Thoughts on lump sum investing?

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BaylorBears
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Thoughts on lump sum investing?

Post by BaylorBears »

I'm only about 50% in the market right now and have a sizable portion of my net worth earning about 1.5%.

thoughts on investing it near market highs?

I'm in my mid 30s with a couple of six figures worth of investable money in the bank.
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Aptenodytes
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Re: Thoughts on lump sum investing?

Post by Aptenodytes »

"couple of six figures" = 12 figures = hundreds of billions of dollars?
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Frengo
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Re: Thoughts on lump sum investing?

Post by Frengo »

Which market are you in ?

If I had to invest 200k in stocks, I'd invest 10k per month in a total market fund/ETF.
If I had to invest 200k in bonds, I'd be happy with your 1.5% return. For the time being.
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Kalo
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Re: Thoughts on lump sum investing?

Post by Kalo »

Vanguard does have a study about dollar cost averaging vs lump sum when the amount to invest is a lump sum (as opposed to a stream of payments).

If you search for "What's the better way to invest - little by little, or all at once Vanguard" you should find it.

I read it about a month ago and found it very informative and the results were not what I would have intuitively thought.

Kalo
"When people say they have a high risk tolerance, what they really mean is that they are willing to make a lot of money." -- Ben Stein/Phil DeMuth - The Little Book of Bullet Proof Investing.
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Frengo
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Re: Thoughts on lump sum investing?

Post by Frengo »

Indeed all studies will show that a lump sum investment on average will yield a higher return than DCA. This is based on the very reasonable assumption that markets generate a positive return in the long run.
The lump sum investment advantage will be larger the longer is the DCA period compared to the total length of the investment.

But the OP is not the average of many investors; He is one particular investor.
And I find very reasonable that one particular investor may desire to cut the risk of catastrophic events.
Since a judicious investment in stocks must be undertaken with the expectation of leaving the money invested for at least 10, even better 15÷20 years, sacrificing 1 year of expected return (this is indeed the expected loss for a 2-year long DCA) is not that terrible, especially when it precludes the investor the chance of investing everything in March 2000, or in August 2008.
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BaylorBears
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Re: Thoughts on lump sum investing?

Post by BaylorBears »

If only it were 12 figures.
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BaylorBears
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Re: Thoughts on lump sum investing?

Post by BaylorBears »

US market
Frengo wrote:Which market are you in ?

If I had to invest 200k in stocks, I'd invest 10k per month in a total market fund/ETF.
If I had to invest 200k in bonds, I'd be happy with your 1.5% return. For the time being.
Default User BR
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Re: Thoughts on lump sum investing?

Post by Default User BR »

As so often is asked when this subject come up, are the people proposing DCA also selling all of their stocks (or at least all of the stocks in tax-advantaged) and dribbling back into the market? If not, why not?


Brian
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Frengo
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Re: Thoughts on lump sum investing?

Post by Frengo »

Default User BR wrote:As so often is asked when this subject come up, are the people proposing DCA also selling all of their stocks (or at least all of the stocks in tax-advantaged) and dribbling back into the market? If not, why not?
Not sure I understand, but people sell for 2 reasons

- They have reached their objective. In which case they have the desired amount and so sell everything in one shot and cash in.

- They have reached a certain time mark and want to start cashing in. In which case a good policy would be selling equal amounts of shares, for diametrically opposite reasons to why is good policy to invest equal amounts of dollars.

But perhaps you are asking why they don't try to time the market now by selling and reentering DCA-style ?
1) Who tells you this is a minimum ? For all I know we are very near to a maximum.
2) DCA-ing for N years involves the loss of the expected return for N/2 years. If I'm out of the market I may want to sacrifice that much in order not to risk investing everything in March 2000. But if I'm already full invested I already know what happened after I started investing.
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Re: Thoughts on lump sum investing?

Post by z3r0c00l »

Frengo wrote: And I find very reasonable that one particular investor may desire to cut the risk of catastrophic events.
But he is greatly increasing the risk of something that our cavemen brains seem to ignore - the risk of lost returns. Keeping his money on the sidelines has already cost tens of thousands of dollars. That would keep me up at night more than the risk of short-term loss, because that is the money you never get back. Make no mistake, DCA already hurt this investor severely. I guess it can't do much worse from here on out? Unless the market goes up another 10% - another $20,000 lost to inaction?

