6 Things To Consider Investing A Lump Sum

[Midpack]

A question that (understandably) comes up perodically here, and one experts suggestions.

One of the first decisions to make is whether to invest the proceeds all at once or over time using dollar-cost averaging (DCA). This is a strategy where you invest equal parts based on preplanned intervals. Here are four simple questions to ask yourself, to help you decide which strategy or combination of strategies may be right for you.

The guide above provides some ideas for the timing of lump-sum investing, but it doesn’t address where to invest it. That depends on your financial situation — although receiving a lump sum often changes that. Here are a couple of guides to help with investment decisions:

6 Things To Consider When Investing a Lump Sum

 

[steelyman]

That's an interesting starter piece and applies to my situation recently. I fell into #4 in the first group (how did you receive?) and chose #1 (how to invest).

I tried to be slick about the investment timing, but in the end it was basically dollar-cost averaging (DCA) over 24 months. That ended this Jan and I intend to post resulting 2015 annual return once the year-end statements arrive.

 

[rayinpenn]

401k transfer will happen soon ...calling it a day. So if my intention is to invest in dividend ETFs and hold forever why would I wait. Cash pays nearly zero.. Invest it all and I get a blended rate of 4% from day one... Market timing seems at best a 50% roll of the dice..


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[Turn_the_Page]

While I understand the argument that you re-invest immediately to stay in the game for the return, I just won't do it. Next year, I should get a pension lump sum, which will be 15% of my portfolio. I'll probably take at least a year getting it back in the market. I remember my co-worker that retired in 2007 or 2008 (? can't remember). He didn't "get around" to doing anything and was sitting in cash when the market tanked.

For me it's the risk of a really bad year immediately after retirement that I can't risk. It's the whole "sequence of returns" subject.

 

[Midpack]

While I understand the argument that you re-invest immediately to stay in the game for the return, I just won't do it. Next year, I should get a pension lump sum, which will be 15% of my portfolio. I'll probably take at least a year getting it back in the market. I remember my co-worker that retired in 2007 or 2008 (? can't remember). He didn't "get around" to doing anything and was sitting in cash when the market tanked.

For me it's the risk of a really bad year immediately after retirement that I can't risk. It's the whole "sequence of returns" subject.

In the long run, all at once vs DCA doesn't make a huge difference from most studies I've read, IOW there is no outright wrong/right answer. Short term, there's no predicting which will be best.

 

[dallas27]

Dca= dillusion of risk control. The only thing more dangerous than risk is thinking you managed it when you didn't


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[RunningBum]

I don't get why it matters where it came from. Money is money. Investments will do the same whether the money came from other similar investments or fell out of the sky. Proper asset allocation is your protection against market downturns, while taking advantage of when the market rises.

Psychologically it is different. Call it that. If it helps you to sleep better by not putting it all in at once, go ahead. Like what was said, it won't make too big of a difference over the long haul.

If you think the market is too high when you have your lump sum, call it market timing. Nothing wrong with that either.

Sequence of returns is another excuse. Hypothetically, if I retired 5 years ago at age 50 and the market was relatively flat, I am in the same position as someone at age 55 retiring today but some will say the new retiree is exposed to a downturn in the first couple years of their retirement because of sequence of returns, but apparently I am safe because I made it 5 years into my retirement without a drop. However, we are the same age and probably the same financial condition since in my hypothetical example I only held ground in those 5 years.

I know I've said this before and I'm a broken record, but I'm surprised to see Ferri take this view.

 

[steelyman]

I didn't word my reply in this thread accurately. I wrote "timing", but what I meant was "amount". I couldn't invest exactly 1/24th of the initial available cash each month over 2 years, because some money (albeit small) was coming in through interest. And some (unknown) amount was withdrawn due to IRS-required distributions.

So I just invested 1/24th in month 1, 1/23rd in month 2, etc. It went to whatever fund was lowest with respect to the eventual desired allocation. That changed too, subject to whatever the market was doing.

 

[hnzw_rui]

I know I've said this before and I'm a broken record, but I'm surprised to see Ferri take this view.

Probably because DCA will at least have someone invest now and continue investing rather than just sitting in the sidelines forever. The advice likely stems from psychology rather than mathematical probabilities.

 

[jazz4cash]

While I understand the argument that you re-invest immediately to stay in the game for the return, I just won't do it. Next year, I should get a pension lump sum, which will be 15% of my portfolio. I'll probably take at least a year getting it back in the market. I remember my co-worker that retired in 2007 or 2008 (? can't remember). He didn't "get around" to doing anything and was sitting in cash when the market tanked.

For me it's the risk of a really bad year immediately after retirement that I can't risk. It's the whole "sequence of returns" subject.

But it's only 15 pct. I would be way more concerned with how the other 85 pct is allocated.


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