DCA or one fell swoop?

[Rich_by_the_Bay]

I just decided to roll over a good chunk of change (around $130k) from a pathetic variable annuity (that a former financial advisor got me into back when I was prey) into my Vg IRA. I have to take a 5% penalty to do it now, but the expense ratio alone is more than 1% greater than Vg, not to mention the performance issues. Hurts to pay that penalty, but should make it up within 3-5 years and then it's all gravy.

Should I just stuff the whole thing into my Vg mod allocation fund (a blended fund of funds, around 60:40) or should I stash in in my MMF and dole it out over a couple of years? I've heard that DCA may not always be the right choice with lump sum deposits and stocks are a bit low these days. What to do?

 

[Cut-Throat]

I just decided to roll over a good chunk of change (around $130k) from a pathetic variable annuity (that a former financial advisor got me into back when I was prey) into my Vg IRA. I have to take a 5% penalty to do it now, but the expense ratio alone is more than 1% greater than Vg, not to mention the performance issues. Hurts to pay that penalty, but should make it up within 3-5 years and then it's all gravy.

Should I just stuff the whole thing into my Vg mod allocation fund (a blended fund of funds, around 60:40) or should I stash in in my MMF and dole it out over a couple of years? I've heard that DCA may not always be the right choice with lump sum deposits and stocks are a bit low these days. What to do?

I have heard these exact questions asked and the financial advisors usually agree on the following.

Put half of it in the Fund Now, Wait 6 months and put the other half in. And then hope that the fund drops in between the 1st deposit and the 2nd deposit, you will come out better that way. If it goes up in that 6 months at least you were half in.

Pretty hard to time the market.

 

[samclem]

Historically, you are better off to put the whole thing in at one time in most cases, but for peace-of-mind reasons, many folks choose to DCA instead.

Here's a good link to an article and a simulator tool based on actual market data.

http://www.moneychimp.com/features/dollar_cost.htm

 

[scrinch]

Invest it all at once and then don't look at it for 6 months so that you're not tempted to second guess yourself. If you're in it for the long run, then you're not a market timer...either when you're buying or selling. At least that's what I told myself a few months ago when I had the same decision to make. Long term, long term, long term. You can drive yourself crazy trying to figure out the positively best thing to do.

 

[MasterBlaster]

There is really no clear answer for this question.

So if the market is marching up steadily over time, it can be modeled as an upward ramp with some noise due to fluctuation. If you buy the ramp model then it's best to just jump in at the start.

If the market is stagnant then it can be modeled as a mean value with fluctuations. If you buy the mean value with fluctuations model then it would be best to dollar cost average. In this case, buying during the occasional low points would give some advantage.

If we are on the edge just before a crash, then it would be best to wait to invest.

Some people have suggested that over the long haul that we are mostly in an upward ramp type market. However you only get to do this one way so your mileage may vary.

Good luck with whatever you choose as it just may be luck rather than smart planning that determines what the right course of action should be.

 

[LOL!]

Although lump-sum has the advantage over DCA, it is not a large advantage. A study showed that LS was better between 60% and 65% of the time. That's close enough to 50% for me.

But knowing the prior, you can use Bayesian statistics to decide what to do.
LS 62% now and the other 38% you can DCA over the next few months.
http://www.fpanet.org/journal/articles/2004_Issues/jfp0604-art11.cfm
and
http://www.fpanet.org/journal/articles/2000_Issues/jfp0600-art5.cfm
http://www.fpanet.org/member/press/releases/101005_journal.cfm

 

[Ed_The_Gypsy]

samclem,

I have run across the same assertion and, at length, I have come to agree with it.

Rich,

Since diversification protects us from the unknown as much as possible, why not consider dumping it all at once into a Scott Burns' Margarita Portfolio? Three parts: domestic index, foreign index and financial instruments? All bases covered (unless you secretly REALLY want to invest in a noni plantation in Panama).

Take the small loss and regard it as a small blip in the market.

I wish I had done that instead of DCA when committing a lump sum once upon a time.

Ed

 

[sgeeeee]

Dollar cost averaging calculator:
http://www.moneychimp.com/features/dollar_cost.htm

 

[Alex]

Send the money to me. You can trust me. I will do you right.

I would DCA into it over 12 months. It just feels safer to me. I know what the experts say, but I don't trust 'experts' and I would rather lose a bit of return if the market moves higher, than have to face myself if the market tanked a week after I lumped summed into it!

 

[CCdaCE]

The only good answer I've ever heard to this question is to Lump Sum it... and here's why.

Using the example of one fund... If you begin withdrawals in 20 years and it's $50 a share... Are you really going to care if you bought at $20 or $20.20 or $22.

By investing in the market, you're assuming the price goes up over the long haul.

-CC

 

[Texas Proud]

Wow... lots of people with some great information... and like others it is a push...

