When would you get in the market with a lump sum?

[Art G]

Which means that DCA is not worth doing if we are talking long periods.........

I had breakfast this morning with Dr. Quincy Krosby, and DCA came up in conversation. Her statement was that you should absolutely be DCA'ing into the market. She stated that ALL institutional investors DCA into the market, and she thought it was crucial or else risk missing the benefits of key moves in the market.
Just thought I'd pass it along.

 

[free4now]

Institutional investors DCA because they are big enough that they can move the market. Most individual investors don't have that concern.

Art, don't knock doing what gives the best odds. In the end that's all we can do as investors is get ourselves into the situation where the odds are most in our favor. Many of us believe asset allocation is the way to do that. But once you have gotten yourself into that situation, you have to be willing to accept whatever happens. Wanting more safety and control is exactly the fear and greed that you talked about wanting to avoid.

 

[Art G]

free, if you wanted to move the market you wouldn't be DCA'ing. You'd want to lump sum in and make a mark.
You say the odds are with not DCA'ing, and I disagree. Nothing wrong with asset allocation and I certainly don't see the two as mutually exclusive.

 

[free4now]

If an institutional investor moved the market that would be a bad thing for them, which is why they use DCA.

 

[W2R]

Anyway, now I have a lump sum and I want to invest based upon Modern Portfolio Theory. I am thinking of the Coffeehouse Model. Set it and forget it. About 40% fixed income, the rest stocks, in ETF's and MF's

The question is, when do I start buying in, using dollar cost averaging?

I am thinking about starting to get some Inflation-Protected Securities now, because of inflationary pressure, and wait a little while to buy stock ETF's. I don't think we've hit bottom, although I know I'm market timing a little, here.

Amy, like you I'm dealing with a lump sum. In my case, I received about 2/3 of it on February 13th and the rest should arrive this spring.

I have put a large amount in Wellesley VWIAX right off the bat; it is over 61% bonds and doesn't vary much, so I have no problems with doing that.

And for what it's worth, as another part of my investment plan I am moving an equally large amount into a small number of Vanguard equity index funds more gradually, over 4-5 months (on the 14th of each month, Feb-June).

I do think that higher risk is likely to give you higher reward, as several here have pointed out. Still, we each have to determine what sort of risk will allow us to sleep at night, and I think that individuals differ on that.

I have no crystal ball telling me what the market will do. I would never know until later, if I was buying equity funds on the best or worst day possible from an investment standpoint. If I bought all of my equity funds on the worst day possible, I would stress out about it and chastise myself endlessly for years. If instead, I buy on five different dates, I have five times as great a chance of hitting the worst day possible - - but I would only be buying 20% my equity funds on that day. I can live with that a lot easier.

I see no need for me to rush into this, though I do want to be fully invested to the extent of my plan by mid-June. Meanwhile, the remainder of the lump sum will be earning interest in Vanguard's Prime Money Market fund VMMXX.

I am definitely NOT saying that everyone should DCA instead of investing the entire lump sum immediately, just because I did so with one portion of my lump sum. I am just saying that for me, as an individual and knowing my own tolerance for stress and risk, I know I have made the right decision. Individuals are different and we need to keep that in mind. This is not necessarily a "one size fits all" decision for the individual investor.

 

[Art G]

If an institutional investor moved the market that would be a bad thing for them, which is why they use DCA.

Well I can only share with you what I got directly from a chief investment strategist.

 

[haha]

Art, don't knock doing what gives the best odds. In the end that's all we can do as investors is get ourselves into the situation where the odds are most in our favor. Many of us believe asset allocation is the way to do that. But once you have gotten yourself into that situation, you have to be willing to accept whatever happens.

There is a problem with this reasoning. We use asset allocation because we are not sure which asset classes will outperform, and which will underperform in a given time frame,though all the classes that we choose have positive expectations over a longer timeframe. A good idea.

We also could apply this same reasoning to diversifying over time. We are not sure when our chosen classes will be going up, when they will be going down. although we assume that they will go up more than go down overa longer time period. This uncertainty seems to suggest that DCA is a good idea, in that it diversifies time based risk exposure, just like asset class investing diversifies asset class exposure.



Ha

 

[FinanceDude]

There is a problem with this reasoning. We use asset allocation because we are not sure which asset classes will outperform, and which will underperform in a given time frame,though all the classes that we choose have positive expectations over a longer timeframe. A good idea.

We also could apply this same reasoning to diversifying over time. We are not sure when our chosen classes will be going up, when they will be going down. although we assume that they will go up more than go down overa longer time period. This uncertainty seems to suggest that DCA is a good idea, in that it diversifies time based risk exposure, just like asset class investing diversifies asset class exposure.



Ha

A LOT of folks have DCA going on all the time, into their 401K. So on an OVERALL analysis, what is wrong with a lump sum when they are looking to do something outside? They are in effect doing both, which couldbe construed as the best of both worlds........

There was a study back in 2004 that said 13% of all folks STOPPED doing any 401K contributions in the period 2000-2003, another 15% LOWERED their contribution, and the majority stayed the course and kept pouring the money in............

