Investment Timing/Allocation


Give me a museum and I'll fill it. (Picasso) Give me a forum ...
Sep 25, 2003
What approach is suggested for taking a pension lump sum and allocating it to an IRA portfolio from a timing perspective? For example, given todays marketplace (all time low interest rates and market on upswing) would you simply take the lump and allocate it to your mix immediately or would some sort of dollar cost averaging make sense over 12-24 month period. Allocating the lump all at once has risks if the market suddenly tanks, but also since the market seems to be on the rise (no idea how far it will go) it would be unfortunate to miss a bull market.

I am looking at having to invest a pension lump sum probably in the mid-December timeframe, and currently have a mix in mind that will look something like this:
59% fixed income
24% large cap
13% small cap
4% international

Does Vanguard or Schwab allow you to set up an IRA account that you can then dollar cost average from a MM to your various investment options?


I was faced with the same problem last year. I expected that my 'financial planners" would certainly have some sort of routine that would make sense. I got a shrug instead. Since then, I really haven't found any good ideas either. So last year I put a portion of it in mutual funds, then every couple months some more, till it was all utilized. Dealing in relatively large chunks each time.

In retrospect, I would have come out "better" if I had just thrown it all in at once at first. But those were still some dark days, market-wise. It could just as well gone down! In fact, late in the year I was projecting a 5 - 7% drop across my total portfolio for the coming year as a worst-case planning exercise in my own spreadsheets. That sure has changed since then!

But then one wonders if the market is nearing the top now, with valuations high. Would large purchases now be buying high? Who knows!

I know I'm not helping you any here, but I didn't find any real help anywhere for this concept. Can find a lot on dollar cost averaging, and value averaging, but they are meant for smaller sums executed frequently over a longer period of time. And I worried that inflation would be silently nibbling away at it if I did nothing.

Avoid getting in now, because it will probably go down?
If I don't get in now, the runup this time will be over?
This is something I agonized over the whole time!

This "Efficient Frontier" article, by Bill Jones, may be of interest:

If you are investing a very large lump sum in one market or sector, then I'd definitely recommend DCAing (especially for psychological reasons). However, if you're moving from cash to a diversified portfolio of bonds (of different types and maturities) and stocks (large, small, value, international, etc.), which should not all experience sharp downturns at the same time (although they certainly could!), the risks of possible sharp market downturns are somewhat alleviated.

A compromise could be to invest half of the money immediately, when you roll over the lump sum, into your allocation (59% bonds, 24% large, 13% small, 4% int'l) and then DCA the other half over the next 12 months.

I think the best thing you can psychologically do is to recognize that no matter what strategy you decide to implement, the chances of it turning out to be the best or optimal are extremely small. And even if you do choose what turns out to be the most optimal strategy after the fact, it is most likely just due to luck and not due to some finance or mathematical mastery.

The best strategy is the one that will allow you to stick to your asset allocation if the market(s) go up or if the market(s) go down. We can only control a couple of things. Investing costs, taxes (to a degree), diversification (to a degree), and our risk tolerance.

Yes, I believe that Vanguard will allow you to set up a money market account within an IRA from which to DCA into stock and bond funds.

- Alec
In 1993, age 49, after becoming an ER thru a layoff, I rolled all my 401k into Vanguard into 4-5 Vanguard funds in an asset allocation picked after reading AAII articles and going to local chapter meetings. Emotionally I wanted to DCA, but sucked it up and did it at once after reading.

BTY - after reading Bogle's 1994 book, I went to one balanced index fund and them rebalance.
What approach is suggested for taking a pension lump sum and allocating it to an IRA portfolio from a timing perspective?  For example, given todays marketplace (all time low interest rates and market on upswing) would you simply take the lump and allocate it to your mix immediately or would some sort of dollar cost averaging make sense over 12-24 month period?

The answers you have so far been given rely in one degree or another on belief in The Efficient Market Hypothesis. There is another approach, loosely termed behavioral finance, that would suggest that any time to invest is not necessarily the same as any other time. Robert Shiller is an academic who has written extensively on this approach, and is now quite well known. Recently Ben Stein of "Win Ben Stein's Money" wrote a popular book that strongly argues that in the markets, there is a time for sowing, and a time for reaping. It has nothing to do with percieved momentum, "bull market" or "bear market", but only with valuation.

