big chunk, dollar cost average?

[Spartacus]

Thanks Charlie, TeeJay.
I'm gonna stay tight on watching the next few months as best I can. Dow keeps rising it seems, but a suckers rally? who knows? Early 1930's again? who knows?
Yea, the fixed income is definately "all in" right away.
I think I've settled on a mixture of both "all in" and "dca/dva"
Going to put the fixed income all in, then dca/dva the equity side UNTIL (if it happens, which it always happens it seems) a larger drop occurs, then toss it all in.
I'm simply hoping for something below dow 9900 or so. The run-up as of late has happened so quickly, it seems so due for a mini correction.
But, if I don't get the drop I'm after, will continue to dca it in over reasonable period of time, say 6 to 12 months.
Does this sound reasonable to you guys?

 

[RunningBum]

My opinion has always been that AA is the way to go. Other than tax implications, the question you ask about your investments is not where you came from, but where do you want to be right now. In my opinion, it doesn't matter where your money was yesterday, it's where you want your money to be today. If you believe in AA, you want the correct AA today. Why does it matter if you had a lot of money in cash yesterday?

Some are saying that I would be trying to time the market by lump sum buying. I think by DCAing, your AA is very light in stocks and that is a different, perhaps unintentional way of trying to time the market. There is every bit as much chance that you will DCA as the market rises, and just as you have fully invested the whole sum, the market tanks then. So you weren't fully invested to get the full benefits during the run up, and you got pounded just as hard %wise when it tanked.

For those pointing to bad times to lump sum, I can find many more good times to lump sum. Granted, the drops can be more severe than the rises, but there have been few of them. If you are going to plan your investing based on the worst runs, why are you ever in the market at all?

I can understand the bad feeling you have if there's a big dip immediately after the lump sum investment. But what if it takes off as you tiptoe in? I feel like that's an opportunity lost. These are emotional responses. I think AA is an unemotional way of investing, and keeping to the AA plan takes the emotion out of it.

 

[Spartacus]

Hi RunningBum,
But, isn't it ok with missing out on some appreciation, simply to have some "insurance" or peace of mind to control for the downside?
The markets up again today it looks like. Sure, I'd be missing out on this potential, but look at this recent runup.
Doesn't it seem we're very due for a short term correction here?
Look at the dow runup since 5 weeks ago. The Dow sat at 9600. Today, just 5 weeks later, it sits at about 10,500
http://finance.yahoo.com/q/bc?s=%5EDJI&t=3m
That's about 9% in 5 measly weeks. I'd simply like to get in around 10,000.
I know saying things like that are "famous last words", but I'm simply looking for a release of some of the market steam...

 

[Spartacus]

The best argument I've ever seen to not time a market ever, especially if asset allocating and investing for the long term
Time Pickers - Index Funds Advisors, Inc.

 

[samclem]

So, it looks like Spartacus may have been influenced by a recent article against market timing:

The best argument I've ever seen to not time a market ever, especially if asset allocating and investing for the long term
Time Pickers - Index Funds Advisors, Inc.

But, 40 minutes before that, Spartacus wrote this pro-market timing bit:

Doesn't it seem we're very due for a short term correction here?
Look at the dow runup since 5 weeks ago. The Dow sat at 9600. Today, just 5 weeks later, it sits at about 10,500
^DJI: Basic Chart for Dow Jones Industrial Average - Yahoo! Finance
That's about 9% in 5 measly weeks. I'd simply like to get in around 10,000.
I know saying things like that are "famous last words", but I'm simply looking for a release of some of the market steam

And, a few hours before that, Spartacus indicated he was looking to time a buying opportunity (bold added):

Going to put the fixed income all in, then dca/dva the equity side UNTIL (if it happens, which it always happens it seems) a larger drop occurs, then toss it all in.
I'm simply hoping for something below dow 9900 or so. The run-up as of late has happened so quickly, it seems so due for a mini correction.

But, it was only yesterday Spartacus was against market timing:

Thank guys. The more I read about this topic, the more I'm becoming a believer in lump summing it.
ifa.com has a good write up about not market timing.

And, within the last 2 weeks you've changed your target withdrawal rate from 3% to 4% annually. That's a big difference.

I'm not sure you need a forum--you've got all the arguments you need right in your own cranium.

