined that I wanted to be in. With long term money, as it sounds like you are dealing with, perhaps DCA in over the next year. That would at least take the psychological (and monetary) sting out of any big drop in the next week, and similarly take some of the psychological sting out of being partially out of the market with that money should the bull keep its legs (by virtue of being somewhat in the market and at least earning your 5% on the MM for the balance).

I do wonder though, at your description that you took money from "crappy" but properly allocated funds and dumped it all into vanguard international (indicating an abrupt change in allocation). My above comments presume a relatvely steady plan for AA.

Edit to add: above also is thinking in terms of new cash. If transferring assets already in equities just to get to better funds, I would likely just move in kind - but that wouldn't avoid any overall hit anyway.

 

[lswswein]

Hi Olav
In general because of the positive risk premium of equities, LumpSum will beat DCA. But if you tend to regret large moves into the market DCA might let you sleep better at night. Also if you are DCAing don't do it for more than an yr!

-h
References to read:

1. Richard E. Williams and Peter W. Bacon, "Lump Sum Beats Dollar Cost Averaging,"
http://www.fpanet.org/journal/articles/2004_Issues/jfp0604-art11.cfm

2. Do Not Dollar-Cost-Average for More than Twelve Months
http://www.efficientfrontier.com/ef/997/dca.htm

 

[DangerMouse]

As others have said, long term studies show that lump sum is best.

However, knowing this, I always choose to DCA. No real logic to my decision, but it's what helps me sleep at night.

It's not about doing what is right or wrong, it's about doing what makes you comfortable. BTW as to thinking you cause all major market downfalls, I used to be the same, as soon as I made a purchase you could expect the equity concerned would experience a price reduction within the next week. However, by DCA I am now able to take advantage of those drop in prices.