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

[amy5708]

Hi there,

looking for some advice (I know; it's worth what you pay for it!)

DH received a very large lump-sum payout last year of his stock after leaving his job of 20+ years. It was in an ESOP, so now sitting in Money Market IRA.

Thank God I didn't listen to everyone last year who was on the stock market and housing investment bandwagon! Everyone thought I was crazy to leave the money alone when they were making gobs, but I insisted that investing when the market was at an all-time high was a very bad idea, and now I am proven right!

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

 

[REWahoo]

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

Here is a thread that discusses lump sum vs. DCA investing: http://www.early-retirement.org/forums/f30/dollar-cost-averaging-lie-24307.html

 

[Dawg52]

No one knows if we have hit bottom, but the Dow is down roughly 14% from last October. Looks like a perfect time to start DCA to me.

I like the Coffeehouse model BTW.

 

[Rich_by_the_Bay]

If you don't need the money for 10+ years or so, most references (here for example) I have seen suggest that you just buy in now. The sooner you're in, the more time you allow for stocks to beat bonds to beat cash, etc. Over that period of time left in the market (or longer) the sooner the better.

DCA basically prevents shocks to your portfolio. For long term investing it may actually provide less total return than lump sum investing. That said, if you would feel awful about it for the rest of your life if stocks dropped another 10% thereafter, DCA will spare you that experience. (Of course if stocks went abruptly up and you had failed to lump sum in, you might feel equally bad; you just can't time it so dive in.)

 

[Art G]

DCA is the way to go in my opinion. If you think the market has hit bottom, you can always speed up the process. However, if you're fully invested, there's no way to undo your investments. Just pick a time frame and make it automatic. Take the emotion out of your decision and you're likely to see better results.

 

[HFWR]

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

Assuming you want to be a DMT, I would do the reverse. I would DCA into stocks, and hold off on bonds.

Stocks are "on sale" after the recent drop(s); bonds, since rates are pretty low, are pricey. Additionally, low rates and stimulative policies by the Fed and the govt. should be good for stocks in the intermediate term.

 

[Rich_by_the_Bay]

DCA is the way to go in my opinion. If you think the market has hit bottom, you can always speed up the process. However, if you're fully invested, there's no way to undo your investments. Just pick a time frame and make it automatic. Take the emotion out of your decision and you're likely to see better results.

Art, but just wondering how you came to that opinion. The evidence (cited above and in abundance elsewhere) seems to strongly support lump sum investing over DCA in this context.

Perhaps you're considering factors besides total return? Thanks.

 

[FinanceDude]

Art, but just wondering how you came to that opinion. The evidence (cited above and in abundance elsewhere) seems to strongly support lump sum investing over DCA in this context.

Perhaps you're considering factors besides total return? Thanks.

I have never DCAd, either in my portfolio or my clients. There's an old adage I heard from a guy I used to work with that had 43 years in as an advisor. He said: "The best time to invest in the market is when you have the money to do so"...........

Sounds too simple, but I think DCA may help on the downside,but not the upside. There are economies of scale in lump sum investing...........

 

[FinanceDude]

Hi there,

looking for some advice (I know; it's worth what you pay for it!)

DH received a very large lump-sum payout last year of his stock after leaving his job of 20+ years. It was in an ESOP, so now sitting in Money Market IRA.

Thank God I didn't listen to everyone last year who was on the stock market and housing investment bandwagon! Everyone thought I was crazy to leave the money alone when they were making gobs, but I insisted that investing when the market was at an all-time high was a very bad idea, and now I am proven right!

If the Dow was at 15,000, would you have said the same thing?

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

If you're NOT going into 100% stocks, why DCA at all? Studies suggest DCA doesn't work in most cases........

I don't think we've hit bottom, although I know I'm market timing a little, here.

Amy

I have yet to meet a market timer that made money.............

 

[Art G]

Art, but just wondering how you came to that opinion. The evidence (cited above and in abundance elsewhere) seems to strongly support lump sum investing over DCA in this context.

Perhaps you're considering factors besides total return? Thanks.

Rich, I guess I need to find the scenario showing buying cows on a DCA basis vs lump sum to make my point.
If you believe the market will do nothing but go straight up, then by all means get in now! However, if you believe the market will be choppy, then I can't imagine DCA won't help. Of course the key is to be getting some sort of return while you wait to invest. If you're sitting with cash under your pillow, then you are losing returns, at least short term.
Now, with that all aside, lets look at the emotional side of it. Consider you doing a lump sum investment on November 1st '07 because you've always heard, "Buy in November and go away in May". However, instead this last November has seen a dramatic decline in value, are you a happy camper that you've just seen your retirement value drop 13% in the first few months of retirement? Are you now considering just pulling all your money out of the market and hiding it in CD's? Or, you've DCA'd into the market and are still buying into the market at these lower prices, and are down about 6% in value?
OR
The market has been running since November and you've just made 13% return already and you wonder why you didn't do this long ago, or are just up 6% because you've been buying monthly, and are still buying at these higher prices.
So the question is, which scenario bugs you more? The answer should determine your personal decision.