Here are some observations:
You are new to this, as we all were at one time. Right now every bit of input you take in is having a lot of impact on your perception of "right." That's natural, and the tendency will decrease as you get a firmer foundation of understanding and make some decisions about how things work. But among the very worst things you can do is commit your money in a big way and then keep changing your investments based on the last thing you read or your gut feel about asset values. That's one major reason that the aggregate returns of all investors is well behind the aggregate returns of the things in which they are invested. That sounds logically impossible, but it is true, and it is because people hop in and out of investments at big cost in taxes, trading costs, and even "pure " returns.

So, I'd strongly urge you to pick a course of action that is mechanical and not subject to hunches and responses to the latest market sentiment. I think a 30-50% committment to your desired final asset allocation (including equities) right now, followed by a mechanical approach (DCA or DVA) over a defined period of time in the future would accomplish this, if you can stick with it. If you do the DCA thing, you can put the whole thing on autopilot through periodic transfers from your MM account to your other accounts and you won't even have to watch the market, (which might be a good thing if it helps you to avoid "fine-tuning" of the plan). If you want to be involved and make allocation decisions based on the latest market ups and downs (which is what your posts hint at) then the DVA approach might be the best way to do that--it is mechanical.

I sure don't know everything, either, this is just my two cents.

 

[RunningBum]

Hi RunningBum,
But, isn't it ok with missing out on some appreciation, simply to have some "insurance" or peace of mind to control for the downside?
The markets up again today it looks like. Sure, I'd be missing out on this potential, but look at this recent runup.
Doesn't it seem we're very due for a short term correction here?
Look at the dow runup since 5 weeks ago. The Dow sat at 9600. Today, just 5 weeks later, it sits at about 10,500
^DJI: Basic Chart for Dow Jones Industrial Average - Yahoo! Finance
That's about 9% in 5 measly weeks. I'd simply like to get in around 10,000.
I know saying things like that are "famous last words", but I'm simply looking for a release of some of the market steam...

My view is that the insurance against a downside is to have the proper asset allocation. You're not investing 100% in the market, you're investing whatever % your stock allocation calls for.

It sounds like your risk tolerance is lower than mine, so maybe you need/want to do it differently than I would. You are the one who has to be comfortable with what you are doing.

If you're planning for a short term correction, you are very clearly market timing, whether you stay out completely or DCA over time.

And that's fine, if that's what you want to do. But how long do you wait for that market correction, and what do you do at the end of that time? If we go up another 5-10% in the next month or two, or 20% in the next year, doesn't that make us even more due for a market correction? Do you still stay out? I saw a lot of people stay out in the 90s run up, and finally give in and throw their money in just before the bubble burst. I got hit hard too, but I had made a boatload of money in the run up, so over the whole up and down I came out well, just giving back some of my gains.

We might be due for a correction, or we might still be early in a recovery. Nobody can say for sure.

There's no black and white answer. I just believe that AA is better than trying to ease in over time.

 

[RunningBum]

Let me ask this. Suppose you get your 5% dip, or whatever % you are looking for, and you go in. And then the market recovers back to the same level as today. What then, supposing no other indications have changed?

Do you pull the money back out, because the market is due a correction? If not, why is this money being treated differently then as opposed to now? It's your money either way, and it's just as much subject to a big drop, right? What's your insurance now?

The only difference is that it's easier to accept the consequences of a passive decision (keeping the money invested) than an active one (making a large investment). That's emotional, not analytical.

 

[FIREd]

A well-researched way to add money to the market is Edleson's Value Averaging approach (also called "Dollar Value Averaging", or "DVA"). It is similar to DCA, but in this method you deposit more dollars when the share prices are lower. It does work, and typically produces better results than DCA. Details:
-- Wikipedia
-- Journal of Finance and Strategic Decisions: DCA vs DVA

To implement this, you'd keep you stash in CDs and MM accounts and put in more whenever the share prices of your various asset classes were lagging behind their expected returns (it's more complicated than this). When the assets get beaten down, you are buying cheap shares. If they go above your trend line, you may even sell some off.

Now, you've said before that you want a simple approach, and this is not the simplest approach. You'll need to buy Edleson's book (assuming it is back in print) or another source of info to help you execute this DVA. There's also risk that you'll have a bunch of money sitting on the sidelines when the market takes off.

Maybe you should read up on it and see if it appeals to you. If so, maybe consider splitting your pile in a way that makes you comfortable. I'd recommend at least 10% in "cash" to help you ride out three bad years of equity returns, then maybe deposit 30% - 50% of your money in a lump sum in your selected investments (this has the practical benefit of letting you meet the min balance requirements of many funds), then DCA and/or DVA the remainder over some reasonable period (1-3 years). Just me--I'd be more comforable DVAing over 3 years and DCAing over about 1 year, but I have absolutely no statistical backup for this gut feel.

