Dollar Cost Averaging vrs lumpsum investment

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abjo
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Dollar Cost Averaging vrs lumpsum investment

Post by abjo »

I am sure similar question has been asked before but hope this brain trust can provide specific solution here for my situation.

-- information --
Married filing jointly, Him 43yrs, Her 40yrs. Tax bracket 39% fed and 9% CA state.
Emergency fund - 1 year. Portfolio near ~1M in Vanguard index funds already
Expect one time $500k posttax lumpsum from her company stock
Plan to invest in: Total Stock (40%), Total International Stock (30%), Total Bond (20%) and Total REIT Index (10%)
Both are planning to keep this money untouched for 15 to 20 years

-- question --
Q1: Is it better to invest lumpsum or should it be distributed across "N" months for dollar cost averaging?
Q2: if it should be distributed what should "N" be?

He is of the opinion that it should be distributed over N=6 (or 8) months with 80k invested per month in above listed portfolio. Her opinion is that it should be single lumpsum or at most N=2 months. The point being that waiting for 6 months hurts the returns by keeping money in cash as well as you lose potential returns from the market since markets tend to inch upwards over time.

Please help.
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Christine_NM
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Re: Dollar Cost Averaging vrs lumpsum investment

Post by Christine_NM »

It is probably more important that both agree on the method than which method is chosen. Meet in the middle at 4 months DCA, or half now and the rest over 6 months. Whatever the two can agree on.

Since there already is considerable market exposure, DCA cash drag will not be as significant as a case where there is no existing exposure and a large sum is to be invested.
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livesoft
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Re: Dollar Cost Averaging vrs lumpsum investment

Post by livesoft »

Divide in half, then each do their own strategy. See who comes out a ahead. It is not all one way or the other.

And yes, this question is asked lots of times, for instance: viewtopic.php?f=10&t=132098
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Dandy
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Re: Dollar Cost Averaging vrs lumpsum investment

Post by Dandy »

In general it has been that lump sum works better most of the time. I haven't seen any studies that show what happens when equity markets are at or near record levels. Or for that matter when interest rates are at or near record lows. Or further still when both are in record territory.

I would DCA 50k per month for 10 months. That might take you through the Fed initial rate rise and a possible pullback in equities. Nothing certain. It really isn't a make or brake decision. By the end of the year you will be fully invested in your target allocation.
beardsworth
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Re: Dollar Cost Averaging vrs lumpsum investment

Post by beardsworth »

abjo wrote:I am sure similar question has been asked before . . .
It looks like you just joined the forum last week, so: welcome.

Yes, the subject has been addressed many, many, many, many times before, which is why it's often a good idea to use that "search" box at the top of the page. My own quick searches for "dollar cost lump sum" and "DCA lump sum" led to these, which you may find helpful.

https://www.google.com/search?sitesearc ... t+lump+sum

https://www.google.com/search?sitesearc ... A+lump+sum
BigJohn
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Re: Dollar Cost Averaging vrs lumpsum investment

Post by BigJohn »

Some perspective from Rick Ferri that might be helpful viewtopic.php?p=2030577#p2030577
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Crow Hunter
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Re: Dollar Cost Averaging vrs lumpsum investment

Post by Crow Hunter »

Assuming this is going into a taxable account you really don't have a downside to lump sum IMHO.

If you put it all in and the market drops, you Tax Loss Harvest and "reset" the cost basis to the new lower market value and capture the tax loss to use on your taxes. If it drops again, TLH again until you hit "the bottom". It will be the same as buying it at the lower price and you get the tax benefits of the TLH.

For example, I lump summed into Total International early last year and got to TLH twice before the end of the year. So now I have several thousand dollars worth of tax deductions that I can carry forward to reduce my income AND my unrealized gains so far this year are over half of what I TL Harvested late last year. :mrgreen:
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Toons
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Re: Dollar Cost Averaging vrs lumpsum investment

Post by Toons »

Lump Sum ,then don't peek:happy
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texasdiver
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Re: Dollar Cost Averaging vrs lumpsum investment

Post by texasdiver »

To help you get your mind around this question I propose you think about the following scenarios (and ignore tax considerations)

1. Your situation. You receive 500k cash to invest and want to invest it according to your 80/20 asset allocation, do you lump sum or DCA?

2. You inherit a 500k portfolio from your great aunt that is already invested in the 80/20 that you desire. Do you cash it out and then DCA back into equities over the next 12 months or just keep it invested as your aunt already has done?

3. You have 500k in your existing portfolio that is already invested in the 80/20 asset allocation that you desire. Do you cash out and DCA back into equities over the next 12 months or just leave it alone?

If your answers to scenarios 1, 2, and 3 are different, ask yourself why. In all 3 cases you have the same exact thing, a 500k investment.
acejacksingh
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Re: Dollar Cost Averaging vrs lumpsum investment

Post by acejacksingh »

Just lump sum it and don't think about it for those 15-20 years. Great job on getting such a large portfolio by your 40s. :sharebeer
livesoft
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Re: Dollar Cost Averaging vrs lumpsum investment

Post by livesoft »

C'mon, folks. This is clearly the setup for some friendly family competition. Only one will be the winner if they both go and do their own thing with $250,000 each. But watch out, they both could lose money after 6 to 8 months. It would be interesting to see if for this point in time if it either way would be significantly different from the other way. Forget about statistics! This is reality!
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The Wizard
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Re: Dollar Cost Averaging vrs lumpsum investment

Post by The Wizard »

The $500K in cash from a company stock sale is presented as a given.
OP appears to be in top tax bracket already, so perhaps it doesn't matter.
If large capital gains in that stock, sometimes it's better to sell over a few years to minimize total tax obligation.
Hence, a form of DCA for that reason...
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