 

[haha]

I have never DCAd, either in my portfolio or my clients. There's an old adage I heard from a guy I used to work with that had 43 years in as an advisor. He said: "The best time to invest in the market is when you have the money to do so"...........

This might be especially true from the POV of an advisor. In the catagory of "Strike while the iron is hot!"

I have yet to meet a market timer that made money.............

How about Millionaire Mom?

Ha

 

[FinanceDude]

This might be especially true from the POV of an advisor. In the catagory of "Strike while the iron is hot!"
Ha

There are plenty of studies to back me up on that..........

But thanks for your kind words so close to Valentine's Day...........

 

[FinanceDude]

How about Millionaire Mom?
Ha

Where is she??

 

[haha]

But thanks for your kind words so close to Valentine's Day...........

LOL! Think nothing of it Dude, I am merely helping you look out for #1.

After all there will soon be a river of volunteer "no fee only" planners issuing forth from ER.ORG. You might someday need a marketing consultant.

Ha

 

[FinanceDude]

After all there will soon be a river of volunteer "no fee only" planners issuing forth from ER.ORG. You might someday need a marketing consultant.

As long as you guys are willing to pay E&O insurance to the tune of $1700-$2200 a year, have at it!!

BTW, I WOULD NOT advise offering a lot of "free financial planning" without it...........

 

[Marquette]

As long as you guys are willing to pay E&O insurance to the tune of $1700-$2200 a year, have at it!!

BTW, I WOULD NOT advise offering a lot of "free financial planning" without it...........

What if we each got liability insurance and then sued each other? some sort of retire quick scheme

 

[mickeyd]

Hey Amy,

I am thinking about starting to get some Inflation-Protected Securities now, because of inflationary pressure

Most of the reading that I have seen about TIPS indicates that it is better to invest in TIPS in tax deferred funds (IRA) because they are tax inefficient. You might want to investigate this aspect of TIPS investing before you actually jump in.

 

[jIMOh]

I'd decide on asset allocation (60-40 is what I heard).

I would put 20% into market now. Then put 10% into stocks and 10% into bonds on same days the first of next 4 months (March-April-May-June)

You would be converting 100% cash to 20-80, then 30-10-60, then 40-20-40, then 50-30-20, then 60-40.

In 20 years the exact entry point 240 months ago won't matter. Whether there is one data point (lump sum) or multiple (DCA) will not have a huge effect on the return.

a) assuming market does not move more than 20% in either direction from here this year
b) assuming you have allocation picked out correctly
c) assuming only two asset classes make sense for this new money

 

[SecondCor521]

Amy,

My opinion, and it's worth what you paid for it, is to determine your asset allocation and then move there immediately. In other words, in your situation I would lump sum invest ASAP. But that's just me.

2Cor521

 

[FinanceDude]

What if we each got liability insurance and then sued each other? some sort of retire quick scheme

Maybe Gumby or Martha can figure it out..........

 

[FinanceDude]

I'd decide on asset allocation (60-40 is what I heard).

In 20 years the exact entry point 240 months ago won't matter. Whether there is one data point (lump sum) or multiple (DCA) will not have a huge effect on the return.

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

 

[Texas Proud]

I have never DCAd, either in my portfolio or my clients. There's an old adage I heard from a guy I used to work with that had 43 years in as an advisor. He said: "The best time to invest in the market is when you have the money to do so"...........

Sounds too simple, but I think DCA may help on the downside,but not the upside. There are economies of scale in lump sum investing...........

The only time I DCA is when I have to... the 401(k) kind of makes you do it that way... all other money goes to where it should when I get it.

 

[Texas Proud]

How about Millionaire Mom?

Ha

What happened to her anyhow... kind of dropped off the radar.. I think my 'BS' meter was working...

BUT, someone who does it for a short time is more 'lucky' than good... for me you would have to show you were doing it on almost all big drops.. because you knew something... anything else is just guessing and by stats there will be a certain % who guessed right...

And she never did say how much she had lost since Oct or YTD.... which would be very interesting to see...

 

[free4now]

While I believe the studies that say lump sum will give you on average the best lump sum at the end, I sometimes do big purchases in three transactions, separated by a week or two. It's a compromise that makes me feel less exposed even though it probably costs me a little in extra transaction fees and opportunity costs, and probably doesn't offer any real risk reduction. It's a small price to sleep well at night.

 

[FinanceDude]

While I believe the studies that say lump sum will give you on average the best lump sum at the end, I sometimes do big purchases in three transactions, separated by a week or two. It's a compromise that makes me feel less exposed even though it probably costs me a little in extra transaction fees and opportunity costs, and probably doesn't offer any real risk reduction. It's a small price to sleep well at night.

I used to have a comparison piece between two investors, one who invested on the BEST market day of each year (Unlucky), and one who invested on the WORST (Lucky). In the end, their portfolios were almost the same in value and return..........I'll see f I can find it........