There's lots of potential to be banging your head over missed opportunities with any approach you take. If the market takes off and you've got a lot on the sidelines, you'll feel like you missed a great chance. OTOH, if stocks dive and you've kept your powder dry with a bunch of cash, you'll be able to buy a lot of cheap shares with DCA or especially DVA (IF you've got the stomach to buy when the papers are full of gloom and doom) and you'll be better set up for future growth.

No one can foretell the future. Read up on the options and place your bets. Even if your bet comes out wrong, it will feel a little better in retrospect if your decision was based on a thorough analysis of the possible approaches.

I have been using DVA for the past year or so. It makes more sense than DCA IMHO, but you can't put it on autopilot like DCA.

 

[FIREd]

For those pointing to bad times to lump sum, I can find many more good times to lump sum.

The point is we don't know what's ahead. By lump summing now you are making a big bet. You may be right or you may be wrong, there is no way to tell in advance. So faites vos jeux and good luck.

DCA is chicken little's way to get in the market. If you got brass cojones then, by all means, lump sum the money.

FWIW, I don't see any asset class that's particularly cheap today (unlike 12 months ago), so if it were me, I'd be hesitant to invest a large sum of money right now. I'd probably keep a good portion in cash and wait for some bargains. But as I mentioned above I am more of a value investor.

 

[M Paquette]

Think of the poor folks who lumped in early 2008. How do you think
they feel now? Do you think you are mentally tough enough to
move all that money now in MM and CDs into more risky assets when
the market could swoon again at any time. Are you sure?

Hey, I resemble that remark. Lump summed in November 2007 and in May 2008. Ah, but here's the trick. Rebalanced in February 2009 and had a broad asset allocation between various stock and bond funds.

Down 10% from my all-time-high as of last night. Probably less today.

 

[RunningBum]

The point is we don't know what's ahead. By lump summing now you are making a big bet. You may be right or you may be wrong, there is no way to tell in advance. So faites vos jeux and good luck.

DCA is chicken little's way to get in the market. If you got brass cojones then, by all means, lump sum the money.

Two scenarios:

Person 1 has $1M that has been invested for some time, in a 60/40 stock/bond+cash mix. That person makes no change to their portfolio today.

Person 2 just got a $1M windfall. If he decides today to put $600K in stocks and $400K in bonds+cash, does he have more cahones than person 1? Why? All he's done is put himself into the same position as person 1. They are now at equal risk for the future. Neither knows what's ahead.

But if person 2 invests just $60K in stock to DCA and leaves the rest in bond/cash equivalants, and person 1 sells $540K in stock, then person 1 would be seen as taking a far bigger risk, even though they are in the same situation.

I don't see how the action is considered riskier than the end position you put yourself in (or leave yourself in).

 

[wolf]

Harley:

OP, I"ve heard, about the lump sum strategy, but be careful with "statistics". What would have happened if you put your 500K, in the market a couple of years ago, and lost 50%.

Allocation is good, but you still have to decide the "correct" percentages.
Again, if I had followed the "experts", I would have lost many dollars.

As, it now stands, I have not lost anything, I do own equities, but the percentage is much lower than recommended.

The return on my fixed income, mainly CD's, returned much more than the decrease in equities. I also, have a rental property, which provides good income. Priority: good location (schools, jobs), equals good tenants, equals easier to rent out even in tough times.

As, the article in Money Magazine, stated, Zvi Bodie, said only invest money in the market you can afford to lose.

Also, your age makes a big difference in investing. Once you get older, you do not have the time to catch up.......so be super conservative, the key is dont't chase yields, and don't be greedy. Go for the base hits and not the home run and you will do well.

 

[Spartacus]

ok Sam, I know you think I'm crazy. I am.
Back and forth, but in reality, I'm not.
Here's what I believe.
I believe AA controls the risk. I believe what Rbum says about things being equal with a person already in the market.
In my MIND, I truly believe in efficient markets and that lump summing it and HOLDING will win in the LONG TERM without moving the money around once the decision has been transacted, (except for rebalancing)
However, my HEART says we've got a little correction coming and I'd simply like to get in at 4 to 5% less than the current market.

I know I'm back and forth, and you have quite correctly called me on it. I appreciate your honesty and candor.
I'm now as you said, "Where you guys once were", and I'm a big whuss when it comes to the trigger.
Will probably look for a drop, but throw in like you said some portion then dca along the way after that.

to paraphrase: "In the battle between the heart and the mind, always choose the mind" ...Ayn Rand

it sure just doesn't feel that way...