The all time high talk is really meaningless. From 1982 till 1999, the market spent most of its time at all time highs. So I guess those 17 years were no good for investing. I can understand taking 6 months to DCA your life savings into a new AA... but letting it drag on this much is statistically harmful.

But if it helps, keep a decent amount of safe money. I am 31 and like to keep 3 years expenses in a bank account, ibonds, and intermediate bonds, the latter part of an 80/20 AA. I feel perfectly fine rebalancing no matter what the market looks like because of this decent stockpile of safe money.
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Gauntlet
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Re: Thoughts on lump sum investing?

Post by Gauntlet »

My suggestion is to develop a financial plan if you have not already. Take your time developing this plan and think long and hard on what you want your asset allocation to be. Then take all of your "side line" money and put it towards your AA. The wiki here has a ton of info that will help you. good luck.
ML 59
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Re: Thoughts on lump sum investing?

Post by ML 59 »

I agree with Gauntlet, but would like to add:

Be sure to include a definite timeline in your financial plan - else you may never find the optimum market conditions to launch.
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Re: Thoughts on lump sum investing?

Post by bertilak »

Frengo wrote:And I find very reasonable that one particular investor may desire to cut the risk of catastrophic events.
If BaylorBears can cut the risk of catastrophic events I wish him well, indeed. I am heavily invested in the market and would be happy if there were fewer catastrophic events.
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Re: Thoughts on lump sum investing?

Post by Frengo »

z3r0c00l wrote: But he is greatly increasing the risk of something that our cavemen brains seem to ignore - the risk of lost returns. Keeping his money on the sidelines has already cost tens of thousands of dollars. That would keep me up at night more than the risk of short-term loss, because that is the money you never get back.
DCA-ing for N years statistically costs N/2 years worth of expected returns. A 2-year DCA on a 20-year investment costs 5% of total returns. in fact, a little less due to volatility in the first two years working in your favour.
Make no mistake, DCA already hurt this investor severely.
Apparently not, had he chosen to invest lump-sum four weeks ago.

DCA is not a method to get richer with the stock market. It is the rough equivalent of a homeowner insurance. Most houses will never burn down, but we still engage in this financial activity characterized by a negative expected return.
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Re: Thoughts on lump sum investing?

Post by avalpert »

Frengo wrote:
z3r0c00l wrote: But he is greatly increasing the risk of something that our cavemen brains seem to ignore - the risk of lost returns. Keeping his money on the sidelines has already cost tens of thousands of dollars. That would keep me up at night more than the risk of short-term loss, because that is the money you never get back.
DCA-ing for N years statistically costs N/2 years worth of expected returns. A 2-year DCA on a 20-year investment costs 5% of total returns. in fact, a little less due to volatility in the first two years working in your favour.
Make no mistake, DCA already hurt this investor severely.
Apparently not, had he chosen to invest lump-sum four weeks ago.

DCA is not a method to get richer with the stock market. It is the rough equivalent of a homeowner insurance. Most houses will never burn down, but we still engage in this financial activity characterized by a negative expected return.
No, it is the equivalent of having a lower allocation to equities - if you really believe it is wise insurance to have a lower equity allocation than you should be lowering your exposure to equities of your existing investments as well. There is nothing special about new money compare to already invested money outside of psychological biases.
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Re: Thoughts on lump sum investing?

Post by Frengo »

avalpert wrote: No, it is the equivalent of having a lower allocation to equities - if you really believe it is wise insurance to have a lower equity allocation than you should be lowering your exposure to equities of your existing investments as well. There is nothing special about new money compare to already invested money outside of psychological biases.
take a 2-year span, 20 years ago. During that time there are 500 lump-sum investors who went all-in each one on a different day and there is one DCA investor who went in 0.2% in each of those days.
Today he is not the richest of the lot, but certainly he is not the poorest either.
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Re: Thoughts on lump sum investing?

Post by bigred77 »

baylorbears,

The best investment decision you can make would be to just buy one of the new luxury boxes their hawking at the new football stadium. Follow Draytons lead and donate!!!
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Re: Thoughts on lump sum investing?

Post by Default User BR »

Frengo wrote:But perhaps you are asking why they don't try to time the market now by selling and reentering DCA-style ?
I didn't say anything about timing the market. What I said was, if DCA is good for new money, why not old money? Why not sell everything and DCA?


Brian
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Re: Thoughts on lump sum investing?

