Lump sum, Dollar Cost Avg or Wait right now?

[Stillwater007]

As someone who is about 6-7 years from Retirement, I have a question regarding Lump Sum, Dollar Cost Avg, or wait.

I have about 10k in cash that I would like to invest into my Roth IRA. A remaining 3k from 2020 and 7k for 2021 as I will turn 50 this year.
I've been holding on to it since earlier this month because I fear an imminent crash within the next month or two. Emotions vs Logic?

While it seems best to invest asap to allow my investment to begin compounding right away, I can't help but feel the influence of our Stock Market Bubble. And today, the Fed's warning caused it to take a big drop.

I've watched enough on Lump Sum vs Dollar Cost in that most of the time the Lump Sum is the way to go and one should not wait. But it sure seems like all signs point to an adjustment to an overpriced stock market during an Economic Pandemic. Would waiting just a couple months hurt?

Does patience and giving it a couple months make sense right now? Or is it best to trust the statistics and invest the lump sum?

 

[RunningBum]

If you were fully invested, would you sell off $10K due to the market situation now? Other than the tax ramifications, it amounts to the same thing.

But that's being logical. The emotion is that you are more worried about an active decision to invest the money, as opposed to a passive decision to leave the money invested.

Personally I like to be fully invested, and use my AA to limit volatility and help me sleep at night. But many people are emotional, and if you emotions tell you to trickle the money in, or leave it out, then do that and sleep better. In the long term it probably won't matter much at all.

 

[pb4uski]

You're combining/confusing 2 issues.... contributing the money to your Roth IRA and investing it.

Just because you contribute it to your Roth IRA doesn't mean that you have to invest it right away... they are separate decisions.

You can hold cash in your Roth IRA just like you can hold cash outside of your Roth IRA.

What you could consider is to deposit the money into the Roth and let it sit in your settlement account or a money market fund... then move it to stocks over time. Say you want to invest that $10k over the next 10 months... invest $1k now. A month from now add in enough to bring it up to $2k. The following month add in enough to bring it up to $3k. Rinse and repeat until you have invested the entire $10k.

 

[mrfeh]

As someone who is about 6-7 years from Retirement, I have a question regarding Lump Sum, Dollar Cost Avg, or wait.

I have about 10k in cash that I would like to invest into my Roth IRA. A remaining 3k from 2020 and 7k for 2021 as I will turn 50 this year.
I've been holding on to it since earlier this month because I fear an imminent crash within the next month or two. Emotions vs Logic?

While it seems best to invest asap to allow my investment to begin compounding right away, I can't help but feel the influence of our Stock Market Bubble. And today, the Fed's warning caused it to take a big drop.

I've watched enough on Lump Sum vs Dollar Cost in that most of the time the Lump Sum is the way to go and one should not wait. But it sure seems like all signs point to an adjustment to an overpriced stock market during an Economic Pandemic. Would waiting just a couple months hurt?

Does patience and giving it a couple months make sense right now? Or is it best to trust the statistics and invest the lump sum?

Sounds like you know the answer.

 

[Chuckanut]

Y

What you could consider is to deposit the money into the Roth and let it sit in your settlement account or a money market fund... then move it to stocks over time. Say you want to invest that $10k over the next 10 months... invest $1k now. A month from now add in enough to bring it up to $2k. The following month add in enough to bring it up to $3k. Rinse and repeat until you have invested the entire $10k.

Thanks for reminding me of this strategy that I once heard about.

Rather than investing a flat amount of money each month, say $1000, you look at your gains or losses in that month (or quarter or whatever time period you use). If your investment went up $100 to $1100 (Congratulations!) you invest $900 that month. If your investment went down and is now only worth $900, console yourself with the knowldege you are buying low, and invest $1100.

Supposedly, this will produce more profit in the long-run than simply tossing in $1000 a month.

 

[pb4uski]

Yes, it's called value averaging.

 

[OldShooter]

The statistics say that putting all the money in immediately is the best strategy. But you are not a statistic and will not be doing this a statistically significant number of times. So if you happen to get in just before a big downturn you will not be happy.

Dollar cost averaging is probably the psychologically best strategy. With DCA you will actually be hoping for dips as your money goes in.

 

[corn18]

Invest money when you have it, withdraw money when you need it.

It really is that simple.

 

[tulak]

I did a lump sum investment in 2008 and in retrospect, I would have been better off DCA. It all worked out though. Time in market helps.

If I was to do it again, I’d value average into my asset allocation over a period of time.

 

[Animorph]

This sounds like something the OP will be facing for 6-7 years. In this case the lump sum strategy should work just fine when used 6 or 7 times. Enough instances to get something close the the average result.

If this was a one-time windfall and a significant portion of the total portfolio I might prefer averaging into the market if it wasn't in a big dip.

For something like a 401k to IRA transfer where a portion of the portfolio had to be liquidated for the transfer I'd prefer to buy back as a lump sum, but have also waited a few days to buy back in at a lower price than I sold if that looks possible.

If you decide to wait I'd be very clear about what you're waiting for so that you're not caught up in something like a "one more year"-like version of investing.