 

[haha]

A LOT of folks have DCA going on all the time, into their 401K. So on an OVERALL analysis, what is wrong with a lump sum when they are looking to do something outside? They are in effect doing both, which couldbe construed as the best of both worlds........

This may be true. I don't remember whether this applies to the OP. Also, it really doesn't change my point; more it makes a case, and possibly a good one, for a special case were the lump sum is not large relative to regularly recurring flows.

Also, I am not saying anything is wrong with anything anyone wants to do. I don't care if your pleasure is to wait until a class is making new highs, and then decide that this is exactly the asset class that you need to add, right now. I remember a flurry of interest in REITs 18 months or so ago, when a lot of posters suddenly discovered that this was a class they really should have. Not much being said about REITs now, after 30-45% losses. I have no idea whether REITs would now be a good or bad investment, but someone bit by the REIT bug 18 months ago might wish that he had DCA'd into them rather than taking a nice big slice then.

No sense trying to stop the tides; no sense trying to stop human nature.

I am just making an abstract intellectual argument for people to use or refuse as they see fit. However, my recent experiences on this board should have shown me that for many it is hard to get away from should, and also that abstract arguments tend to hold little interest for many of us.

Ha

 

[Art G]

haha....I couldn't agree more.

 

[FinanceDude]

I remember a flurry of interest in REITs 18 months or so ago, when a lot of posters suddenly discovered that this was a class they really should have. Not much being said about REITs now, after 30-45% losses. I have no idea whether REITs would now be a good or bad investment, but someone bit by the REIT bug 18 months ago might wish that he had DCA'd into them rather than taking a nice big slice then. Ha

People would rather argue with EMOTION than LOGIC, remember Spock's famous phrase: "Logically, Captain, I should be Captain"...........

The reason most investors do poorly is their nature to get in when things are at alltime highs. Also, listening to CNBC and other financial gurus leads folks to BAD decisions..........once the news is ALL about REIT, it means the "smart money" has been in there for awhile, and is trimming their positions.

I love the MF managers they have on there, when they use the words: "We like XYZ stock,you better sell it quick, or have a put strategy in place", because after a 1-hour uptick that puppy's heading south most likely.............

 

[Art G]

One thing this Quincy Krosby said that stuck with me was that; when the market is going up, people believe this time will be different than all the others and continue up, and when things look the worst, people are convinced this time things will be different and never come back.
One other thing, she said she was asked on CNBC what should the individual investor be doing in these times and her response was, "turn off the TV".

 

[FinanceDude]

One thing this Quincy Krosby said that stuck with me was that; when the market is going up, people believe this time will be different than all the others and continue up, and when things look the worst, people are convinced this time things will be different and never come back.
One other thing, she said she was asked on CNBC what should the individual investor be doing in these times and her response was, "turn off the TV".

I like her already..........

I remember when the Dow hit 7286 on October 9th, 2002. You couldn't GIVE a stock away..........seems to have been a good time to put a lump sum in, no??

 

[Art G]

She gave some pretty good indicators to watch for, but not sure where a good place to post on here would be.
Although, her bottom line seemed to be about the same as mine. We need to be watching still for further indicators.

 

[hellodeli1]

Actually, since you are considering cost averaging, the assumption is that you'll be in the market for a while. In this case, it's actually better to go ahead and invest the lump sum. In the long run, you'll get a better return because of the time the money was in the market.

musings on personal finance

 

[chinaco]

I have stopped chasing momentum (which is usually the popular advice). Because of a aversion to risk, I have tended to average my money into and out of (any significant) position. But on analysis of past events, I have found that I would have been better off with a lump sum investment.

IMHO - use a contrarian strategy and lump-sum invest in assets that are out of favor. But ensure that you have at least a 7-10 year time horizon for long-term securities.

However, in spite of my advice above I still DCA in and out of positions. THe older I get, the more risk averse I am.

 

[Anne]

What is the consensus around here on dollar value averaging? This is likely going to be my strategy when I start making large monthly investments in taxable, but I'd like to hear your thoughts.

 

[haha]

What is the consensus around here on dollar value averaging? This is likely going to be my strategy when I start making large monthly investments in taxable, but I'd like to hear your thoughts.

I read Edleson's book on this method aroung the millennium. I thought it was very interesting, and he is well informed and highly educated.

It seems that since you will be selling funds from time to time, it might be better in a tax deferred account.

Ha

 

[Anne]

Thanks Ha. My thought is that if I'm investing enough monthly, I won't have to sell very frequently because I can just put the money into other asset classes to keep both the overall portfolio value and the asset allocation where I want them. I think I need to model this with a hypothetical portfolio to see if it will work.

 

[ziggy29]

Thanks Ha. My thought is that if I'm investing enough monthly, I won't have to sell very frequently because I can just put the money into other asset classes to keep both the overall portfolio value and the asset allocation where I want them. I think I need to model this with a hypothetical portfolio to see if it will work.

If you are regularly adding substantial amounts to your portfolio, "rebalancing" by buying the underrepresented asset classes works very well. And as you said, it can prevent the need to sell -- particularly important for taxable accounts.

In reality, in my 401K plan (Fidelity) I'm too lazy to change what I buy week after week. I have it set up so I always buy the 2030 lifecycle fund with each new contribution, and at the end of the year I rebalance between five different funds.