Investing in Stocks When Market is High

[justthink]

Curious on peoples opinions on this. Have a bunch of money to invest right now. Want to add to my 50/50 portfolio. Am I dumb to be nervous about putting a large chunk of money in stock funds right now with the market so high? Would you just dump it all in now? Or average out the stock portion over the next year. This is for a retirement portfolio where retirement is starting now.

 

[Tyro]

We're in a similar situation, and discussing now a plan for dollar cost or value average investing. In either case, it's not going to kill us to wait out the summer for a correction, or begin averaging in in the early fall. YMMV.

Tyro

 

[W2R]

When I feel uneasy about investing a lump sum, I usually try dollar cost averaging into it. Dollar value averaging is supposed to be even better.

The main advantage of spreading out the investment like this is that you don't feel like a total chump for picking the absolute worst day possible to invest the lump sum. Instead, you are investing it evenly through a period of time.

Without DCA'ing I don't think I would have had the courage to invest at all at certain times.

 

[braumeister]

The important thing, in my mind, is that it's simply impossible to predict the future. The market could go down as easily as up, at any time at all. We tend to think about it in terms of trends ("bull or bear" markets), but in fact it's (IMHO) more like a roll of the dice.

Craps shooters may think they're on a roll, so if they haven't made their point in a while they figure they're "due" a win so they increase their bet. But it's totally random and they're only fooling themselves.

The market is like that, too. Just set your sights on a regular input to your accounts and don't beat yourself up because you didn't time the market perfectly. In the long run it matters far less than most people realize.

 

[Live And Learn]

Definitely agree with going in over a period of time. When the Dow hit 11,500 I "knew" it would sink back down to 10,000 so I sat on some cash waiting for that dip. I'm still waiting and know the ship has sailed. On the plus side, having that cash will allow me to keep MAGI below 60k to get a healthcare subsidy for a few years.

 

[unclemick]

I believe the academic answer is to invest when you have the money - provided you are maintaining a balanced portfolio and plan to live a long time in retirement.

Of course - chickenheartedness being what it is I always ignored science and dollar cost averaged over 2-3 years both during savings 1966-1993 and in retirement 1993-present whenever a lump sum(usually from selling a house or other real estate) happened.

Heh heh heh - I knew what I should do and then there is .

 

[justthink]

after posting this i did some googling on dollar cost averaging vs. whole lump sum at once and it seems mathematically doing the whole lump at once is a little better...unless you are chicken which i guess i am....maybe i will break it up over 3 months....then again i shouldn't have to touch this money 5 years so maybe the lump at once is best. damn need a crystal ball.

 

[katwillny]

We are at a very odd crossroads. The market has become a rather confusing place to be nowadays. In previous time good news was a good thing for the market but today it seems that good news means the opposite due to QE3.... It makes me a bit nervous when I look at it from the vantage point of Bernanke having so much power over the market. I say all that to say that I am new to investing and I am still in the middle of my learning curve.

 

[clifp]

after posting this i did some googling on dollar cost averaging vs. whole lump sum at once and it seems mathematically doing the whole lump at once is a little better...unless you are chicken which i guess i am....maybe i will break it up over 3 months....then again i shouldn't have to touch this money 5 years so maybe the lump at once is best. damn need a crystal ball.

Yup mathematically it makes sense to invest all at once, but being able to sleep also is important. But if you think about on average the market goes up about 10%/year so spreading out over 6 months means you lose 2.5% on average.

What I would do is construct a few scenario onhow the market will do and then ask yourself how you'd react to various scenarios.
One thing to keep in mind is that there are very few average (market goes up 8-12%) years. Generally it is more common +30%, 0% or -20%.

Scenario 1. market goes up 30% in the next 6 month (or 1/2 that in 3 months)
A lump sum: You'll pat yourself on the back for being logical and making money.
Dollar cost average. You'll be happy the market is up. Will you also beat yourself up for losing out on 15% gains?

Scenario 2. Market goes down 20% in 6 month or whatever
Lump sum. You'll be upset you lost money. Will you be upset you were not cautious and didn't dollar cost average or will you think, I've got 5 years before I need the money I did the right thing.
DCA: You'll have lost 10% of your money. Will you be thankful you dollar cost averaged or more pissed that you lost money?