Post by avalpert »

Frengo wrote:
avalpert wrote: No, it is the equivalent of having a lower allocation to equities - if you really believe it is wise insurance to have a lower equity allocation than you should be lowering your exposure to equities of your existing investments as well. There is nothing special about new money compare to already invested money outside of psychological biases.
take a 2-year span, 20 years ago. During that time there are 500 lump-sum investors who went all-in each one on a different day and there is one DCA investor who went in 0.2% in each of those days.
Today he is not the richest of the lot, but certainly he is not the poorest either.
Tell me how that is different from your portfolio today? Today your existing portfolio is the equivalent of a lump sum investor - why aren't you taking it out and DCA'ing back in?
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Re: Thoughts on lump sum investing?

Post by Frengo »

avalpert wrote:
Frengo wrote: Tell me how that is different from your portfolio today? Today your existing portfolio is the equivalent of a lump sum investor - why aren't you taking it out and DCA'ing back in?
Because, and this is for Brian too who's asking again and didn't read my previous answer, I already know how the past two years went and I already know that I did not pick the worst possible days to lump-sum in.
DCA has a cost which becames too large if I DCA every day of the trading week.
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Re: Thoughts on lump sum investing?

Post by InvestorNewb »

If I could go back I would DCA my way in.

I only started investing in February 2013, but 3/4 of my ETFs are currently priced lower than what I bought them at. :annoyed

"lump sum is better 2/3rds of the time my ***"
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
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Re: Thoughts on lump sum investing?

Post by avalpert »

Frengo wrote:
avalpert wrote:
Frengo wrote: Tell me how that is different from your portfolio today? Today your existing portfolio is the equivalent of a lump sum investor - why aren't you taking it out and DCA'ing back in?
Because, and this is for Brian too who's asking again and didn't read my previous answer, I already know how the past two years went and I already know that I did not pick the worst possible days to lump-sum in.
DCA has a cost which becames too large if I DCA every day of the trading week.
But you don't know what the next two years will go like, maybe being lump sum in today is the worst possible day - why risk it, take out the money and DCA back in.
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Re: Thoughts on lump sum investing?

Post by bertilak »

And what about ME?

I'm heavily invested in the market right now. If the next two years are too risky for the OP aren't they too risky for me too? Yikes! :shock:

Should I bail out now? If not, why not? :confused
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Re: Thoughts on lump sum investing?

Post by Frengo »

bertilak wrote:And what about ME?

I'm heavily invested in the market right now. If the next two years are too risky for the OP aren't they too risky for me too? Yikes! :shock:

Should I bail out now? If not, why not? :confused
Let me illustrated the concept with an example.
Let's take the proverbial 20-year long investment in the stock market and rewind the clock to Jan 2, 1991.
In the period 1991-1993 there will be 500 lump-sum investors (one for each trading day).
bertilak1 goes all in on Jan 2, 1991 and ends his 20 year investment on Dec 31, 2010.
bertilak2 goes all in on Jan 3, 1991 and is done on Jan 2, 2011
...
bertilak500 starts on Dec 31, 1993 and will be done on Dec 30, 2013.

Then we have Frengo-DCA, who's not a rapper but the ideal DCA investor. He splits his dough in 500 equal parts and invests one on each of those 500 trading days.

Now, let's calculate total return for all: We have R1 (bertilak1's return), ...., R500 (bertilak500's), and R-DCA.
It is obvious that R-DCA will be less than the best of the Rn's. In fact, R-DCA will likely be less than the average of the Rn's: Frengo's capital weighted investment has been 19 years long vs. 20 years for all the bertilaks.
But it is also obvious that, given the market's volatility, R-DCA won't be the worst of the Rn's.
And since in the real world we are all individual investors, not average ones, you can be sure that now some of the bertilaks, the unlucky ones, are regretting not using DCA for their investment.

As for your particular question, it is equivalent to the question "Why not DCA-ing all the time ?"
We don't do that because if Frengo-DCA had spanned his gradual investment over 20 years, instead of 2, his capital weighted investment would have been approximately 10 years long and then you can be reasonably sure R-DCA would have been at the bottom of the list, even for the worst 20-year market you can reasonably imagine.
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Re: Thoughts on lump sum investing?

Post by bertilak »

Frengo wrote:
bertilak wrote:And what about ME?

I'm heavily invested in the market right now. If the next two years are too risky for the OP aren't they too risky for me too? Yikes! :shock:

Should I bail out now? If not, why not? :confused
Let me illustrated the concept with an example.
I couldn't follow all those hypotheticals.

