DCA vs Lump Sum Investment ~ Your Thoughts?

[bingybear]

historically dca does not work well since long term markets are up 2/3's of the time and down only 1/3.

that is the reason target date funds are not the best vehicles for buying in to over time.

you get less and less shares as prices go higher at the same time the fund is cutting back.

you can end up way more conservative than you wanted to be .

I thought target date funds shifted your allocation with age which is recommend by many financial resources and advisers. What is the old adage? .. own 100-age% in bonds. So if one is following the adage, target date or not ... this is a different issue. But I think most dollar cost averaging is in accounts like 401ks as you invest new money.

DCA would have worked great for one who DCA for 6 months starting September 2008... so it can work out OK. But I agree in general one should just invest lump sum. However, this the OP being concerned about the market being high and as he put it "DCA will help him sleep at night". The latter is a good reason to DCA. If one is anxious, they may act rashly due to short term market volatility.

 

[mathjak107]

well the problem is just that , at the same time the target fund is ramping down by time the fact that markets are only down 1/3 of the time means you will be buying less and less shares as time goes on plus less and less in equity's.

that combo will leave you far more conservative than if you were able to plunk down a lump sum and let the target fund run its glide path.

dca'ing has cherry picked time frames where it may have performed better but basically you would be betting against the house hoping your time frame was one of them.

 

[pb4uski]

While I understand that 2/3 up and 1/3 down argument in favor of a lump sum investment, I wonder if the 2/3 to 1/3 relationship persists within 18 months of a market being at an all-time high.

If I had a large lump sum, I would be hesitant to invest it all given the run the market has had recently.

 

[bingybear]

well the problem is just that , at the same time the target fund is ramping down by time the fact that markets are only down 1/3 of the time means you will be buying less and less shares as time goes on plus less and less in equity's.

that combo will leave you far more conservative than if you were able to plunk down a lump sum and let the target fund run its glide path.

dca'ing has cherry picked time frames where it may have performed better but basically you would be betting against the house hoping your time frame was one of them.

note I agreed with you on the premise of DCA not being the typical best way is to lump sum if one can sleep at night. The sleeping at night is the bigger issue, these emotions tend to get people to bail on a plan at the wrong times.
I still don't understand your issue with the target date fund unless you don't like following the adage of what % one should have in bonds vs stocks. If you did shift your own allocation by this adage... you would have a similar result. So other than the added expenses, I don't see the difference of using a target date fund. Note -- I don't use target date funds. So would you suggest the same allocation cradle to grave?

And for me, I have had no real choice but to DCA because my employers would not front load my pay... that is give it all to me at the beginning of time... but paid me little bits every month. So I could DCA or I could have saved it until I had it all ... and then invested.

And yes I cherry picked a date. But in Sept 2008 I think it was obvious where the market was headed. Where the bottom was going to be and when... less so. At this point, less so.

 

[eytonxav]

As with any allocation, better to do what ever will let you sleep at night and not second guess yourself.

 

[RunningBum]

And for me, I have had no real choice but to DCA because my employers would not front load my pay... that is give it all to me at the beginning of time... but paid me little bits every month. So I could DCA or I could have saved it until I had it all ... and then invested.

The question was whether to DCA a lump sum. It makes perfect sense to contribute as you go from your paycheck. You get the benefits of averaging in, while also having the benefits of being fully invested.

And yes I cherry picked a date. But in Sept 2008 I think it was obvious where the market was headed. Where the bottom was going to be and when... less so. At this point, less so.

Did you sell in Sept 2008? If not, why not, since it was so obvious?

Jan 2000 was another date to cherry pick, especially in hindsight. The market had been roaring, and it should've been clear it couldn't keep going, right? Clearly a DCA strategy would do better. But conditions weren't much different at the start of 1999. But if you DCA'd over 1999, you missed out much of a near 20% rise, only to be fully invested just in time for the fall. Much worse than lump sum.

And that's one of the problems with DCA. Yes, the market seems high right now, but is it going to dive tomorrow, or is it going to go up for awhile longer while you slowly trickle your money in, and then dive once you're all in? You not only have to know which direction the market is headed, but you have to know that it is headed that way right now, or at least in the very near future.

 

[mathjak107]

While I understand that 2/3 up and 1/3 down argument in favor of a lump sum investment, I wonder if the 2/3 to 1/3 relationship persists within 18 months of a market being at an all-time high.

If I had a large lump sum, I would be hesitant to invest it all given the run the market has had recently.

in the scheme of a 25-40 year accumulation stage do those few months or even a few years influence much ?

likely not

 

[bingybear]

Did you sell in Sept 2008? If not, why not, since it was so obvious?

Sold most of what I had in September 2008. Most of the rest in early October 2008.

Jan 2000 was another date to cherry pick, especially in hindsight.

I sold at the end of 1999 (Dec) just before a move back to the US. Had just be through a mass layoff in the tech industry (not laid off personally). I was skeptical on how the cellular industry was going to sell the next version of cellular at the time. I figured the cell providers needed to reduce debt and improve their income steam.

Those are the only times I really did a mass bail on my investments. I know I can't time the markets in general.