I don't think it will surprise you that by his criteria- all historically developed- now is definitely not the time to plant new crops in American equity or long term bond markets.

Personally. I would keep my portfolio largely in cash, even though the yields are paltry. Things will change, and clear opportunities will present themselves, probably sooner rather than later. Notice too that company insiders are making historical sales to purchase ratios- ie. they are liquidating big time in the stocks they know best, their own companies.

I have sold most of what I have in tax deferred accounts, and have sold enough in other accounts to have a hefty long term capital gain tax to pay. This goes against one of my rules- avoid taxes- but I think I am going to continue selling, until I don't own any equity except petroleum related, some Asian and European, and some tobacco. All these things are at least somewhat uncorrelated to the American general market. There is even some chance that Asia is poised for an historic economic advance which ought to give their equity markets some underpinning.

I realize this is quite non-PC for retirement investing boards, almost on the level of suggesting that a woman's place is in the home at a N.O.W. meeting. Still, you will hear plenty of the other point of view from others, and while mine is different, is is based on some years of applying it. I rely on my portfolio, since I will have no pension, and I don't yet draw SS. So while I may be wrong, it is not a casual opinion!

The timing and asset allocation decisions are certainly both important. Funny, I have received advice from two different financial advisors this week that are 180 degrees opposite each other:

- One suggests approximately 75/25 equity to fixed income and believed that a high % of equity was needed to contend with inflation over a 35+ year retirement period. Also thought dollar cost averaging over a 6-12 month period into the equities is approproiate

- The other had a mix recommendation that was just the opposite 75/25 fixed income to equity and felt the time is not right to get into stocks more aggressively than that, as P/Es are still too high. Also recommended dollar cost averaging for equity portion over 12 month period, but could be shorted if conditions warrant.

While I am not totally comfortable making these decisions myself, I have not yet found any third parties that I am ready to hand my money over to. Most of the advice here has been very educational and spot on.



There is nothing inherent in equities that is inflation protected or purports to guarantee inflation beating returns. People (especially financial advisors, brokers, etc.) love to show us averages of past stock returns and past inflation adjusted stock returns. And lord almighty, how those numbers/averages are deceptive.

Why were equity returns high in the 1900's? Well, stock prices started low (and in conjunction dividend yields started out high). Also, stocks did well in times of stable and low inflation. However, in times of higher inflation, when you needed your investments to keep up (since you are spending more money from this savings as goods get more expensive), stocks did terribly (well, to be fair some stocks "less bad" than others). Stocks are not good inflation hedges.

Stocks have only "beaten" inflation b/c the past nominal returns have been so high. Well, what if the returns of stocks will be lower in the future (b/c their prices are higher now)? Stocks become much less attractive because the extra risk you take on by increasing your equity allocation does not compensate you as much as it has historically. To put it another way, the "Equity Risk Premium" will not be as high as it has been in the past. The risks/downsides of equities remain the same, but the rewards are much less.

Also, to get the future equity returns, you may have to wait 10 to 20 years before the extra risk you take pays off. Meanwhile, you're spending down your portfolio, decreasing the amount that can grow.

Did the first financial advisor even ask you how much risk you're comfortable with? As you increase your equity exposure, you increase the magnitude of the really bad outcomes. If you are trying to set up your portfolio so you won't lose big, you more or less have to give up the hopes of winning big.

If you're only comfortable with 30% stocks and 70% bonds, there is certainly nothing wrong with that. You may have to cut back on some expenses, but that is a much safer method than increasing your equity allocation in hopes of higher returns. Some will say that you'll be getting eaten alive by inflation with all those bonds. That would be true, except now we have bonds that are inflation protected (TIPS). Of course, the CPI may not reflect the rise or fall in the prices of goods you personally consume.

I created a little spreadsheet for my own amusement to see how unattractive stocks would get as their returns got closer to bonds. If you want to play around with it (it's pretty low tech), here it is:

You can vary the stock and bond return %'s to see how that affects the incremental return for adding more stocks. Also shown are the returns for various asset mixes from three bear markets. Some better examples are in William Bernstein's "The Four Pillars of Investing", on pp. 114-116. Particularly table 4-1, figure 4-6 and 4-7. I highly recommend reading it.

- Alec
Thanks for the spreadsheet Alec, I will try it out. I have also just started to read the "Four Pillars of Investing" which was recommended to me by one of the members. I'm learning ;)


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