Re-visit: DCA vs. Lumpsum ..please advise

[saenar]

Dear All

Thanks for the most valuable community.

I have been reading all the old thread regarding DCA vs. Lumpsum discussions (back in 2006-2007). Basically, lumpsum normally beats the DCA but most of us do not have the lumpsum to really actually do the lumpsum. DCA, however, helps you the downside risk and help you being more disciplined. Also with DCA, there was an article that said the max you can DCA (if you have lumpsum) would be 12 months.

Now, 2013 with the current market situation. I got scared away from 2008 market. Still LBYM and save lots of money, my wife and I managed to have 200k saved in cash (I know ...I missed lots of opportunity here - my bad). I want to make this 200k works for us now even it can be little too late.

1. For the peace of mind, I still want to do DCA. How long should be distribute this money into? monhtly for 12 months?

2. Let say if I will go with DCA and , et say, decide to put in 10% every month for the next 10 months. Where should I put the excess money? Can I put it into any low-risk fixed income? I don't want to see my money sitting there doing nothing anymore.

3. Or...Lumpsum?

 

[Ready]

There is no right or wrong answer here. DCA should theoretically reduce risk, but also reduce reward if you miss out on opportunities while waiting to invest the money over time. On average, DCA will not beat lump sump because the market goes up more frequently than it goes down.

However, whether we are at a market high today or not is anyone's guess. You just have to decide what you are comfortable with. I always try to DCA, then get frustrated and end up putting the rest into the market at just the wrong time, and end up losing out. I finally just accepted that I'm going to keep 60% in equities and not try to time the market any more, but if the market goes down, my 60% might become 55%, at which point I would need to shift another 5% in to rebalance. So for me, rebalancing has been more manageable than trying to DCA.

 

[saenar]

I finally just accepted that I'm going to keep 60% in equities and not try to time the market any more, but if the market goes down, my 60% might become 55%, at which point I would need to shift another 5% in to rebalance. So for me, rebalancing has been more manageable than trying to DCA.

Thank you "Ready"!!. Now my question will be where do you put the 40% of the money Not in equity? Bond is looking bad right now. Thanks again.

 

[Midpack]

There have been many more threads since 2007, here's a more recent example http://www.early-retirement.org/forums/f28/investing-in-stocks-when-market-is-high-66906.html, but the consensus is always 'no consensus' on DCA vs Lump Sum. The decision is as much personal/emotional is it is quantifiable - if lump sum just makes you nervous for whatever reason(s), then DCA. DCA does not always beat Lump Sum or vice versa, the best you'll get are odds, and those can vary too depending on asset classes, period studied, etc.

As for where to put the money during the DCA period. Clearly you don't want equities or you'd lump sum. You don't want bonds by your own statement in #3. And cash returns are almost zip. Unfortunately, those are your only real choices - I can't imagine doing something more exotic with the funds, especially for a 12 month DCA. Best of luck...

 

[saenar]

There have been many more threads since 2007, here's a more recent example http://www.early-retirement.org/forums/f28/investing-in-stocks-when-market-is-high-66906.html, but the consensus is always 'no consensus' on DCA vs Lump Sum. The decision is as much personal/emotional is it is quantifiable - if lump sum just makes you nervous for whatever reason(s), then DCA. DCA does not always beat Lump Sum or vice versa, the best you'll get are odds, and those can vary too depending on asset classes, period studied, etc.

As for where to put the money during the DCA period. Clearly you don't want equities or you'd lump sum. You don't want bonds by your own statement in #3. And cash returns are almost zip. Unfortunately, those are your only real choices - I can't imagine doing something more exotic with the funds, especially for a 12 month DCA. Best of luck...

Thank you Midpack!!. I didn't read the thread and will do that. I don't mind the bond but everything I read about the bond these days are negative. Oh well....I believe I will slowly doing DCA just for our peace but will need to figure out where to put the rest of the money. Thanks again!!

