How to invest a lump sum

[MasterBlaster]

Here's the real answer...

If you believe that the market always rises in a ramp like fashion but with some minor fluctuation then pop it in all at once. There is no sense in waiting cause the market will only go up.

If you believe that the market is flat but with some minor fluctuation then dollar cost average your lump sum in. There is a case for dollar cost averging to your advantage over flat markets.

If you believe that the market has peaked in the short run, then by all means hold on to your stash and wait until the market bottom.

If you believe that the market has peaked for the long run, then keep all of your money, perhaps you should buy gold or precious stones. Don't even think about getting into the market.

[LOL!]

Quote:

Originally Posted by ScaredtoQuit LOL, is that your judgement or is there an authoritative source making that recommendation. Your recommendation does "feel better"

I just made that up. A few years ago, my wife received an inheritance. We read up on this lump sum vs DCA. Everyone said lump sum does better, but did not give the probability which has been published. I think many people take that "lump sum does better" to mean it does significantly better at least 80% of the time. That is simply not true. LS averages just a percent or two better than DCA over 3 month or 6 month period. Thus folks are making much ado about nothing.

The main danger is that if you are waiting for a correction, then you really lose because you do nothing. So have a plan to put it in when you get it -- no matter what.

http://www.fpanet.org/journal/articl...0604-art11.cfm

[audreyh1]

Hey I like that half-n-half approach!

For me, DCAing saved my butt!! But I also started investing in late 1999 , and spread it out over 2 years. By late 2001 I slowed down my DCAing because the market just kept dropping!

This, however, was an extremely unusual situation. 3 years down was unprecedented.

Oh yeah - and then I recovered it all and then some in 2003!

Market valuations today are NOWHERE NEAR what they were in 1999/2000. So that shows how even if a market appears to be somewhat overvalued or it's been a long time since a correction - markets can still get a lot more overvalued. It's just impossible to time these things.

Audrey

[wabmester]

Quote:

Originally Posted by audreyh1 Market valuations today are NOWHERE NEAR what they were in 1999/2000. So that shows how even if a market appears to be somewhat overvalued or it's been a long time since a correction - markets can still get a lot more overvalued. It's just impossible to time these things.

Don't you love valuation metrics? P/E seems reasonable, but only because we've had record earnings.

If earnings went back to their 2003 levels, I think that would put the market P/E at around 40....

Let's hope earnings don't mean-revert!

[MasterBlaster]

Quote:

Originally Posted by wab If earnings went back to their 2003 levels, I think that would put the market P/E at around 40....

Why stop there, What would happen if earnings reverted to their 1933 levels ? Then P/E levels would be out of this world !

Lions, and Tigers, and Bears !

Oh My !

[lazygood4nothinbum]

also appreciating this thread as we will be settling mom's estate early this year and hopefully house will sell by end of year. my concern has been that the market is still in such record territory. am i being paranoid?

[wabmester]

Quote:

Originally Posted by MasterBlaster Why stop there, What would happen if earnings reverted to their 1933 levels ? Then P/E levels would be out of this world !

Yes, I should have said *real* earnings. Doubled in the last few years. A lot of it due to oil company and bank profits. Caveat Investor!

[Dawg52]

Quote:

Originally Posted by Goonie I'm glad I read this thread. I'll be getting a lump sum (2 actually) when I bail out in a couple of months. Both are MUCH smaller amounts than ScaredtoQuit's, but I was wondering about the same thing. The "all at once" or the DCA. After reading all the replies, I like the partial lump sum, and the rest DCA'd. Thanks to you all for your vast wisdom!

I will probably do the same. I have a chunk to invest in April when I retire. If there is a big correction between now and then, I might go ahead and invest it all. Will play it by ear.

[Alex]

In early november I had $140,000 to invest from the sale of an investment property. I lumped it all at once into my AA. Normally, I really could care less what happens in the short term, but was still a bit nervous due to the relatively large sum. But I bit the proverbial bullet and I have not regretted it. My advice is to do what makes you feel safest.

PS: Have you ever heard of 'Value averaging"? You might read up on it a bit and then make your decision. Good luck!!

[audreyh1]

Quote:

Originally Posted by wab Don't you love valuation metrics? P/E seems reasonable, but only because we've had record earnings. If earnings went back to their 2003 levels, I think that would put the market P/E at around 40.... Let's hope earnings don't mean-revert!

Earnings don't "mean-revert", they grow over time.

Audrey

[wabmester]

Quote:

Originally Posted by audreyh1 Earnings don't "mean-revert", they grow over time.

Well, I'm not saying we're going to have a repeat of 2000-2003, but real earnings doubled from 1993-2000. Then they got cut in half from 2000-2003.