 

[LOL!]

I would be leery of the theory of Lump Sum vs Dollar Cost Average. The reports of studies that I have read state the LS is better on average about two-thirds of the time, but then go on to state that "better" is a pretty small difference of 1% to 2% over the course of 1 year of DCAing.

So would you use LS to try to do about 1% to 2% better that first year? In 2011, on about 38% of the trading days the S&P500 had a price change of more than 1% (Source). Some of those days were up days and some were down days.

If you lump-summed 50% now and DCA'd the rest, that would mean an average difference of just 0.5% to 1% over the 100% LS situation.

It sure seems to me that one could easily beat LS most (but not all) of the time if they invested 50% now and then just LS'd the rest on any day that the market was lower than than initial LS day. The only way that would not work would be if the market remained higher every day for the next year. That might happen like in 2012 for US stocks, but it is a rare occurance.

 

[target2019]

after posting this i did some googling on dollar cost averaging vs. whole lump sum at once and it seems mathematically doing the whole lump at once is a little better...unless you are chicken which i guess i am....maybe i will break it up over 3 months....then again i shouldn't have to touch this money 5 years so maybe the lump at once is best. damn need a crystal ball.

Some investors divide the potential investment into buckets of 20% or some other percentage you are comfortable with. You need a signal of some kind to tell you when to make the purchases.

Last year I entered a challenge, and invested 10k in Vanguard's energy fund. I compared the bucket approach to my own lump sum, all-at-once approach. I found that getting all in to the rising market was the best tactic. Off course the results change when there are dips. And if you go all in to a market that is tanking, well that is another feeling.

I think the amount of money you have to deploy is an important factor. If it is 1% of your investments, then all-in probably feels right. If it is 10% or more, then you probably need to DCA, or buy buckets.

 

[Onward]

My strategy has always been to invest the entire amount all at once because:

1. Statistically it's the superior strategy, and

2. It gets the money out of your hot little hands, where it could get spent on other things.

 

[RunningBum]

I'm a lump summer. My view is that the safety is in diversification and asset allocation, so I'd rather get right to those levels rather than have my AA out of whack while I average into it. I'm not a market timer. If I'm going to feel secure in my AA in a year when I've fully averaged in, why wouldn't I feel secure with it today by lump summing it?

Besides, there is nothing different (other than tax implications and transaction costs) between a person who is already fully invested, and someone who is trying to decide how to invest a sum of money they may have just come into. If it's better for the second person to put 10% in every month, should the first person be selling 90% of their holdings and then putting 10% back in each month? Some market timers may do that, and if this is you, averaging in may make sense. For me as a non-timer, it makes no logical sense. But if averaging in helps you sleep better, do it, but you ought to recognize you are letting emotions influence a financial decision.

 

[tuixiu]

What about a very short term DCA, just to ease the mind on not picking that one day with the huge market swing that costs you 1% or more? 20% per day over five days or something, you'd avoid the long term statistical disadvantage but maybe get some peace of mind.

 

[Midpack]

If you're investing for the long term, it really shouldn't matter, current market highs will seem like bargains in like every time before in 10, 20 or 40 years IF the past 140 years are any indication. And "this time it's different" has been wrong every time before this, though people were just as convinced otherwise every time before too (like now?). I've invested large lump sums before (the largest in summer 2011), but I DCAd I to 401k's for decades like many others too.

That said, if a lump sum makes you uncomfortable, nothing wrong with DCA or some otherwise stepwise series of investments instead of a lump sum. There's no absolute best way, and you'll only know long after you've acted - woulda, coulda, shoulda - life is too short.

 

[justthink]

sincere thanks to everyone who responded it is awesome to have someone to "talk" to about these tough decisions. since this will be such a large chunck of my portfolio i believe i will go for 1/2 tomorrow and dca over 4 months even though logic says to put it all in now. will check back with you all in a year when the dow is 18000. oh look the market is up this morning ;-) i know, stop looking!

 

[Fermion]

If lump sum is better on average by 1% or 2%, what about the times when it is worse? Is it really bad vs DCA in certain times?

I am not sure getting 1% more by lump sum is worth it if there is a risk of losing 20% vs DCA in a falling market.

