Advice please - large cash holding, so when to invest?

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markierussell
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Advice please - large cash holding, so when to invest?

Post by markierussell »

Hi All,

I am 57 and near retirement (like maybe even this year!). I have a 7 figure nest egg composed 81% cash and CDs, 16% bonds (including some BND) and 3% equity ETFs (mainly VTI).

I would like to move to something closer to a classic 40/60 equity/bond split. I expect to invest mainly in VTI and other index ETFs, and BND for the bonds. The question is timing. I know the merits of dollar cost averaging but given I have a large cash position, if I use that method to slowly build up my positions (especially thinking about equity, but it applies also to the bonds) I could lose a lot of gain over the first years while a lot of cash sits on the sidelines. On the other hand, if I invest a large chunk of cash in the near term and the market tanks, I could lose a lot!

This is like an inheritance scenario except in my case it isn't inheritance, it's just that for various reasons I stayed mostly in cash up to now.

(In case it matters, I am an NRA and do not pay tax on any investment income/gains other than dividends.)

Any suggestions?

Thanks!

M
retcaveman
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Post by retcaveman »

You could put some in now and DCA the balance. You could also set up the transfer so that you are DCAing a large sum of money with each purchase. If it were me, I would take a year or more to complete the transfer.

Good luck.
"The wants of mortals are containers that can never be filled." (Socrates)
dbr
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Re: Advice please - large cash holding, so when to invest?

Post by dbr »

markierussell wrote:Hi All,

I am 57 and near retirement (like maybe even this year!). I have a 7 figure nest egg composed 81% cash and CDs, 16% bonds (including some BND) and 3% equity ETFs (mainly VTI).

I would like to move to something closer to a classic 40/60 equity/bond split. I expect to invest mainly in VTI and other index ETFs, and BND for the bonds. The question is timing. I know the merits of dollar cost averaging but given I have a large cash position, if I use that method to slowly build up my positions (especially thinking about equity, but it applies also to the bonds) I could lose a lot of gain over the first years while a lot of cash sits on the sidelines. On the other hand, if I invest a large chunk of cash in the near term and the market tanks, I could lose a lot!

This is like an inheritance scenario except in my case it isn't inheritance, it's just that for various reasons I stayed mostly in cash up to now.

(In case it matters, I am an NRA and do not pay tax on any investment income/gains other than dividends.)

Any suggestions?

Thanks!

M
Here's a question. If you had the money invested at 40/60, would you take everything out into cash so that you could decide when to put the cash back in? If you are afraid now that you will invest the money at 40/60 and lose a lot, why would you not be afraid of the same thing once you are invested?
livesoft
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Post by livesoft »

This is a frequently asked question.

When the market is going up, you will get quite a lot of responses that say, "Invest it all now since lump sum has been show to be better!"

When the market is going down, you will get quite a lot of responses that say, "Dollar-cost average in since the market may go lower!"

A compromise is do both: Lump sum some in now and dollar-cost average the rest. I suggest that whatever you do, that you commit to getting it all in in the next 10 to 12 months. That could mean 30% to 60% tomorrow and the rest in 10 monthly payments. You can even speed up the monthly payments if the market continues to drop. That is, if the market drops 3% to 5% in the next month, then put in 2 months' worth.

You are only limited by your imagination and inability to act with conviction.
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markierussell
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Re: Advice please - large cash holding, so when to invest?

Post by markierussell »

[/quote]

Here's a question. If you had the money invested at 40/60, would you take everything out into cash so that you could decide when to put the cash back in? If you are afraid now that you will invest the money at 40/60 and lose a lot, why would you not be afraid of the same thing once you are invested?[/quote]

Thanks. That is a great question and I'm not sure of the answer. On the one hand, a good answer seems to be what you imply: it's irrational to fear investing everything now, since that puts me in the position I'd be in if I had slowly accumulated the same position, which would have been a sensible approach. But on the other hand, if that analysis is correct, would it not refute dollar cost averaging in general and any other gradual system for investing? Wouldn't it imply that the best system is to always invest everything you can, every month? In other words, if it is sensible to hold back some of your cash each month and just dollar cost average in, then why does it become irrational if the holdback happens to be a large sum?

M
retcaveman
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Post by retcaveman »

It's generally accepted that it's better to invest all you want in a lump sum vs DCA. The problem is many people find that emotionally difficult (including me). Fear of regret/failure can be very powerful.

FWIW, I retired 1-1-2000. I took a lump sum and knew about the studies that suggested it's better to put it all in the market at once. But I couldn't do it. So I did 50% and held the rest in the Prime MM acct. In the summer of 2003 I invested the rest and made out ok. There was no great insight or analysis of the market that told me to do that.

It was just fear that caused me to hold back 50% and luck that the '03 investment paid off. If the market drops by 30 or 40%, it's clearly a better time to buy. (Buy low/sell high.) If you are already fully invested, you may not have the means to take advantage of the "dip."

