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Lump sum, Dollar Cost Avg or Wait right now?
Old 01-27-2021, 04:52 PM   #1
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Lump sum, Dollar Cost Avg or Wait right now?

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?
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Old 01-27-2021, 05:20 PM   #2
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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.
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Old 01-27-2021, 06:00 PM   #3
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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.
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Old 01-28-2021, 07:03 AM   #4
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Quote:
Originally Posted by Stillwater007 View Post
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.
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Old 01-28-2021, 09:30 AM   #5
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Quote:
Originally Posted by pb4uski View Post
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.
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Old 01-28-2021, 05:50 PM   #6
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Yes, it's called value averaging.
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Old 01-28-2021, 06:21 PM   #7
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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.
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Old 01-28-2021, 06:37 PM   #8
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Invest money when you have it, withdraw money when you need it.

It really is that simple.
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Old 01-28-2021, 06:59 PM   #9
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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, Id value average into my asset allocation over a period of time.
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Old 01-28-2021, 07:34 PM   #10
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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.
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Old 01-28-2021, 08:05 PM   #11
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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.
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