Lump sum or DCA investment for inheritance?

[disneysteve]

A large chunk of the inheritance I've received is coming to me in cash which is totally throwing off our AA. My question is if I should get it invested ASAP as a lump sum or spread it out over a few weeks or couple of months? I wouldn't drag it out any longer than that no matter what. Right now counting everything (including money I haven't actually received yet but will), our stock allocation is about 14% below my target AA due to the sudden cash inflow.

I know the "right" answer is probably to get it invested right away but it's a little hard to pull the trigger on buying a substantial 6-figure amount of stock all at once like that.

What would you do?

 

[RunningBum]

I would have faith in my AA strategy to get me through any volatility and invest the lump sum.

 

[SecondCor521]

Personally I would lump sum, especially if I were comfortable with my target AA.

However, before doing so I think I would attempt to analyze if the inheritance was large enough to where I should change what I was currently doing - either in my target AA, when I was going to take SS, whether or not I would pay off the mortgage, how I would fund my kids' college, etc. If so, then I'd probably work that out first, then establish a new target AA reflecting those changes, then lump sum to that new AA.

I'd also consider waiting a bit in order to let things sink in and think through any potential changes.

But I can understand the nervousness and would completely understand DCA as well.

There's a good Bogleheads wiki page on handling an unexpected lump sum, you might take a look at that:

https://www.bogleheads.org/wiki/Managing_a_windfall

 

[GravitySucks]

I had a similar conundrum. After taking my pension lump sum I was doing monthly DCA over 3 years when at month 3 I ran into an article that said over 80% of the time it is better to just go all in. Found a couple of supporting articles saying the same thing so I invested it all.
Worked out great in 2013. Hope it does now for you.

 

[sengsational]

A long while ago I came to believe that the best way was not to DCA toward your AA, but to just rebalance in one fell swoop. This belief came from research I did when the practical question came up for me, but I don't remember the specific research that convinced me. PS: Consider the source...the finance industry probably benefits with the all-in now move more than DCA.

When I think of it now, the reasoning goes, if the market goes directly down during the period you'd have been DCA-ing, you'd have half the amount of loss. If the market goes directly up during the period you'd have been DCA-ing, you'd have half the gain. If you aren't going to time the market, you'd just jump in an take whatever it gives, good or bad. I should probably read the bogleheads page...I'm sure I'd learn something. ETA: Nothing about the decision between applying windfall to asset allocation vs dollar cost averaging toward AA target in that page that I see.

One time when DCA is good is when you continually find yourself with a few extra bucks (not a lump sum), as in when you're w*rking. Then the principles of DCA work in your favor because it's money you couldn't lump sum in, and it's over a very long span of time, where there are lots of dips where you buy more.

 

[SnowballCamper]

One time when DCA is good is when you continually find yourself with a few extra bucks (not a lump sum), as in when you're w*rking. Then the principles of DCA work in your favor because it's money you couldn't lump sum in, and it's over a very long span of time, where there are lots of dips where you buy more.

This definitely.

I think DCA over a couple months or less, using some limit orders, would be prudent. The studies I've read (several years ago) all came up with lump sum being better. This is because they compared DCA over several years to a lump sum at the beginning. Time is the long term investors friend!

 

[audreyh1]

A large chunk of the inheritance I've received is coming to me in cash which is totally throwing off our AA. My question is if I should get it invested ASAP as a lump sum or spread it out over a few weeks or couple of months? I wouldn't drag it out any longer than that no matter what. Right now counting everything (including money I haven't actually received yet but will), our stock allocation is about 14% below my target AA due to the sudden cash inflow.

I know the "right" answer is probably to get it invested right away but it's a little hard to pull the trigger on buying a substantial 6-figure amount of stock all at once like that.

What would you do?

A few weeks or a couple of months won’t make a difference.

DCA a large lump sum usually means a year.

Always a tough call.

 

[RxMan]

I’d probably just lump sum invest it to get it into my asset allocation but I’d hardly argue with anyone who decided to DCA and gradually shift that money into their investments. I will say this is a perfect time to evaluate your asset allocation and make sure it’s still appropriate for your needs and risk tolerance and adjust it if necessary. Good luck!

 

[disneysteve]

Thanks for all of the responses.


Over the past week, I made a bunch of transactions and have gotten our portfolio back within 3 points of my target. I'm okay with that for the moment. There will be more money coming in at a later date so I'll need to do another round of investing at that time and can fine tune the AA in the process.