Dollar cost average a windfall?

[JohnnyBGoode]

Would love to get the collective wisdom here.

As part of FIRE this year, I have some vested stock options that I have to exercise within 90 days of last day of employment or I lose them. The net total will be in the mid/high six figures after taxes - so definitely a "good" problem to have.

I could exercise to just hold the shares and wait for long term cap gains to kick in, but then it would be a large tax hit now and could be a big downside if the stock went down in the next 12 months. So I'd rather just take the tax hit at the cash all at once as a known quantity.

We don't need the money any time soon, so I'm planning to roll it into my retirement account leveraging my desired allocation: 65% stocks, 20% bonds, 15% cash/cash equivalent.

But what is the best way to incorporate it into my account? I was planning on sweeping it in through 10 or 12 equal monthly payments so I could just dollar-cost-average my way in. But then just yesterday I saw this article (Is dollar-cost averaging the cure for market jitters? - May. 3, 2017) that indicated that according to a Vanguard Study 2/3 of the time lump sum deposit is better than dollar-cost averaging.

So, for example, when Vanguard researchers looked at how someone investing a lump sum of cash all at once into a portfolio of 60% stocks-40% bonds vs. moving the cash into that 60-40 blend over a period of 12 months, they found that investing the lump immediately beat dollar-cost averaging about two-thirds of the time in the 1,069 rolling 12-month periods from 1926 through 2015.

So go in now or dollar-cost average? Or something else I haven't thought of? Would love to get some opinions on this. Thanks!

 

[Blue Collar Guy]

Would love to get the collective wisdom here.

As part of FIRE this year, I have some vested stock options that I have to exercise within 90 days of last day of employment or I lose them. The net total will be in the mid/high six figures after taxes - so definitely a "good" problem to have.

I could exercise to just hold the shares and wait for long term cap gains to kick in, but then it would be a large tax hit now and could be a big downside if the stock went down in the next 12 months. So I'd rather just take the tax hit at the cash all at once as a known quantity.

We don't need the money any time soon, so I'm planning to roll it into my retirement account leveraging my desired allocation: 65% stocks, 20% bonds, 15% cash/cash equivalent.

But what is the best way to incorporate it into my account? I was planning on sweeping it in through 10 or 12 equal monthly payments so I could just dollar-cost-average my way in. But then just yesterday I saw this article (Is dollar-cost averaging the cure for market jitters? - May. 3, 2017) that indicated that according to a Vanguard Study 2/3 of the time lump sum deposit is better than dollar-cost averaging.



So go in now or dollar-cost average? Or something else I haven't thought of? Would love to get some opinions on this. Thanks!

I have spent endless hours debating this with myself. Do you want to be in the 1/3 that takes a beating? My answer was a big fat NO.
I lump summed 25 % immediately into my AA, then i did a 2 year DCA into it. I didnt do it monthly either, i did it every Thursday. Just how i looked at the world.
I could have put it on the roulette machine too and had almost a 50 % shot at doubling it too, not that brave either. From your post you do not sound like a gambler, so id stick to the DCA you might make less, but you sure will lose a lot less,(maybe even make more) if the market decided to tank the week after you lump sum. Slow and steady wins the race. Good luck ,either way you won already.

 

[Nature Lover]

I had a windfall a number of years ago and just went in. Used it to "rebalance" to my then preferred AA...didn't DCA. I'd do the same today.

 

[Texas Proud]

The reason is that 2/3rd of the time the market is going up instead of down.... and as anybody can see, over time it is going up...


This is not the only study showing this... it has been known for a couple of decades at least as that is how long ago I read it... maybe even more than that...

 

[Christine]

I am in a similar situation now and although i lumped $20000 with great success a few years ago I now found I sleep much better doing DCA with 10 times that much.

And the reason I sleep better is although things are going up it's been a while since the bear visited and I know I would feel bad if he came just after me lumping. Even though it's a long time hold kind of investment. So I'm going with my stomach/heart here and not with maths and stats.

 

[brucethebroker]

Could you do both? Move 50% now, and the rest over 12 months?

I stole the idea from King Solomon of the Bible.......

 

[DrRoy]

Could you do both? Move 50% now, and the rest over 12 months?