Silly me, I thought I was managing risk with my AA. Just to be safe, I'll bail out now and do as you suggest: DCA back in for a couple of years. I'll get back to you when I'm done with that for further instructions.
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Re: Thoughts on lump sum investing?

Post by avalpert »

Frengo wrote:
bertilak wrote:And what about ME?

I'm heavily invested in the market right now. If the next two years are too risky for the OP aren't they too risky for me too? Yikes! :shock:

Should I bail out now? If not, why not? :confused
Let me illustrated the concept with an example.
Let's take the proverbial 20-year long investment in the stock market and rewind the clock to Jan 2, 1991.
In the period 1991-1993 there will be 500 lump-sum investors (one for each trading day).
bertilak1 goes all in on Jan 2, 1991 and ends his 20 year investment on Dec 31, 2010.
bertilak2 goes all in on Jan 3, 1991 and is done on Jan 2, 2011
...
bertilak500 starts on Dec 31, 1993 and will be done on Dec 30, 2013.

Then we have Frengo-DCA, who's not a rapper but the ideal DCA investor. He splits his dough in 500 equal parts and invests one on each of those 500 trading days.

Now, let's calculate total return for all: We have R1 (bertilak1's return), ...., R500 (bertilak500's), and R-DCA.
It is obvious that R-DCA will be less than the best of the Rn's. In fact, R-DCA will likely be less than the average of the Rn's: Frengo's capital weighted investment has been 19 years long vs. 20 years for all the bertilaks.
But it is also obvious that, given the market's volatility, R-DCA won't be the worst of the Rn's.
And since in the real world we are all individual investors, not average ones, you can be sure that now some of the bertilaks, the unlucky ones, are regretting not using DCA for their investment.

As for your particular question, it is equivalent to the question "Why not DCA-ing all the time ?"
We don't do that because if Frengo-DCA had spanned his gradual investment over 20 years, instead of 2, his capital weighted investment would have been approximately 10 years long and then you can be reasonably sure R-DCA would have been at the bottom of the list, even for the worst 20-year market you can reasonably imagine.
So if you want to reduce your capital weighted investment by 5% to reduce the risk associated with that then why not do that by lowering your equity allocation - that way you are always insuring against the risk instead of only across those first 2 years. Are those first two years somehow riskier than the next 18?
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Re: Thoughts on lump sum investing?

Post by Frengo »

bertilak wrote: I couldn't follow all those hypotheticals.
So you don't understand the simplest example...
Just to be safe, I'll bail out now and do as you suggest: DCA back in for a couple of years.
...yet, act on it ??? And that after a DCA fan didn't suggest at all what you propose to do, but clearly spelled out "Don't do it, because..." ??
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Re: Thoughts on lump sum investing?

Post by Frengo »

avalpert wrote: So if you want to reduce your capital weighted investment by 5% to reduce the risk associated with that then why not do that by lowering your equity allocation - that way you are always insuring against the risk instead of only across those first 2 years. Are those first two years somehow riskier than the next 18?
At the end of the 20 years, I'll come ahead of the losers in the first two years.
As I said it is a method to avoid catastrophic events. The losers sometimes can be real losers and their personal return be negative for even longer than 10 years.
And, no, doing 95% stocks + 5% cash for 20 years is not the same. It is the same only on average.
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Re: Thoughts on lump sum investing?

Post by EyeYield »

My thoughts are that this may be less a monetary decision and more of a behavioral one. Which method will allow you to sleep better at night? When it comes to health, financial health may not be your top priority; then again, it's up to you.
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Re: Thoughts on lump sum investing?

Post by bertilak »

Frengo wrote:
avalpert wrote: So if you want to reduce your capital weighted investment by 5% to reduce the risk associated with that then why not do that by lowering your equity allocation - that way you are always insuring against the risk instead of only across those first 2 years. Are those first two years somehow riskier than the next 18?
At the end of the 20 years, I'll come ahead of the losers in the first two years.
But will you come out ahead of the WINNERS of the first two years? Remember, the market is generally on an uptrend and the DCA-er gave up half of that.
  • If you DON'T think the market is generally on an uptrend your best action is to get out completely.
  • If you think it's only the next two years that are dangerous, stay out completely for two years and then lump-sum back in.
  • If you REALLY trust your predictive power, leverage is your friend. Buy/sell options. Use borrowed money.
  • If you feel your predictive power is no better than anyone else's, pick an AA and don't dither around. Accept the rewards of human industry as provided by capitalism.
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Re: Thoughts on lump sum investing?

