Go all in or easy does it?

[Olav23]

Hi all,

I have about $75k that I have been simply hoarding in EmigrantDirect. And about $40k collecting dust in an IRA. Being that I am 29 years old, I should probably allocate this a little smarter then I am currently doing. I am pretty skilled as far as divying it up into the correct allocations, (probably use either a Bernstein/CoffeeHouse approach) but I'm not sure as to how to go about it.

I am worried that the markets in general are outpacing their value, especially in the US and emerging markets, so I have been leery to simply allocate 100% immediately. But I have felt this way for the past 2 years and I am still sitting on all this cash and ratcheting up the time-risk

So, should I simply take my allocation, and do 1 transaction like tomorrow, and allocate it all into some ETFs? Or do you recommend dividing the amounts into say 1-2 years and incrementally adding to no-transaction-fee no-load mutual funds (at TD Waterhouse, kinda a crappy selection) then after the 100% is invested, sell off the funds, and move it into the ETFs? I do realize that this might be an expensive tax issue to simply sell it, so perhaps more of a slowly phase out the losers into ETFs in the taxable accounts? The tax-free could be flipped immediately as soon as 100%.

Any help greatly appreciated!
Thanks!
Olav

 

[grumpy]

Olav,

Please heed the adage: "Its time in the market not timing the market that matters." You are young. Get the money invested and let time work in your favor. If you are not comfortable putting it all in at once, then set a time table and feed it in monthly or quarterly. This dollar cost averaging will reduce the risk that you are putting it all in at a top.

Grumpy

 

[Cut-Throat]

Yup. at your age you should be invested in other classes than cash. As soon as you understand that you are not smart enough to time the market, the richer you will be.

 

[Gone4Good]

If you are not comfortable putting it all in at once, then set a time table and feed it in monthly or quarterly.  This dollar cost averaging will reduce the risk that you are putting it all in at a top.

That is what I do. Every year's bonus gets invested in equal monthly installments over the next 12 months. It's easy to do at Vanguard, and probably other shops too. You can set up automatic fund exchanges to move $ from your cash account to other mutual funds on a schedule of your choosing (as often as weekly).

Worked great when the market was declining, but I've been leaving some gains on the table the past few years.

 

[cute fuzzy bunny]

Buy a lifestrategy or target retirement fund appropriate to your risk tolerance.

Stocks dont look too horribly valued these days.

 

[free4now]

I personally like to do transactions in units of 100 shares, because there's very slightly more liquidity meaning I'm more likely to get a better execution (better bid/ask) since the person on the other side of the trade is often doing things in units of 100 shares.

So if whatever you are buying has a relatively low share price, you might consider buying 100 shares at a time.

As far as whether to DCA, I think DCA is a great strategy for adding money to the market but isn't so great for transferring money. Especially when you are moving it from a place that is clearly wrong for you (cash) to the right place. I would get it in sooner rather than trying to spread it out.

So if I were in your situation I might buy 100 shares of ETFs every week or so until I were fully invested.

 

[SC]

So if I were in your situation I might buy 100 shares of ETFs every week or so until I were fully invested.

A cheaper way might be to send the equivalent money into a Vanguard (or other low cost) fund each month -- weekly is too much bookkeeping for me -- and when you're happy with the amount there, move it into an ETF all at once if that's where you want it to end up. At least that way you only pay the brokerage commission once.

SC

 

[Olav23]

Thank you very much, everyone, for your quick responses. I guess I already knew this in my gut, but reading it from other people is sometimes a good motivator to put it into action.

sc: Just wondering, when you say invest in Vanguard, then move into an ETF, do you use Vanguard as your brokerage? The commisions seem pretty hefty. (like 20-25$ a trade) Are you trading ETFs through them, or is it possible to buy Vanguard funds as no-transaction-fee funds at any specific brokerages?

Thanks again!
Olav

 

[SC]

sc: Just wondering, when you say invest in Vanguard, then move into an ETF, do you use Vanguard as your brokerage? The commisions seem pretty hefty. (like 20-25$ a trade) Are you trading ETFs through them, or is it possible to buy Vanguard funds as no-transaction-fee funds at any specific brokerages?

I use ScottTrade as my brokerage and have been very happy with their price and service (it helps that there's a branch nearby). I'm not aware of any brokerage where you can buy Vanguard funds without a commission; my guess is that Vanguard's low cost structure doesn't allow for whatever kickbacks make that possible.