+1

 

[Scuba]

I received two large bonuses equivalent to almost two year's pay shortly before I RE. Used 10% to reduce HELOC balance and put 90% in the market immediately. Since then assets have increased substantially. Unless you can foresee exactly when the market will drop and come back, you're better off going all in if you don't need to draw out the money anytime soon. Even if the market drops, you can leave the funds in and it will come back in time.

 

[DawgMan]

I have a similar "problem". I like the compromise idea of 1/2 in, then DCA the rest... but OTOH, it's easy for Jedi mind tricks to take hold. Logically, assuming you have bought into an AA strategy based on some time horizon, then I would say pull the trigger and deploy 100% accordingly. While that's what the smart version of me says, my fear/greed gland starts pumping and telling me the stocks are too high, bonds will continue to get hit with rising interest rates, so sit in cash until the next big dip (whatever big dip means)... major analysis/paralysis. So what am I going to do Who the hell knows!!! How's that for guidance!

 

[audreyh1]

I like to hedge my bets too.

I retired in 1999, and I had a large lump sum to invest. Boy was I glad I picked two years to DCA. I just couldn't bring myself to put it all in with the crazy late 1999 market.

I remember another (smaller) chunk that I decided to put all in 2007 because DCA was more work - oops!

Now I have another smaller chunk. Am I putting it all in? We passed 2007 valuations a while ago. I can't bring myself to lump sum. I'm lowering my AA instead, and I won't normalize it until we are out of the extreme valuation. I came up with a CAPE 10 influenced allocation that I think I can live with that slides between 50% and 60% equities and right now with new money I'm at 51.5% and need to rebalance down to 50%. If we ever see valuations drop under 25, then equity exposure will gradually rise again.

Just look at the graph and you'll see how unusual it is to have CAPE10 >>25, and right now we are approaching 30, and IMO it's because very low interest rates and other QE have pushed risk assets way up, and normalizing that even part way will have the opposite effect. There is a long unwinding still ahead, even if we only get to Fed Funds rate of 2.5 to 3%.

I guess I've never been able to get past that valuations matter, or the times I ignored it I got slapped.

 

[MichaelB]

We don't need the money any time soon, so I'm planning to roll it into my retirement account leveraging my desired allocation: 65% stocks, 20% bonds, 15% cash/cash equivalent.

But what is the best way to incorporate it into my account? I was planning on sweeping it in through 10 or 12 equal monthly payments so I could just dollar-cost-average my way in. But then just yesterday I saw this article (Is dollar-cost averaging the cure for market jitters? - May. 3, 2017) that indicated that according to a Vanguard Study 2/3 of the time lump sum deposit is better than dollar-cost averaging.

Not really a cash windfall investment, because right now that portfolio asset is 100% equities, even acting as a leveraged equity investment. The moment you sell and replace it with your intended allocation (65/20/15) the risk profile of your portfolio immediately declines. You've already lowered your risk.

Do you need to further reduce your risk? There's no harm in DCA'ing over a year in monthly or quarterly amounts, especially if that helps you sleep better, but you should look at your total portfolio asset allocation, actual vs plan, after exercising the options and paying the tax, to see how far you are from your target. If this cash addition significantly changes the actual vs target, you need to be comfortable with that.

 

[donheff]

No good answer on this. I just dumped a big chunk of cash into VG Total Market last year and did fine. But like you, I worried about being in the lower 1/3. One year further into the bull I might be more inclined to follow the recommendation to move in 50% now and the rest through DCA. But since you plan to leave it be for a while maybe you are overthinking. If you move it all in now and we get a correction this summer so what -- leave it be and it will come back up eventually.

 

[joeea]

So go in now or dollar-cost average? Or something else I haven't thought of? Would love to get some opinions on this.

It depends on how bad your "jitters" are.

If you want to maximize your expected return, then go in with the entire lump sum. That's what I'll do with any windfall I happen to receive. I'm very confident in my asset allocation and would see no reason to temporarily deviate from it no matter how large a windfall I receive. I'm not a superstitious guy and I don't believe in trying to time the market with long-term investments. When I make a decision, I tend not to look back and don't have remorse if things go awry. That's just me. As you can see, others apparently feel differently about new monies they receive.