 

[Animorph]

There was an article I read long ago that compared buying or selling a yearly amount on the peak or lowest market price of each year. IIRC, and I'm probably not too close, it made something like a 10% difference in the final portfolio value versus something like DCA or calendar lump sum.

You still get the compounding that makes up the vast majority of investment gains, but you lose a simple 10% off the top of your portfolio value for having bad luck with your timing. While 10% isn't exactly insignificant, it doesn't compare to compound gains.

So the effects of this decision are limited, on average. Though any one instance could be much better or worse.

 

[dleeper47]

Value Averaging -- 12 years positive experience

I'm new to this forum and this thread. This is my first post. I retired in 2008 at age 61.

In 2010, I began investing aggressively with a small portion (5%) of my net worth -- I used a version of Value Averaging, changed its parameters over the years, and have had excellent results over a 12-year period. In response to questions from friends, I wrote up the method I now use. The simplest & shortest summary I can manage appears below -- comments & questions welcome! (As always, your mileage may vary!)

----------------------

Using Value Averaging with Leveraged Index ETFs

Described herein is Value Averaging (VA) as I have practiced it to get by far the highest returns I’ve ever enjoyed.

None of the parameters in this description is “magic” or sacred. There are many possible variations. It is the underlying algorithm that helps me buy low and sell high with leveraged ETFs.

Simple Version of The Algorithm:

Buy a starting investment in UPRO, a 3X-leveraged S&P500 Exchange-Traded Fund (ETF).

Check the market value (MV) of the shares you own every 15 days.
If the MV has grown by more than 20% annualized (equivalent to 0.7% over 15 days), sell enough shares to bring the MV back down to a 20% annualized growth rate.
If the MV has increased by less than 20% annualized, buy enough shares to get the MV to back up to that 20% annualized increase.
Lather, rinse, repeat.

Notes:
Monitor your progress by computing the Internal Rate of Return (IRR), an accounting method used to gauge the return of any investment that has sporadic buys, sells, gains, and losses of variable amounts. It is easily computed in Excel via the XIRR() function.
Following this plan will cause you to buy low and sell high about 26 times per year. That will enhance the IRR of the underlying ETF by at least several percentage points per year.

 

[mrfeh]

I'm new to this forum and this thread. This is my first post. I retired in 2008 at age 61.

In 2010, I began investing aggressively with a small portion (5%) of my net worth -- I used a version of Value Averaging, changed its parameters over the years, and have had excellent results over a 12-year period. In response to questions from friends, I wrote up the method I now use. The simplest & shortest summary I can manage appears below -- comments & questions welcome! (As always, your mileage may vary!)

----------------------

Using Value Averaging with Leveraged Index ETFs

Described herein is Value Averaging (VA) as I have practiced it to get by far the highest returns I’ve ever enjoyed.

None of the parameters in this description is “magic” or sacred. There are many possible variations. It is the underlying algorithm that helps me buy low and sell high with leveraged ETFs.

Simple Version of The Algorithm:

Buy a starting investment in UPRO, a 3X-leveraged S&P500 Exchange-Traded Fund (ETF).

Check the market value (MV) of the shares you own every 15 days.
If the MV has grown by more than 20% annualized (equivalent to 0.7% over 15 days), sell enough shares to bring the MV back down to a 20% annualized growth rate.
If the MV has increased by less than 20% annualized, buy enough shares to get the MV to back up to that 20% annualized increase.
Lather, rinse, repeat.

Notes:
Monitor your progress by computing the Internal Rate of Return (IRR), an accounting method used to gauge the return of any investment that has sporadic buys, sells, gains, and losses of variable amounts. It is easily computed in Excel via the XIRR() function.
Following this plan will cause you to buy low and sell high about 26 times per year. That will enhance the IRR of the underlying ETF by at least several percentage points per year.

You've done great because US equities have been a bull market for 13 years.

If anybody considers doing likewise, you may want to see how the plan would've fared during the 00s.

 

[stephenson]

It is fear that is now - likely unlike previous years - driving you to become more emotional than previously. Common and human.

2021 was no different than 2015, 2016, 2017, 2018, 2019, 2020 ... nor is 2022. Each year is different, but over time your IRA has increased in value.

You are YOUNG - get your bucks back into the market. While I know it is timing, I try and buy when the market is down - occasionally successful, but usually I buy too soon during the short downs .. but that is still lower than the highs . So, I usually buy on the way down - a bit at a time. And, if at the bottom I buy innovative, game changers - will this work - time will tell. Oh, yeah, and I gave up on mutual funds - when I am buying the market writ large, I do so with ITOT.

 

[nobody]

About a year ago I got access to my ESOP private stock and cash way way way more then 10k. I'm "retired." I was nervous given the market and let it sit in cash and I spent about a year watching the market grow and was kicking myself. Finally pulled the trigger and have most of it back in the market with the recent dip. I still have many buys set in place to buy if VTI drops again. I got very lucky after kicking myself for about a year. I would put most of it back in the market and keep a bit to the side to buy in when the market drops. I like stephenson, buys probably too soon on the dips.

 

[dleeper47]

Yes, it's called value averaging.