I personally would sleep better knowing I was at most losing 2% max gains if I knew I would not be losing 20% over a weekend.

 

[RunningBum]

And what about the times it is better than average? You are comparing average for gains vs worst case for losses, so of course the risk looks ridiculous to take if that's your view. The biggest one day change in the Dow was a 22% drop, but there have been 7 double digit gains vs just 3 double digit losses in history, and 2 of those losses were the 1929 crash.

List of largest daily changes in the Dow Jones Industrial Average - Wikipedia, the free encyclopedia

Single day changes aren't the only concern, a prolonged slide would also be tough to take, but a prolonged run up would be bad to miss out on. You can google or just find with stock charts that there have been steep rises to more or less offset any steep drops.

Being able to sleep at night is underrated, so if concern about losses is worse than missing out on gains, go ahead and average in. Or stay out of the market entirely, because that 20% drop might come the day after you've finished averaging in.

 

[Willers]

I was in a similar situation and ended up DCA'ing over about a month. It was short enough to be in quickly at my target AA, but long enough to avoid the "I stupidly picked the worst possible day" syndrome. Not a purely analytical approach, but we're all human, right?

 

[Running_Man]

I think the most important item is to have a plan and be able to stick to it. Even if the stock market is at a top and collapses 80 percent, do you have the ability to re-establish the 50% in stocks by selling the bonds? That is what is going to be needed and when it will make a difference. As long as you have a well thought out plan and do not deviate from it merely because of market fluctuations and fear, you should be ok and when you invest the money will not matter too much, your allocation percentage should keep you in check. Just look at your figures and be sure you can buy if the market were to decline 80%.

 

[obgyn65]

I would not do anything drastic in this environment. Proceed with caution. Have you thought about buying an annuity instead ?

Curious on peoples opinions on this. Have a bunch of money to invest right now. Want to add to my 50/50 portfolio. Am I dumb to be nervous about putting a large chunk of money in stock funds right now with the market so high? Would you just dump it all in now? Or average out the stock portion over the next year. This is for a retirement portfolio where retirement is starting now.

 

[timo2]

Curious on peoples opinions on this. Have a bunch of money to invest right now. Want to add to my 50/50 portfolio. Am I dumb to be nervous about putting a large chunk of money in stock funds right now with the market so high? Would you just dump it all in now? Or average out the stock portion over the next year. This is for a retirement portfolio where retirement is starting now.

When do you need the money? to deal with question for myself, I separated my money into 5 year and 14 year money. The 5 year I put in safe places that is earning about 1.2%, and the 14 year I put in the stock market. By five year, I mean the pile of money I'm going to start using in five years, and should last the next 10, until I'm 70 (when I'll file for SS). I'm hoping that in 10-11 years the market will have at least kept up with inflation, and I can take out the short term money again.

 

[web_diva]

If it were me, I would probably DCA in over the course of a year. There are historically good and bad months for the market.

Seems the Federal Reserve may be changing their monetary policy in coming months and the market is plainly jittery about that. I wouldn't want to see the account plummet (even in the short term) when they get serious about stopping QE.

 

[Midpack]

I would not do anything drastic in this environment. Proceed with caution. Have you thought about buying an annuity instead ?

For perspective, obgyn65 will tell you he's probably the most conservative member here and he's essentially never invested in stocks in his life. He doesn't recognize the fundamental value underlying stocks, he only sees the emotional drivers ("fear and greed").

And he should also note that this is also one of the worst times in history to buy annuities, low yields/interest rates make them cost more for income provided than almost any time in generations. I'd wait to buy an annuity until much later in life, especially in this rate environment. There is no place to hid investment wise right now, equities are the only investments providing real returns at present, and the OP already realizes we're at highs...

 

[retire2020]

For perspective, obgyn65 will tell you he's probably the most conservative member here and he's essentially never invested in stocks in his life. He doesn't recognize the fundamental value underlying stocks, he only sees the emotional drivers ("fear and greed").

And he should also note that this is also one of the worst times in history to buy annuities, low yields/interest rates make them cost more for income provided than almost any time in generations. I'd wait to buy an annuity until much later in life, especially in this rate environment. There is no place to hid investment wise right now, equities are the only investments providing real returns at present, and the OP already realizes we're at highs...

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