And that's one of the problems with DCA. Yes, the market seems high right now, but is it going to dive tomorrow, or is it going to go up for awhile longer while you slowly trickle your money in, and then dive once you're all in? You not only have to know which direction the market is headed, but you have to know that it is headed that way right now, or at least in the very near future.

I have no idea if we are really at a top right now or just having a little volatility before we head higher. I still think if one has trouble sleeping at nights if they lump sum invest, but not if they DCA, I would DCA so I could sleep. Otherwise the emotions are likely to cause them to bail on short term volatility. As stated I think lump sum is likely the best way as far as investing. But that said, I keep some in cash for opportunities. Unfortunately I was hiking without cell service when the Greek dip occurred. And yes... buying on dips can cause more blood when it is a falling knife.

 

[easysurfer]

I selected DCA.

But since 100K, divided amount the asset allocations isn't that much (for example, 30K in US Stocks, 20K international, 30k bonds, 20K cash) I might just plop them all in lump sum.

Now, if the amount was higher, say $1M, I'd definitely DCA.

 

[RunningBum]

Sold most of what I had in September 2008. Most of the rest in early October 2008.

I sold at the end of 1999 (Dec) just before a move back to the US. Had just be through a mass layoff in the tech industry (not laid off personally). I was skeptical on how the cellular industry was going to sell the next version of cellular at the time. I figured the cell providers needed to reduce debt and improve their income steam.

Those are the only times I really did a mass bail on my investments. I know I can't time the markets in general.

Great! Hitting those two times has probably put you way ahead of the game for life. If I could pick two times in my life to take a shot at market timing those would be it. I only took a bit off the table in 2000, mostly to pay for my retirement house, and stayed the course in 2008.

I have no idea if we are really at a top right now or just having a little volatility before we head higher. I still think if one has trouble sleeping at nights if they lump sum invest, but not if they DCA, I would DCA so I could sleep. Otherwise the emotions are likely to cause them to bail on short term volatility. As stated I think lump sum is likely the best way as far as investing. But that said, I keep some in cash for opportunities. Unfortunately I was hiking without cell service when the Greek dip occurred. And yes... buying on dips can cause more blood when it is a falling knife.

I said it earlier, if DCA helps you sleep, do it. But recognize that's why you're are doing it.

 

[Totoro]

I said it earlier, if DCA helps you sleep, do it. But recognize that's why you're are doing it.

+1

I have (almost done) my mother on a DCA approach for exactly that reason.

If the market tanked (it didn't), no biggie, we still have plenty left and there is a massive sale going on!

Now the market has risen and she sees the increase as pure profit. So even if a market drop of 20% happens, it was "free" money anyway and no emotional dent in her plans. She never planned for or expected it.

If I went lump sum in the beginning and the market tanked, no way I could have convinced her to rebalance. Conversely and strangely, if the market had taken off initially she likely would have pushed hard to sell-off before the biggest gains ("wall of worry").

By DCA'ing, starting from the most vulnerable position (first years of retirement), we have avoided regret and anxiety. And with little at stake initially one gets used to the daily crazy fluctations.

Money left on the table for sure in this case, but that was unpredictable. And there is/was no need for risky strategies.

 

[pb4uski]

in the scheme of a 25-40 year accumulation stage do those few months or even a few years influence much ?

likely not

The OP only has 10 years left in his accumulation phase since he plans to retire in 2025.

It is hard to know the impact ... but it might be significant. If over the next 10-12 months stocks had a modest slide, then if the OP value averages in their windfall he would have more shares than if he went all in today and those higher number of shares might be worth more... of course, if the market continues to climb over the next 10-12 months then the opposite might be true.

Let's say over the next 10-12 months that equities slide 15% and that equities are 100 today. If the OP invests his $100k today he get 1,000 shares. If he invests over 10-12 months, he gets 1,081 shares assuming an average price of 92.50 , so he is 8.1% better off having valued averaged in. Conversely, if the market rises 15% over the next 10-12 months he'll only buy 930 shares assuming an average price of 107.50 and is 7% worse off.

It really becomes a market timing/sleep at night decision but given recent trends it would seem to me that a sideways or modest decline is more likely that a modest or strong rally from where we are today.

 

[RunningBum]

+1

I have (almost done) my mother on a DCA approach for exactly that reason.

If the market tanked (it didn't), no biggie, we still have plenty left and there is a massive sale going on!

Now the market has risen and she sees the increase as pure profit. So even if a market drop of 20% happens, it was "free" money anyway and no emotional dent in her plans. She never planned for or expected it.

If I went lump sum in the beginning and the market tanked, no way I could have convinced her to rebalance. Conversely and strangely, if the market had taken off initially she likely would have pushed hard to sell-off before the biggest gains ("wall of worry").

By DCA'ing, starting from the most vulnerable position (first years of retirement), we have avoided regret and anxiety. And with little at stake initially one gets used to the daily crazy fluctations.

Money left on the table for sure in this case, but that was unpredictable. And there is/was no need for risky strategies.

You had me right up until the comment about "risky strategies". You should have an appropriate asset allocation strategy to hedge against risk. There is nothing more risky about going lump sum a year ago vs. having it all invested today. It's a perceived risk, not a real one.