Post by avalpert »

Frengo wrote:
avalpert wrote: So if you want to reduce your capital weighted investment by 5% to reduce the risk associated with that then why not do that by lowering your equity allocation - that way you are always insuring against the risk instead of only across those first 2 years. Are those first two years somehow riskier than the next 18?
At the end of the 20 years, I'll come ahead of the losers in the first two years.
As I said it is a method to avoid catastrophic events.
But what about avoiding the catastrophic event that happens at 2 year +1 day. Is that less catastrophic then the one the happened on day 32? Why aren't you doing anything to avoid that risk - you are just relegating yourself back to the lot of losers and your personal return could be negative for even longer than 10 years.
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Re: Thoughts on lump sum investing?

Post by Frengo »

bertilak wrote: But will you come out ahead of the WINNERS of the first two years? Remember, the market is generally on an uptrend and the DCA-er gave up half of that.
No and I wrote it. I will have a return worse than the winners and likely even worse than the average.
  • If you DON'T think the market is generally on an up-trend your best action is to get out completely.
  • If you think it's only the next two years that are dangerous, stay out completely for two years and then lump-sum back in.
  • If you REALLY trust your predictive power, leverage is your friend. Buy/sell options. Use borrowed money.
  • If you feel your predictive power is no better than anyone else's, pick an AA and don't dither around.
1) I never think whether the market is on an up-trend or a down-trend. In fact, I know that trends don't exist until after the fact.
2) I never think that this particular chunk of time will be more dangerous than another one. That is market timing.
3) As it is clear from my example I don't have to predict anything. I don't know whether it will be a good or a bad market. I only know that I will avoid the worst result.
4) My objective is not to maximize my expected return, but to eliminate the chance of achieving the worst return.

It is not a concept so alien:
Expected return from home insurance is negative. Most houses don't burn down. Yet, something tells me your home is insured even if on average you would come ahead by not insuring it.
"On average" is the key. You don't care about what happens on average, you care not to be the one who loses hundreds of thousands due to bad wiring!
Last edited by Frengo on Mon Jun 24, 2013 11:59 am, edited 1 time in total.
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Re: Thoughts on lump sum investing?

Post by FinancialDave »

avalpert wrote:
Frengo wrote:

DCA is not a method to get richer with the stock market. It is the rough equivalent of a homeowner insurance. Most houses will never burn down, but we still engage in this financial activity characterized by a negative expected return.
No, it is the equivalent of having a lower allocation to equities - if you really believe it is wise insurance to have a lower equity allocation than you should be lowering your exposure to equities of your existing investments as well. There is nothing special about new money compare to already invested money outside of psychological biases.
psychological biases
This is one of the biggest reasons investors lose money, so if DCA helps them get in the market quicker (as opposed to being on the sidelines) then so much the better.

As far as whether DCA will make them money or lose them money along the way NO ONE HERE can predict that -- if the market goes up during your DCA you lose, if it goes down you win.

The biggest risk factor of damage to your portfolio is the size of the lump sum and the years to retirement. The damage can also be positive or negative.

HOWEVER, let's stop and listen to what all the opponents against DCA don't seem to realize. They have no problem having an asset allocation of 40-50% bonds, even though everyone knows over the long term bonds will drag down the performance of your portfolio (or at least so history has shown) so why would you have a problem with DCA which is a different form of risk reduction to your portfolio.

Everybody uses DCA over their lifetime to some extent or other. Personally for large sums of money I prefer to use VCA, and while it will still lose money in an up trending time-frame, the lose is less.
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Re: Thoughts on lump sum investing?

Post by avalpert »

Frengo wrote: It is not a concept so alien:
Expected return from home insurance is negative. Most houses don't burn down. Yet, something tells me your home is insured even if on average you would come ahead by not insuring it.
"On average" is the key. You don't care about what happens on average, you care not to be the one who loses hundreds of thousands due to bad wiring!
What you are missing is that your chosen form of insurance is not the most effective means of insuring against losses in your equity investments and you are inconsistent about when you are willing to pay for it (for the first 2 years but not after that).
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Re: Thoughts on lump sum investing?

Post by bertilak »

EyeYield wrote:My thoughts are that this may be less a monetary decision and more of a behavioral one. Which method will allow you to sleep better at night? When it comes to health, financial health may not be your top priority; then again, it's up to you.
This is quite true, especially for the new investor.

