Investing Windfall into Market

[Lienlord]

Had a small windfall come my way from a real estate investment, $25k.
Have another $25k accumulated excess cash flow from real estate dividends over the past year. Normally, I'd wait for another real estate investment opportunity to come along. But thinking I should diversify a little more by putting it into the market (VTSAX).

Would you make a single purchase of $50k at the current price on that day, or spread over time in smaller increments? What would be your reasons for your choice?

I have no immediate need for the funds, so would be content to let them ride awhile (a few years at least) and would probably continue to add to it monthly going forward instead of letting it accumulate.

Thanks!

 

[freedomatlast]

Since I don't try to time the market, I'd put it in all in one shot on a single day, especially if this is a very small percentage of your total portfolio.

 

[njhowie]

Scale in slowly/monthly and stay diversified.

 

[jimbee]

I would invest it immediately as my investment policy statement dictates. For me, that means 50/50 equity/fixed.

 

[pb4uski]

Numerous studies on this suggest all in at once is optimal, but I'd be a bit hesitant to do that since market is currently just off of all-time highs.

I've always liked value averaging.

Put in $10k tomorrow. On Mar 1 add enough to bring the balance to $20k. On Apr 1 add enough to bring balance to $30k. Repeat until your $50k is fully invested. You'll end up investing more then the market is relatively low and less when the market is relatively high.

 

[The Cosmic Avenger]

I would invest it immediately as my investment policy statement dictates. For me, that means 50/50 equity/fixed.

Agreed. If you're confident in your AA, then put it in at your earliest convenience. Spreading it out over 12 equal investments would be a second choice, but for me that leads to the strong temptation to cheat by a few days because I feel like I "know" that I've seen or will see a peak or valley. So for me, dollar cost averaging works best for salary/wage income, not windfalls.

 

[FREE866]

Here's a great article about this:


https://ofdollarsanddata.com/why-market-timing-can-be-so-appealing/


The biggest takeaway is this:

"Even if you could buy the market bottoms at the lowest possible prices over time, you still would only outperform dollar cost averaging by 0.4% a year."

 

[RunningBum]

I would invest it immediately as my investment policy statement dictates. For me, that means 50/50 equity/fixed.

That's what I would do. What you should do is up to you. All of the suggestions given are reasonable. Pick the one you like best. If you have another idea, post it here and see what reaction you get.

 

[W2R]

Would you make a single purchase of $50k at the current price on that day, or spread over time in smaller increments? What would be your reasons for your choice?

I would invest $10K, wait a couple of months, invest the next $10K, and keep doing that until it is all invested which would be later on in 2020. This is essentially DCA (Dollar Cost Averaging).

The reasons why I would do this, is that I wouldn't feel like I picked the absolute WORST day possible to invest (because it wasn't all invested on one day). So I wouldn't be beating myself up for investing when I did.

I do a lot of that (beating myself up mentally over bad decisions), but maybe that isn't an issue for you.

 

[captain3d]

If it is going into equities then you should plan on much longer than a few years. 10 minimum then it doesn’t matter how you put it in.

 

[Helen]

I am my own worst enemy.

I sold a lot of individual stocks December of 2018 to put into stock index funds. I felt the market was too high so I put it in short term securities

I also didn't sell more individual stocks at the 2019 to move into stock index funds because of paying the capital gains in a high market.

It is really tough to pull the trigger and invest a lot of money into stocks during a record breaking bull market. I keep thinking the end must be near and a reversion to the mean will happen.

 

[Retireby45ish]

Just invest it all at once.

The people above who talk about dollar cost averaging do it so they don’t “look back and beat themselves up” over a local low or high. That isn’t a mathematical reason to do it...it’s psychological. So if you are looking for best math it’s getting it in now. If you want to feel less worse then it comes with a cash drag cost.

By investing it all now you are preventing that cash drag. Over a long time horizon, which it seems you have, it shouldn’t matter too much how this piece of your portfolio is timed entering the market.

In 10 years it will be up (say) 120% on average. With a variance of (say) 117% or 123% depending on whether you time it well or poorly over next few months.
Averaging would just move the 117 and 123 closer together towards the 119.5 middle (lower cuz you missed out on months of avg gains). That’s the trade off.

But one thing is clear, you will lose opportunity cost in doing this...to the tune of 0.3% per month.

 

[Lienlord]

It is really tough to pull the trigger and invest a lot of money into stocks during a record breaking bull market. I keep thinking the end must be near and a reversion to the mean will happen.

This is exactly what I've been thinking too! The fear that you're buying at the top of a cycle and there's no place to go but down, or there is a correction coming.

Thanks to all for sharing your wisdom and experiences. I'll consider all ideas, and probably implement some of all. Thankfully, this represents a small portion of NW, so it can ride the wave for awhile until needed. And I will make ongoing monthly investments into it which will also help average out the costs.
LL

 

[RxMan]

There are relative bargains in any market. As long as you do your homework and find a good price then I’d just invest it all. Depending on how large a position you’re comfortable holding in one stock you may need to find multiple bargains to spread the 50K around a little.

If dollar cost averaging is really a concern just buy half now and wait for this coronavirus scare to be over and invest the second half at that time. In the long run having a large cash position on the sideline would make me more nervous. The large percentage of every year’s gains are typically realized on just a few big trading days. You don’t want to miss out on those gains.

 

[Lienlord]

I would invest $10K, wait a couple of months, invest the next $10K, and keep doing that until it is all invested which would be later on in 2020. This is essentially DCA (Dollar Cost Averaging).

The reasons why I would do this, is that I wouldn't feel like I picked the absolute WORST day possible to invest (because it wasn't all invested on one day). So I wouldn't be beating myself up for investing when I did.

I do a lot of that (beating myself up mentally over bad decisions), but maybe that isn't an issue for you.

Those are excellent reasons. I think I'm going to start by funding backdoor Roth contributions/conversions for DW and I for 2019 & 2020. Since we're both 55, that should take care of about $28K. I'll invest these into VTSAX and then pull the rest over in chunks to a regular account that I can continue investing in monthly.

 

[skipro33]

Invest it all at once. My experience is, over time, the market does go up. And when it does, you'll be counting the dollars you DIDN'T invest months ago when you had the chance AND you'll now be worried that at the current, higher price, the market is sure to drop with you buying high.

I tested this last year with $50K initial investment and with another $10K each month for a year when I fired a financial advisor who was managing an IRA I had through an employer years ago. Looking back, every month I would have done better if I had invested it the previous month or better, along with the initial investment when I began. I think I started this in November of 2018. But even so, my account grew to over 18% to date. So still not too shabby. Could'a been another 10% if I had lump invested at the beginning though.

 

[DrRoy]

At least half today.

 

[mrfeh]

Since I don't try to time the market, I'd put it in all in one shot on a single day

+1

Do a search on bogleheads.org, where this topic has been beaten to death over the years.

 

[Montecfo]

Loots of good advice.

I also have some idle funds. I am not rushing to invest right now. I feel confident you will get some nice opportunities to put it to work on a pullback. Unless we get a quick solution on coronavirus I think you will get some more days like Friday.