 

[Ready]

Buying bond funds is very challenging today, but if you DCA into the bond funds, you will almost certainly see some benefit. Which begs the question, why buy into bond funds at all right now? But since we don't know how long interest rates will be depressed or how quickly or slowly they go up, having some exposure to bonds is still generally considered a good idea. I currently have capped my exposure to bonds at 20%, but I'm fortunate to have CD's paying 3.5% for the remaining 20% of my fixed income. If I didn't have those, the decision would be a bit tougher.

 

[clifp]

The good news is bond funds, like BND, are down 5+% and yields are up even more than that. So while bonds are far from a great investment they don't suck as much as they did just a few short months ago.

 

[pb4uski]

Assuming that you ultimately want to be in equities, I would 1) move the cash to an online savings accounts that will pay 0.8-1.0% and then 2) value average over some period of time.

For example, let's say you have $200k to invest and want to do it over 20 months. Invest 10k. A month later add whatever you need to to bring your balance to $20k. A month later add whatever you need to to bring your balance to $30k. Repeat until fully invested. You'll end up investing more when the market is relatively low and investing more when the market is relatively high.

YMMV

 

[Brett_Cameron]

. . . . You'll end up investing more when the market is relatively low and investing more when the market is relatively high.

YMMV

Sometimes, more is less!

Sorry, I could not resist.

 

[karluk]

Dear All

Thanks for the most valuable community.

I have been reading all the old thread regarding DCA vs. Lumpsum discussions (back in 2006-2007). Basically, lumpsum normally beats the DCA but most of us do not have the lumpsum to really actually do the lumpsum. DCA, however, helps you the downside risk and help you being more disciplined. Also with DCA, there was an article that said the max you can DCA (if you have lumpsum) would be 12 months.

Now, 2013 with the current market situation. I got scared away from 2008 market. Still LBYM and save lots of money, my wife and I managed to have 200k saved in cash (I know ...I missed lots of opportunity here - my bad). I want to make this 200k works for us now even it can be little too late.

1. For the peace of mind, I still want to do DCA. How long should be distribute this money into? monhtly for 12 months?

2. Let say if I will go with DCA and , et say, decide to put in 10% every month for the next 10 months. Where should I put the excess money? Can I put it into any low-risk fixed income? I don't want to see my money sitting there doing nothing anymore.

3. Or...Lumpsum?

I would venture to assert that even a casual reader of this thread cannot help but be struck by the fact that you have apparently decided to go from a 100% cash position into 100% stocks and your only question for the forum is "lump sum or dollar cost average?" You don't like bonds because you perceive them as too risky, and you don't like cash because you "don't want to see my money sitting there doing nothing anymore". So stocks are the place to be, and you're ready, willing and able to jump in. The only question is how fast.

I suggest that the first questions you need to ask yourself are a little more along the lines of "How much risk am I willing to take?" or "What will I do once the next bear market hits?" or "What should my long term target asset allocation be?" If you take the trouble to answer these questions, you will have a much better chance of making a sensible investment plan and sticking to it without perpetually bouncing around from 100% this into 100% that and back again, depending on your current perception of market conditions. In particular, I find it hard to believe that bonds have no place whatsoever in your portfolio, no matter how poor your current opinion is of them.

 

[pb4uski]

Sometimes, more is less!

Sorry, I could not resist.

Oops!

 

[rayvt]

2. Let say if I will go with DCA and , et say, decide to put in 10% every month for the next 10 months. Where should I put the excess money? Can I put it into any low-risk fixed income? I don't want to see my money sitting there doing nothing anymore.

3. Or...Lumpsum?

You realize that after 10 months you'll be 100% invested, right? And that when you look back at it 20 years from now, that 10 month span will not look any different than a 1-month lumpsum?

You money will be either invested in something, or sitting in cash. Sitting in cash it'll be earning approx 0.000% If something else, why not just go ahead and put it now into whatever it'll be after 10 months?

 

[Rothman]

DCA made sense when you were saving the money, you would have done well. Given you set your AA and this money should be in equities, do it. Do it now, add to positions with new savings. Sitting in cash is lost opportunity of the past, you clearly see that now. Good luck, congrats on great savings ability, take DW to nice dinner to celebrate your market day.