 

[samclem]

I know I'm back and forth, and you have quite correctly called me on it. I appreciate your honesty and candor.

Hey, I only recognized the symptom of your "illness" because I've done EXACTLY the same thing so many times. And I still do. Still, I'm getting better at recognizing my weaknesses and tricking myself to overcome them. I'm lucky to be inherently lazy, which I've harnessed by just picking an allocation and not even looking at the results except once or twice per year.

 

[Spartacus]

Hey, I only recognized the symptom of your "illness" because I've done EXACTLY the same thing so many times. And I still do. Still, I'm getting better at recognizing my weaknesses and tricking myself to overcome them. I'm lucky to be inherently lazy, which I've harnessed by just picking an allocation and not even looking at the results except once or twice per year.

If I can get to a place where I look at this stuff only once or twice a year, I will be in a state of nirvana! One day....

 

[charlie]

Lumping is probably best IF you don't need to draw your poke at 4% like
Spartacus originally posted. Lumping vs. DCA would likely have a SMALL
advantage over a significant period of time, assuming no draw down.

However, if FIRECALC has show us anything, it is that the most
dangerous time to start your withdrawal is just before a market correction of major proportions.

Do you really understand your risk?

Cheers,

charlie

 

[Spartacus]

What if you had the spectacular asset allocation, all the science/theories of investing, and then invested in Japanese markets "for the long term" 20 years ago?
20 years later, still down, never recovered?

What would a long term investor say to that? I don't know.

 

[DblDoc]

What if you had the spectacular asset allocation, all the science/theories of investing, and then invested in Japanese markets "for the long term" 20 years ago?
20 years later, still down, never recovered?

What would a long term investor say to that? I don't know.

I'd say they did not have a "spectacular" AA. A good AA would NOT have you 100% invested in your own domestic equity market.

DD

 

[teejayevans]

What if you had the spectacular asset allocation, all the science/theories of investing, and then invested in Japanese markets "for the long term" 20 years ago?
20 years later, still down, never recovered?

What would a long term investor say to that? I don't know.

If they balance it out with other investments in China, India, etc they would be very happy today.
TJ

 

[cardude]

Spartacus,

Why are you in such a rush to put that money into the market? The first rule of investing is don't lose money, and by lump summing it in at today's market levels with all the current economic uncertainty has a high level of dissapointment IMO.

Just park the money in some online bank accounts, get your piddly 1.5%, and be ready when the stock market corrects when the Fed starts raising rates. Could be a year or so, but so what? Don't rush. I've done that (rushed) a few times in my investment and business career, always with bad results.

Slow down. Take a breath. Do nothing until you KNOW it's the right time. I really think the opportunity to get into the market will present itself farily soon.

I'm waiting as well..............................

 

[samclem]

Do nothing until you KNOW it's the right time. I really think the opportunity to get into the market will present itself farily soon.

I'm waiting as well..............................

The crystal ball is never as clear as the rear view mirror. We've had folks here who've given up a lot of gains by waiting until their bunion told them to get into the market. If these folks have the knack to know when the time is right to buy and sell, then they are wasting their time with their piddly portfolio, they could make a million dollars a year advising a pension fund using their unique talent or system. Maybe they'll come out ahead.

 

[teejayevans]

Spartacus,

Why are you in such a rush to put that money into the market? The first rule of investing is don't lose money, and by lump summing it in at today's market levels with all the current economic uncertainty has a high level of dissapointment IMO.

Slow down. Take a breath. Do nothing until you KNOW it's the right time. I really think the opportunity to get into the market will present itself farily soon.

I'm waiting as well..............................

Money is made by investing when times are uncertain, not when everything is looking good. What's the phrase, invest money when there is blood on the streets?
Put 50% in the market now, 25% 6 months from now and another 25% 12 months from now, the worst that will happen is you won't be 100% correct, but you won't be 100% wrong either.
And if investing (as oppose to speculating), it won't matter much 10 years from now.
Many hedge managers have been shorting the market since it hit 9000 months ago because they were all calling for 10% pullback, it was a certainty...except it never happen, opps? Wait till their investors find out they would have been better off with an index fund instead of the high price hedge fund.
TJ

 

[easysurfer]

So, if you buy on the dips is that market timing or just wise investing? Or is that a product of procrastination since you shouldn't have had that much cash on the sidelines to begin with?