Risk is managed by setting the appropriate AA, but it takes time for an investor to understand his personal risk capacity. Until one has been through a rough patch or two one's idea of risk may not be fully developed.

For a seasoned investor who is comfortable (and *rightly* comfortable) with his risk tolerance, there is no need for all that DCA toe-dipping and whistling past the cemetery.
Last edited by bertilak on Mon Jun 24, 2013 12:01 pm, edited 1 time in total.
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Re: Thoughts on lump sum investing?

Post by Frengo »

avalpert wrote: But what about avoiding the catastrophic event that happens at 2 year +1 day. Is that less catastrophic then the one the happened on day 32? Why aren't you doing anything to avoid that risk - you are just relegating yourself back to the lot of losers and your personal return could be negative for even longer than 10 years.
I cannot chose the 20 year span in which to invest and I don't want to give up half of that span. I have to start my investment when the Great Starter Above fires the gun and I'm making sure I don't trip on the starting blocks.
I'd love to make sure I also don't trip on the fifth hurdle, but that would mean taking a stroll instead of running. And although I surely won't medal by DCA-ing, I also won't be the last person to cross the finish line to be mocked by the crowd.
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Re: Thoughts on lump sum investing?

Post by Frengo »

avalpert wrote: What you are missing is that your chosen form of insurance is not the most effective means of insuring against losses in your equity investments and you are inconsistent about when you are willing to pay for it (for the first 2 years but not after that).
For the time being I end up ahead of the worse bertilakN's and sometimes those can be real busts.
If you have a better method, I'm on the board to learn. Your 95/5 allocation it ain't one.
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Re: Thoughts on lump sum investing?

Post by avalpert »

FinancialDave wrote:
avalpert wrote:
Frengo wrote:

DCA is not a method to get richer with the stock market. It is the rough equivalent of a homeowner insurance. Most houses will never burn down, but we still engage in this financial activity characterized by a negative expected return.
No, it is the equivalent of having a lower allocation to equities - if you really believe it is wise insurance to have a lower equity allocation than you should be lowering your exposure to equities of your existing investments as well. There is nothing special about new money compare to already invested money outside of psychological biases.
psychological biases
This is one of the biggest reasons investors lose money, so if DCA helps them get in the market quicker (as opposed to being on the sidelines) then so much the better.
I can see the merit in that - though personally I don't believe that giving into your biases helps you mitigate them in your decisions. In this instance I find as likely as not that someone who DCAs because they can't stomach going all in are going to end up DCAing into a riskier position than they really want to take and end up making an even worse decision down the line.

HOWEVER, let's stop and listen to what all the opponents against DCA don't seem to realize. They have no problem having an asset allocation of 40-50% bonds, even though everyone knows over the long term bonds will drag down the performance of your portfolio (or at least so history has shown) so why would you have a problem with DCA which is a different form of risk reduction to your portfolio.
Because the less risky asset allocation is a more sustainable way to reduce your risk. I don't think anyone arguing against DCA has a problem with people taking a low risk approach - they should do so in a way though that is consistent. DCAing to reduce risk, unless you take it all out and start again, is reducing your risk up front and increasing it later - you need to have a good reason why you think that first period is riskier to justify that.
Everybody uses DCA over their lifetime to some extent or other.
No they don't. Please don't confuse periodic investing with DCA - it is misleading and incorrect.
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Re: Thoughts on lump sum investing?

Post by Toons »

BaylorBears wrote:I'm only about 50% in the market right now and have a sizable portion of my net worth earning about 1.5%.

thoughts on investing it near market highs?

I'm in my mid 30s with a couple of six figures worth of investable money in the bank.
Time Horizon? Decades? Then buy your mutual funds today,don't peek ,ignore the news,let compounding go to work for you .It works,believe me. I bought at the "top" in Sept.1987,still hold the fund,,,that month was meaningless when looking out decades. :happy
Your fund will see market lows but many more new market highs along your journey.Think LONG TERM
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Re: Thoughts on lump sum investing?

Post by avalpert »

Frengo wrote:
avalpert wrote: What you are missing is that your chosen form of insurance is not the most effective means of insuring against losses in your equity investments and you are inconsistent about when you are willing to pay for it (for the first 2 years but not after that).
For the time being I end up ahead of the worse bertilakN's and sometimes those can be real busts.
Or behind (more often than not).
If you have a better method, I'm on the board to learn. Your 95/5 allocation it ain't one.
See, here you are wrong. It is one, setting your asset allocation to provide the constant exposure to risk that you are comfortable taking in a great one. Pretending that risk in the early part is somehow worth avoiding in a way that it isn't in the later part of the time frame (ironically when the value at risk is higher) is a poor one.
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Re: Thoughts on lump sum investing?