Just tell me what is going to happen in the stock market for each day for the next year and I will tell you which is better

 

[mathjak107]

dca usually hurts you...markets are up 2/3 of the time and down only 1/3... odds are against you big time that you would do better doller cost averaging..it would take more luck than anything else to come out better

 

[saluki9]

It sounds like the money was already invested, so unless you know something I don't about where the market is going why would you DCA?

Usually DCA'ing is reserved for new money or re-entering a previously over valued market

 

[youbet]

This is not new money. You are just changing the administrative details (IRA vs annuity). If you were happy with your total portfolio asset allocation before pulling from the annuity, lump sum into the IRA to restore the same asset allocation you had with the annuity.

 

[Rich_by_the_Bay]

This is not new money. You are just changing the administrative details (IRA vs annuity). If you were happy with your total portfolio asset allocation before pulling from the annuity, lump sum into the IRA to restore the same asset allocation you had with the annuity.

I'll be moving it from bonds to mostly stocks. The stock choices under the 403B VA were atrocious, so I used it as part of my fixed allocation. Under the IRA, I'll be moving it to stocks, and adjust the allocation elsewhere.

Sounds like the consensus is to just dive in. I appreciated the advice.

 

[youbet]

I'll be moving it from bonds to mostly stocks. The stock choices under the 403B VA were atrocious, so I used it as part of my fixed allocation. Under the IRA, I'll be moving it to stocks, and adjust the allocation elsewhere.

It still sounds like you're keeping the same overall portfolio asset allocation because you're adjusting the allocation elsewhere. So, you're only changing administrative details, not allocation. Jump right in lump sum!

 

[FinanceDude]

Why would you take a 5% penalty ($6500) to get out of the annuity? Is it really that bad..........i.e. could you move the money to an asset allocation model or invest it so it does better until the cost is lower to move??

Keep in mind, you'll have to make the 5% penalty up before any gains are made, and in this market, who knows how long that will take?

Sounds like you just got into it within the last couple years..............

Good luck with your decision.............

 

[Rich_by_the_Bay]

Why would you take a 5% penalty ($6500) to get out of the annuity?

Arithmetic.

The available funds were lackluster at best. The most appealing among them were a few Vg and Fidelity "outside" offerings. The expense ratios were around 1.5 to 2% if you include the annuity fees. So, even if they performed comparably to the Vg funds, I was giving up at least 1 to 1.5% per year in expenses. The penalties dropped each year for the next 5 years, but during that time the expense ratios would eat them up and then some.

I figure a 4-5 year payback on the penalties. During that time, the funds are under my management, will perform at least as well, and have lower expenses.

Best I can do is consider the 6K to be tuition in my financial education.

 

[d]

It still sounds like you're keeping the same overall portfolio asset allocation because you're adjusting the allocation elsewhere.  So, you're only changing administrative details, not allocation.  Jump right in lump sum!

ditto

 

[dmpi]

I tend to buy into the maket once every 10 months or so. Its almost impossible to pick the low, so every time I've bought in, sometime in the future its even lower.
I can't pick the bottom, but overall I think I do better than DCA. Anyway the key is to just get your money into the market. After a few years ti don't make that much diffrence when you jumped in.

 

[scrinch]

The market might go up. The market might go down. It might go sideways. There are too many fun things to do in this world to worry too long over whether to lump sum it or DCA it. I repeat my advice...lump sum it using whatever you think is about the right asset allocation, and then don't look at it again until the "I told you so" statute of limitations has expired within your investing conscience.

Easy for me to say, huh? :

 

[astromeria]

I was glad I was in the market yesterday Reminded me of the good old days <I had a typo: gold old days!>...a few months ago. But I rebalanced a little out of small cap.

 

[gummy]

There's a fun spreadsheet:
http://www.gummy-stuff.org/Excel/DCA-stuff.xls

It's described here, at the bottom ... sort of:
http://www.gummy-stuff.org/DCA_for_masochists.htm

You click a button and get 12 consecutive months of S&P500 returns (selected from the returns for year 1928 to year 2001) and it compares your final portfolio with 12 equal monthly DCA instalments or all-at-once.

You can also ask for 1000 such scenarios, to see how often all-at-once wins.

 

[Ed_The_Gypsy]

gummy!

Nice to hear from you again!

I learned a lot from using your spreadsheets and reading your tutorials.

You used to have tutorials on how to make spreadsheets like yours, but the links got broken. Do you know if those links ever got restored?

Thanks again,

Ed

 

[Rich_by_the_Bay]

There's a fun spreadsheet:

Thanks very much. I'll check them out.

I'd like to echo the sentiments of other posters that I enjoy your presence here as well as your own site. This place can get a little unruly at times, but I am glad to see you are still contributing.