You've done great because US equities have been a bull market for 13 years.

If anybody considers doing likewise, you may want to see how the plan would've fared during the 00s.

Actually I've "done great" for 3 reasons: (a) the 13-year bull market, (b) the use of leveraged S&P500 index ETFs, and (c) the algorithm itself which had me buying on downturns and and selling on upturns on at fixed periods. I made no attempt to "time" the highs and lows, and there were plenty of both.

A web search on "value averaging" will yield results of multiple (back-tested) comparisons of VA with dollar-cost averaging and other algorithms. As I recall, VA usually comes out on top, even without leveraging, but with leveraging, I've seen results that are even better.

VA benefits in general from market volatility and a 3x-leveraged ETF fund like UPRO amplifies volatility, causing the investor to buy at lower lows and sell at higher highs. Even in markets that move sideways for 10+ years, that effect boosts returns.

 

[OldShooter]

If this is such a successful and safe scheme why are you betting only 5% of your portfolio?

IMO you've been lucky. Good for you.

 

[dleeper47]

Good question!

The algorithm made great sense to me, but I didn't know how well it would actually work until I was into it a few years. Then I started adding more money and making more money because of the leverage and the all the good buy-low / sell-high trades.

It is now about 15% of my net worth, in part because of the new money I committed to the algorithm and in large part because the growth has been so strong. It has outpaced all my other investments by a wide margin!

Make no mistake -- it is not risk-free -- if the market had fallen to zero, so would my investment!

For anyone who wants to try leveraged VA ETF investing, I would say start small, set up your spreadsheet (you really do need one to keep track), run the algorithm for a year, and see how you do. You might even try the algorithm "on paper" only so that your risk nothing except loss of time. And if you can, run this algorithm in your IRA so the tax consequences are deferred.

 

[sengsational]

In 2010, I began investing aggressively with a small portion (5%) of my net worth ....

I don't quite get it. I think you're saying you segregated a portion of your net worth. Let's put a number on it, even though it's wrong: $100,000.

So, we're looking at $100,000 in the cash account at your brokers. Now what? All 100K into the leveraged ETF? Well, then, in terms of this thread, you've just done a lump sum. Did I get it right? Please advise.

 

[dleeper47]

sengsational:
Well, I started in February, 2010 with an initial investment of about $10,000 from my money market in my Fidelity IRA. Back then, I was using a 2x-leveraged ETF (SSO) and I set a target value path of 16% growth. (I suppose you could call that a "lump-sum" start, but it was certainly not a buy-and-hold investment!)

Every 30 days thereafter (I used 30 days rather than 15 back then), I began buying or selling shares as directed by the algorithm, always keeping the value of the shares growing at a 16% annualized rate.

I also added more new money sporadically, whenever I had more cash to commit, tracking everything in a spreadsheet and always sticking to the 16% annualized growth bogie in value every 30 days.

There were some severe down markets in 2015 and 2018 when the algorithm called for buying many more shares, and most of the time I did so. On one occasion, I only bought a portion of the shares called for, but the buy-low/sell-high effect kept working for me anyway.

There were also some great months in 2013 when the algorithm had me selling shares almost every month(!). The profits helped me buy shares at low prices in 2015 and 2018.

Anyway, it has been by far the most successful of any investment I ever made, I was in full control, no brokers were involved, there were no commissions, and all tax consequences have been deferred because it all occurred with in an IRA. I never had to form an opinion or prediction of market behavior. I just reacted to what what happening.

I use the XIRR() function in Excel to compute "Internal Rate of Return" so I could monitor my progress. You may know more about IRR than I do, but that's an accounting method used to rate the return on an investment with sporadic puts, takes, etc. I understand it's useful in rating some types of bonds.

My IRR oscillated wildly for the first year or two but then stabilized to what it is today -- about 28%. That sounds more impressive than it is -- IRR tends to exaggerate positive returns (you can read about it online), but that's what it computes to.

That's probably more info than you wanted(!), but there it is.

 

[RunningBum]

A set of rules to follow that just lets you react to market behavior. Not always followed in down markets. Plus sporadic influx of new money. Sounds like a bulletproof system to me. Bardstown returns, maybe?

 

[dleeper47]

Learning about Value Averaging

Anyone who is seriously considering Value Averaging should borrow, steal, or buy a copy of Value Averaging by Michael Edleson -- 2006 --

As I recall, Edleson calls for using a simple S&P500 index fund with 'adjustments' every 90 days. I 'goosed' the algorithm by using leveraged S&P500 funds like SSO and UPRO, and I may buy/sell adjustments every 15 days.

For me, performance as measured by Internal Rate of Return (IRR) has been excellent for over 12 years in my IRA -- it is currently at 28%. IRR is a convenient measure of performance, and Excel will compute it for you, but it does exaggerate positive returns.

Most of my retirement funds are in safe but low-yielding investments -- but a healthy portion is now following Value Averaging algorithms. I'm new to this forum, and I'm not sure how to send 'private' or 'directed' messages yet, but I'd be happy to swap notes with anyone who wants to have a serious discussion about VA or other investing algorithms. (dleeper47)