Post by bertilak »

Frengo wrote:4) My objective is not to maximize my expected return, but to eliminate the chance of achieving the worst return.
Planning to avoid the worst-case is an honorable goal and I fully support it. It is especially important to people in the divestment stage (no longer putting new money into their portfolio) where I am today. This is often overlooked. People tend to look at the "expected" return as if it were what we should plan for. (As a Civil Engineer I understand that one does not design a bridge for the average, expected, normal, etc., load. One establishes an agreed to worst case and designs for that.)

For investment strategies, DCA does not accomplish that "worst-case design" goal.

Worst case design leads towards a more conservative strategy LATE in one's investment life rather than early. One of the primary tools for this is an appropriate AA, which will change as time goes by. Early on, one can take take more risks because one has time and resources (i.e. income from job) to recover. Best to establish the AA and stick to it. A high-cash allocation might be the right thing, but it does not change based on the availability of new funds, assuming the newly-available funds are not so large to make one re-think one's overall strategy.

If I suddenly won a million bucks in a lottery (someone would have had to enter for me!) I would NOT simply lump-sum it at my current AA. I would rethink my whole strategy (including the portfolio AA) and put it in place as soon as possible.
Last edited by bertilak on Mon Jun 24, 2013 12:22 pm, edited 2 times in total.
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Re: Thoughts on lump sum investing?

Post by Frengo »

avalpert wrote: Or behind (more often than not).
That's not possible, unless the DCA period is too long. 2 years out of 20 it is not too long, since the 5% reduction in expected return is well within the sigma of possible 20-year returns at start.
See, here you are wrong. It is one, setting your asset allocation to provide the constant exposure to risk that you are comfortable taking in a great one. Pretending that risk in the early part is somehow worth avoiding in a way that it isn't in the later part of the time frame (ironically when the value at risk is higher) is a poor one.
On the final day of my 20 years the market may very well tank. I'd say with the same probability that it may tank on the first day.
Yet, if it tanks on the final day I have almost 19 years worth of returns to protect me. If it tanks on the first day, there goes my lump-sum.

Once again, for a given 20 year span, DCA-ing for the first two years virtually eliminates the chance of being one of the worst investors in that same 20-year span.
Sometimes, the worst investor in a 20-year span obtains tragic results. It depends on which 20-year span that actually turns out to be, but I have no choice on that. I cannot pick 1980-1999, or 1935-1954. I have to use the 20-year span my parents gave me. And I'll make sure I'm not the worst investor in that particular 20-year span, be that a "mild" span, or a terrible one.

On the other hand, being a slightly below average investor in a 20-year span, means a pretty good return, irregardless on the particular 20-year span.
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Re: Thoughts on lump sum investing?

Post by FinancialDave »

Everybody uses DCA over their lifetime to some extent or other
avalpert wrote:

No they don't. Please don't confuse periodic investing with DCA - it is misleading and incorrect.
Periodic investing can be the same as DCA if the periodic investment is the same (or close to same) dollar amount on a fixed time interval.

Check the Boglehead Wiki.


If I know that I have $1200 to invest in my Roth over a year and I take $100 a month out of my paycheck and put it there, this is DCA, plain and simple, and also a form of periodic investing that almost every investor participates in, if they have any kind of payroll deductions.

Periodic investing can of course also mean I invest whatever I want into my Roth every month, which could be $100 in Jan. $200 in Feb and so on, but this is not what I was referring to.

The lump sum investor invests the whole $1200 into the Roth on Jan 1, which is not uncommon, however the 401k investor is almost exclusively a DCA type investor, which is what I was stressing - we almost all do it.

fd
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Re: Thoughts on lump sum investing?

Post by avalpert »

FinancialDave wrote:
Everybody uses DCA over their lifetime to some extent or other
avalpert wrote:

No they don't. Please don't confuse periodic investing with DCA - it is misleading and incorrect.
Periodic investing can be the same as DCA if the periodic investment is the same (or close to same) dollar amount on a fixed time interval.