Then they doubled again from 2003-2006.

Since we're talking about real earnings, inflation is already factored out, and inflation is responsible for most of earnings growth. What's left is real GDP growth. That sometimes goes negative, especially after an outsized growth run like we had the last few years.

And, of course, the "market" P/E includes all of the high-earnings / low-P/E energy sector and bank stocks, which makes the market look fairly valued when other sectors may be overvalued.

Bottom-line: market P/E doesn't capture the whole picture. We're in good shape if you believe our recent growth is sustainable, and that energy and bank earnings won't revert to more normal levels.

[genghis]

Statistically speaking - dump it all in at once and watch it grow (eventually)

Emotionally speaking - dump it all in at once and don't worry about it (see above)

[free4now]

To take this discussion in a new direction, I wonder if anyone has seen studies of using limit orders to take advantage of volatility as you are getting in.

Intuitively it seems like limit orders would be a better way to capture the volatility than DCA'ing, at least for relatively short time periods. But I haven't studied it enough to know if it generally works.

I'm thinking something like this for getting into the market over seven days:

On day one place a limit buy order say 7% out of the money.
If that fails to execute, on the next day change it to 6% out of the money.
If that fails to execute, on the next day change it to 5% out of the money.
and so forth until you get to zero in which case you just buy.

I suppose the main risk is that the limit orders prevent you from buying if the price is increasing.

[MasterBlaster]

Quote:

Originally Posted by free4now To take this discussion in a new direction, I wonder if anyone has seen studies of using limit orders to take advantage of volatility as you are getting in. Intuitively it seems like limit orders would be a better way to capture the volatility than DCA'ing, at least for relatively short time periods. But I haven't studied it enough to know if it generally works. I'm thinking something like this for getting into the market over seven days: On day one place a limit buy order say 7% out of the money. If that fails to execute, on the next day change it to 6% out of the money. If that fails to execute, on the next day change it to 5% out of the money. and so forth until you get to zero in which case you just buy. I suppose the main risk is that the limit orders prevent you from buying if the price is increasing.

So if the market goes up 6% on day one you are still out of the market...

If it goes up another 5% on day two you are still out of the market...

If it goes up another 4% on day two you are still out of the market...

and so on. As I see it you just (opportunity cost) lost 15% of your (potential) money playing around with unusual buying statagies.

[clifp]

Quote:

Originally Posted by free4now On day one place a limit buy order say 7% out of the money. If that fails to execute, on the next day change it to 6% out of the money. If that fails to execute, on the next day change it to 5% out of the money. and so forth until you get to zero in which case you just buy. I suppose the main risk is that the limit orders prevent you from buying if the price is increasing.

An alternative strategy to purchase a stock you want to own but aren't happy with the current price is to write a put option at the price you are comfortable owning the stock. (remember the put gives the other guy the right to sell his stock to you at certain price for a specific length of time (2 weeks 2 months, 6 months). If the stock goes up the put you sold expires worthless and you collected free money (but don't own the stock). If the stock goes down you have purchased the stock at price you were happy with. Of course it may have dropped a lot making you quite unhappy.

I don't necessarily recommend this strategy, but I think it is better than trying to catch a stocks intraday swings.

[dmpi]

I would just put it all into the market at once. However I must confess I never put 700K into market at once, so I would be a bit scared too. There is almost a 100% chance that you'll see the market lower than the point where you bought in. Hopefully after a year or two you'll be well past your buy in price.
Also by looking at P/E & market participation (of the masses), I think the market is underpriced right now.

[Meadbh]

Quote:

Originally Posted by dmpi I would just put it all into the market at once. However I must confess I never put 700K into market at once, so I would be a bit scared too. There is almost a 100% chance that you'll see the market lower than the point where you bought in. Hopefully after a year or two you'll be well past your buy in price. Also by looking at P/E & market participation (of the masses), I think the market is underpriced right now.

I did this after receiving an inheritance. It went down a bit, then up a lot.......I'm cool.

[cute fuzzy bunny]

I dumped ~500k in once, while thinking things were a little over priced.

That was about 3.5 years ago.

That worked out pretty well.

[audreyh1]

Interesting chart from PIMCO shows that after tax corporate profits are at the highest percent of GDP in the last six decades.



And companies are using these profits to buy back stock like crazy.



Of course PIMCO's Bill Gross sees it all coming to no good:
http://www.pimco.com/LeftNav/Feature...ruary+2007.htm

Audrey

[wabmester]

Quote:

Originally Posted by audreyh1 Interesting chart from PIMCO shows that after tax corporate profits are at the highest percent of GDP in the last six decades.

So, after looking at the chart, do you still think that earnings don't mean revert?