My answer assumed that you eventually want to end up with your money in ETFs, which may or may not be true. IMHO, in your situation it's far more important to get the money invested than to worry about a few basis points difference in expense ratios between a fund and an ETF, so my advice would be to start dollar cost averaging into some low cost, no load funds immediately.

Personally, I'm still in the "send money to Vanguard every month" phase of moving to our target allocation. If I decide to move a chunk of that into ETF's to get the slightly lower expense ratio, I'll probably exchange into a Vanguard money market fund and then write a check to Scottrade, or just pay Vanguard's brokerage fee to save the hassle. So far it hasn't seemed worth it and my only ETF is a mid-cap value index (IJJ) which is an index that Vanguard doesn't offer.

SC

 

[grumpy]

Olav,

I'm not sure why you are concerned about a brokerage. For your IRA account just call Vanguard and tell them you want to do a rollover to them. They will take care of all the paperwork. For the $ in EmigrantDirect, just open a Vanguard money market account, send them a check for the full amount and set up automatic monthly transfers into the funds you select for your allocation. There are no brokerage charges involved.

Grumpy

 

[MJ]

Olav,

I'm not sure why you are concerned about a brokerage. For your IRA account just call Vanguard and tell them you want to do a rollover to them. They will take care of all the paperwork. For the $ in EmigrantDirect, just open a Vanguard money market account, send them a check for the full amount and set up automatic monthly transfers into the funds you select for your allocation. There are no brokerage charges involved.

Grumpy

When opening an account with Vanguard, you can ACH for free your funds into your Vanguard account.

 

[cute fuzzy bunny]

Theres a daily limit to the ach. I've hit it a bunch of times. No big deal, you can just do it over 2 or 3 days. I think the limit is 100k?

 

[LovesLife]

I just ARC some funds over to VG. It is a 100K limit per ARC, but you can do more than one ARC per day.

 

[NYCGuy]

Olav,

Too much agreement here. Someone has got to speak up for market timing. I happen to think that you are right and everyone else is wrong. Yes, you can time the market and now is a good time to stay out. Buy and hold is the advice of the generals fighting the last war. It was very good advice for the bull market of the 90's, but not, in my opinion, for the current long term bear market. If you are a university endowment fund or an insurance company, you can outwait the market, but not if you have the misfortune to be a natural person, even a young one. Returns for ten and twenty year periods that begin when the market is at a high valuation (current S&P P/E = 18.70) are not very good. There have been long periods (e.g. 1966 to 1982) when the market underperformed Treasury Bills. Are we in such a period now? Quite possibly.

Market timing has got a bad rap for several reasons:
1. mutual fund companies have an interest in promoting buy and hold strategies
2. activities subsumed under the heading range from day trading on up.

Here's a book I recommend: "Yes, You Can Time the Market" by Stein & DeMuth. It is not about day trading. They start with the reasonable observation that we know when other things in life are cheap or dear: gasoline, milk, long distance calls, etc. But stocks aren't like that? Really? We should buy them at all times?

Another book that touches on the subject is "Bull's Eye Investing" by John Mauldin.

There is also a possibility that we will have a slowdown or recession in the next 18 months. The average stock market decline during a recession is 43%. The bases for expecting a slowdown/recession are:

1. currently inverted yield curve
2. expectation of decline in housing prices reducing the wealth effect of consumers and then reducing consumer spending.
3. further hikes in short term rates by the Fed, ECB, even the BOJ.

I agree with you that everything (stocks, bonds, commodities, USD, houses) is expensive now. The central banks have been cheapening the cost of money since 2001, but they are showing signs of stopping now and anyway, money doesn't stay cheap in the long run.

Of course, it may be different this time, but it usually isn't.

 

[LOL!]

...
Buy and hold is the advice of the generals fighting the last war.  It was very good advice for the bull market of the 90's, but not, in my opinion, for the current long term bear market. 
...
There have been long periods (e.g. 1966 to 1982) when the market underperformed Treasury Bills.  Are we in such a period now?  Quite possibly. 

If all bear markets were like your "current long term bear market", I want lots more of them.  I don't know if you have looked lately, but in the last 3 years, the S&P500 is up more than 60%, the EAFE index up 113%, and the Russell 2000 index up 109%. 