But if you are too nervous, then dollar-cost average it in. You will reduce your expected return, but perhaps you'll sleep better at night.

 

[target2019]

Assuming a 1M portfolio without the lump sum, that is 650k, 200k, 150k. S/B/C.

Add 500k (after taxes). Lump sum added in same percentages to keep same AA in future is too much cash?

I would place the lump sum into something with guaranteed interest right away. CDs, online savings, etc.

Over 5 years I would invest regularly to match a new target AA, perhaps 100k each year. The B in allocation needs increasing?

Studies are absolutely true for the average investor at an average point in time. However, in 2017 my guess is that Cape10 plays into this much more strongly than in 2016. This time could be different, though.

 

[Texas Proud]

Just to add a thought to this...


If you lump sum and the market goes down.... you will know how much you are down and will be kicking yourself for doing it....


If you DCA and the market is going up, you still will be making money and when you are finally through investing you will NOT know how much you failed to make if you had just put it all in at one time... you will be patting yourself on the back for how much money you have already made...


I do not agree with this thinking, but I believe that most people will think this way....

 

[Christine]

This time could be different, though.

It is different. This time it's my money on the line.

 

[Free To Canoe]

Could you do both? Move 50% now, and the rest over 12 months?

I stole the idea from King Solomon of the Bible.......

+2

The OP is asking two questions:
1 When do I cash in?
2 When do I reinvest?

I like the above for question 1.

Someone else suggested that it be kept in cash and use for "rebalancing".
I like this idea for 2.

 

[Cobra9777]

I'm selling a rental so I'll be facing this decision in a couple weeks. I'll probably just go all in. Not a big fan of holding a bunch of cash and deviating from target AA. But I'm reading comments here with great interest.

I like our 15% allocation to real estate, so most of it will probably go to VNQ and the rest will boost my international equity a bit closer to the conventional wisdom of 20-30%. Still have a ways to go.

 

[target2019]

It is different. This time it's my money on the line.

That's a keeper.

 

[JohnnyBGoode]

Thanks everyone for the (as usual) great and thoughtful responses. As many have said, there is no easy answer. I'm thinking that since my AA already has a 35% bond & cash component, going all in with the windfall while keeping to my AA is already hedging my bets.

 

[Blue Collar Guy]

No good answer on this. I just dumped a big chunk of cash into VG Total Market last year and did fine. But like you, I worried about being in the lower 1/3. One year further into the bull I might be more inclined to follow the recommendation to move in 50% now and the rest through DCA. But since you plan to leave it be for a while maybe you are overthinking. If you move it all in now and we get a correction this summer so what -- leave it be and it will come back up eventually.

+1

 

[rnitz]

Here's a thought experiment for you: If instead of giving you cash for your exercised options and sold shares, suppose the company gave you stocks, bonds, and cash in your exact planned allocation (and the particular funds you were going to choose).

Would you sell all of those stocks and bond funds into cash so you could DCA back into those exact same securities/funds?

Since you can convert between cash and your desired funds almost immediately (and with minimal cost), there should be no difference for you of how you received the funds. If there is, it's a sign you are paying (real expected money) for a psychological benefit.

 

[bw5972]

...I could exercise to just hold the shares and wait for long term cap gains....

Wouldn't you have to come up with the cash to purchase?

 

[JohnnyBGoode]

Wouldn't you have to come up with the cash to purchase?

Yep, but fortunately the option price is very low (< $2 / share) so the case the outlay wouldn't be a burden.

 

[Christine]

I am in a similar situation now and although i lumped $20000 with great success a few years ago I now found I sleep much better doing DCA with 10 times that much.

And the reason I sleep better is although things are going up it's been a while since the bear visited and I know I would feel bad if he came just after me lumping. Even though it's a long time hold kind of investment. So I'm going with my stomach/heart here and not with maths and stats.

Studies are absolutely true for the average investor at an average point in time. However, in 2017 my guess is that Cape10 plays into this much more strongly than in 2016. This time could be different, though.

It is different. This time it's my money on the line.

I ended up investing 1/3 immidiately and the rest over 6 months. Perfectly happy with the results. Knowing what I know at this moment in time I could have done even better by going all in but I'm content and sleeping well.