Check the Boglehead Wiki.
From the Wiki (bolding added):
However, this form of investing is not dollar cost averaging. It is called periodic investing. The difference is that periodic investing is maximizing expected return, because you are investing the money as soon as you have it. DCA applies when you have the money to invest, but delay doing so.
If I know that I have $1200 to invest in my Roth over a year and I take $100 a month out of my paycheck and put it there, this is DCA, plain and simple,

It is only DCA if you have the $1200 available at the start of the year and you spread out investing it in the market through paycheck deposits. If you don't have it at the beginning of the year (or at least you don't have enough cash on hand to feel comfortable investing $1200) and instead have to invest out of free cash flow it is not DCA, plain and simple.
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Re: Thoughts on lump sum investing?

Post by Default User BR »

Looks like I threw some gas on this little blaze!


Brian
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Re: Thoughts on lump sum investing?

Post by Ged »

Default User BR wrote:As so often is asked when this subject come up, are the people proposing DCA also selling all of their stocks (or at least all of the stocks in tax-advantaged) and dribbling back into the market? If not, why not?
Well, today I decided to take advantage of the recent decline in emerging market equities to harvest some tax losses and use that space to make my taxable holdings more tax-efficient (and get rid of some pre-boggle purchases of dividend stocks). So I sold my VWO holdings, along with everything else in my taxable accounts this morning when the S&P was down something like 2%. I immediately used the proceedings to purchase just VTI. It was a bit nerve-wracking, certainly the largest amount of equities I've ever bought and sold in one day. And on a day when the market was moving strongly as well.

Now here we are in the mid-afternoon and the S&P has improved significantly from this morning. If I had done DCA back into the market I would missed the recovery that occurred later.
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Re: Thoughts on lump sum investing?

Post by Frengo »

Ged wrote: Now here we are in the mid-afternoon and the S&P has improved significantly from this morning. If I had done DCA back into the market I would missed the recovery that occurred later.
How long a DCA would have you been interested into ?
Until that much time goes by you can't tell if you would have missed something positive, or something negative.

Most objections to DCA come from a defective understanding of what DCA is and how it works.
I'm not surprised. Just recently there was a thread on this very same forum where people would have sworn on their first-born that given two securities with identical total return, the one paying higher dividends would outperform the other... :oops:
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Re: Thoughts on lump sum investing?

Post by Ged »

Frengo wrote: How long a DCA would have you been interested into ?
Well, the last time I used DCA was back during the 2007-2008 recession. This is before I had purchased a copy of Random Walk Down Wall Street which was my Boglehead epiphany (One of the side-effects of the Great Recession was to get me to take a lot deeper interest in investing ideas).

During early 2007 my father convinced me that we were heading into a recession so I pulled out of the market. Then things started to go south, so I had to start thinking about how to get back in. Since I had no idea when the bottom was going to be I decided to DCA. I started when the market was 15% down and continued for a year based on some statistics that the average stock market recession lasted a year and declined 25%. Of course things went for two years and the low was 50% down. Did I come out ahead of where I'd be if I used AA? Hard to say. But at least I wasn't buying high and selling low. So overall it worked for me.

So 1 year was what I did previously.

Now though I'd rely on AA and rebalancing to take care of market fluctuations unless I felt there were really big reasons to pull out of the market. Like PE/10 > 40.
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Re: Thoughts on lump sum investing?

Post by hollowcave2 »

Most objections to DCA come from a defective understanding of what DCA is and how it works.
I totally agree. Like I always said, lump sum investing works best with other people's money.

DCA is a risk management technique that gets you investing and avoiding investment paralysis at times of uncertainty. There's been lots of threads on this subject in the forum and also check the Boglehead Wiki for more info.

I personally like DCA as a strategy to overcome nervousness and gets you investing immediately. You just have to stick with it for a certain time frame that you choose. It has nothing to do maximizing returns, although that is a possible outcome. It's a way to get into the market and still sleep well.

I also like DCA because it offers a guarantee, one of the very few in the investing world. Assuming there will be volatile price fluctuations, the process of DCA guarantees that your net average cost per share of the investment will be less than the average price of the security during the period of DCA. That's because you invest an equal amount of money each month, buying more shares when the price is low and less shares when the price is high. I like DCA just for that alone.
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Re: Thoughts on lump sum investing?

Post by Frengo »

Ged wrote: So 1 year was what I did previously.
OK. So if when I say "DCA" you think "1 year", how can you tell "I sold this morning, if I had reinvested DCA-style I would have missed the recovery" ?
You have to wait about 1 year to know if a 1-year long DCA would have been advantageous or not. Dead cat bounces always look like recoveries at first.
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