So to answer your question directly: No, we are not in such a period now.

But might the next 6 months, year or 3 years be such a period?  Maybe.

When my spouse received an inheritance, we stuck in a money market and invested $10K to $20K a month over a few years.  That met our psychological goals as well as our financial goals.

For more info on lump-sum vs DCA you might wish to read:
http://www.fpanet.org/journal/articles/2004_Issues/jfp0604-art11.cfm

 

[grumpy]

The average stock market decline during a recession is 43%.

NYCGuy,

Just off the top of my head that statistic seems suspect. What definition of a recession are you using? What period of time? What market? Thanks.

Grumpy

 

[mathjak107]

since stocks move up 67% of the time over time and down only 33% your timing better be damn good..you may catch it lucky 1 or 2x and get it right but speaking for myself more ofton than not i shoot myself in the foot getting back in higher than i bailed out...id never buy and hold stocks as one bad earnings report can pummel them but diversified funds are another story.buy and hold works great....

 

[WilliamG]

Best advice i've seen on investing lump sum is from (i think) Larry Swedroe:
invest 1/2 immediately and the other 1/2 dca. if market goes up, you'll be glad you got at least half in. if market goes down, you'll be glad you didn't do it all!

 

[Nords]

The average stock market decline during a recession is 43%. 

I'd be interested to see the math or the reference for that statistic.

It implies that the DOW, currently ~11,000, could be at 6270. That's more than Bill Gross' DOW 5000 "prediction" but it's a good bit lower than ~7200, the worst of the 2000-2003 era. I'm no Abby Joseph Cohen but it would certainly exceed the typical three-standard-deviations expectation.

 

[cute fuzzy bunny]

Yeah me too, since its not even close to being true.

 

[LOL!]

If you had invested $100,000 in the Vanguard Total Stock Market Index fund on March 23, 2000 and sold on July 23, 2002 you would have had less than $55,000 left.

 

[mathjak107]

theres always one particualer time frame that yields untypical results..its like buying at the best possible time ..you always see the ole if you missed the best trading days of this or that time period cited as an example but they mean no more or less than missing the worst days to be in.....long term averages always play out for most of us and buy and hold in funds wins

 

[eridanus]

Olav,

Too much agreement here. Someone has got to speak up for market timing. I happen to think that you are right and everyone else is wrong. Yes, you can time the market and now is a good time to stay out.

Everyone's a trading genius. Just look at all the active fund managers that have beaten their benchmarks for 10 years or more.

Oh, wait, there's only 1 (LMVTX)....

How about 5 years? Not too sparkling a record either. (Check out the midcap index!)

http://www2.standardandpoor.com/spf...search='active fund managers beating the S&P'

 

[cute fuzzy bunny]

If you had invested $100,000 in the Vanguard Total Stock Market Index fund on March 23, 2000 and sold on July 23, 2002 you would have had less than $55,000 left.

And then if you waited a few more years, you'd have it all back. Unless you sold, there was no loss.

The original comment was that recessions average a 40-something percent loss. There have only been a few 40-something percent losses in the history of the US economy, and many recessions. None of the 40-something percent losses were sustained with the exception of the great depression.

 

[free4now]

Crystal balls fuzzy

I recently subscribed to the Hulbert Financial Digest, which tracks the actual results of model portfolios based on the financial newsletters. I was hoping to find that there were newsletters that could reliably beat the indexes. But I'm afraid to say it seems not to be so... most fail to beat their indexes and the ones that do beat the indexes either don't do for long or only by a little bit and with more risk (beta).

So timing as a way to get above average returns is just not going to work in my mind.

But I do see a place for macroeconomic timing for peace of mind and for managing expectations. If you are the kind of person who would be devastated if your investment plummeted right after you lump summed into a market you predicted would be a bear market, then I think it's appropriate to abstain from investing. Even though on average you are giving up gains, the pain of losing it when you thought you might could be reason enough for you to stay out.

I also think it's useful to use macroeconomics for making some decisions... for instance if we were in a true bear market I would think twice about retiring or counting on a 4% SWR, and plan on adjusting my living expenses accordingly. But we are not currently in a bear market and even though there are good indications that one may be coming, we just don't know that is true. A couple of years ago there were good indications that the housing bubble was about to collapse but it kept up it's steam and I would not be surprised if it never falls down to even the levels of a couple of years ago.