We are currently around 18% below the high of roughly 14,300 on the Dow. 11,700 was approximately the high in March of 2000.

Best wishes.
"The wants of mortals are containers that can never be filled." (Socrates)
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markierussell
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Post by markierussell »

Lots of good feedback here, thanks. I agree a big factor is emotion, it's just hard to toss a lot of cash at the market when you feel it could fall soon. These days I really have a feeling that it's gonna drop significantly in the next year or so. It just seems that it is being buoyed up by all the cash that doesn't want to go into bonds since interest rates are so low. But of course, who knows. They say you can't time it.

I think the same reasoning that supports DCA supports holding back some of the lump sum. That's just reducing the risk of bad timing, for instance if retcaveman had invested ALL his cash in 2000. But then the question is how slowly to move into the market. I guess it's a balance between reducing risk as just mentioned vs. the near-certainty that you will miss out on some significant gains by keepin a large lump of cash out of the market if you do so for a long period. I take it from the feedback that most members feel that the lump should be fully invested over the course of not more than a year or so (if not immediately). Anybody know of a professional study that has evaluated this statistically?

Cheers,
M
assurancefp
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Post by assurancefp »

Markierussell,

There are studies that I have read that state lump sum is a better method (I cannot find the links right now). This passes the sanity check considering on average, the stock market has gone up. Of course, past performance does not mean future results and you are not an average, you are 1 person.

Outside of academia and statistics, I recommend doing what you are comfortable with. Just from your few posts, I think that a full 1M+ lump sum contribution would not be best for you. It takes a ton of guts to do this, especially with a 7 figure portfolio. (I'm in the same boat. I know statistics, but I'm only a single data point).

A 3 step approach should be fine. 33% now. 33% in 3 months. 33% in 6 months. Any variety of this would be fine. You don't want to loom over the decision too much, but it will at least take the sting off of an initial 10% portfolio drop.

Geoff
livesoft
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Post by livesoft »

A study published awhile ago showed that LS was better about 65% of the time, but "better" was under 5% better versus a 1-year DCA. I can find the reference to the study, but not the study itself.

So when folks say LS is better, I have to laugh since they imply it is significantly better. It ain't; it's is only mildly better and not enough to make me want to use it in a situation like yours.
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rob
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Post by rob »

Going out on a limb... and say never in the case you describe. You got to 57 and now want to go to 60/40?? What has changed? I would say keep doing what you have been comfortable with.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
livesoft
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Post by livesoft »

Here is a related study for your reading pleasure: http://www.fpanet.org/journal/CurrentIs ... Averaging/
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letsgobobby
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Post by letsgobobby »

livesoft wrote:A study published awhile ago showed that LS was better about 65% of the time, but "better" was under 5% better versus a 1-year DCA. I can find the reference to the study, but not the study itself.

So when folks say LS is better, I have to laugh since they imply it is significantly better. It ain't; it's is only mildly better and not enough to make me want to use it in a situation like yours.
seems it would depend on the timeframe of the DCA. Over 1 year - maybe 5-6% advantage LS. Over 5 years - maybe 15% advantage LS. over 50 years - maybe 500% advantage LS.
Jacobkg
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Post by Jacobkg »

Question: Is this your first foray into equities or did you ever have a significant allocation to stocks in the past?
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markierussell
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Post by markierussell »

rob wrote:Going out on a limb... and say never in the case you describe. You got to 57 and now want to go to 60/40?? What has changed? I would say keep doing what you have been comfortable with.
Rob - I'm in an unusual position I guess in that most of my net worth is from savings earned in the last 10 years alone (i.e starting when I was 47). Being rather cautious and not that schooled about investing I didn't move into the market quickly, but did accumulate an equity position a few years ago, then got caught in a crazy situation where my broker went bust (actually a fraud case) and I had to sell my holdings right when the markets were tanking in 2009. That spooked me and got me back into about 80% cash. Now I'm trying to get closer to a 40/60 because I do believe in the long-term benefits. Make sense?

M
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markierussell
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Post by markierussell »

Jacobkg wrote:Question: Is this your first foray into equities or did you ever have a significant allocation to stocks in the past?
Jacob - as I replied to Rob, I did start buying equities over the past decade but cautiously (probably not more than 20%), then had to bale when my broker tanked. Now tiptoeing back in.

M
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Re: Advice please - large cash holding, so when to invest?

Post by YDNAL »

markierussell wrote:I would like to move to something closer to a classic 40/60 equity/bond split. I expect to invest mainly in VTI and other index ETFs, and BND for the bonds. The question is timing. I know the merits of dollar cost averaging but given I have a large cash position, if I use that method to slowly build up my positions (especially thinking about equity, but it applies also to the bonds) I could lose a lot of gain over the first years while a lot of cash sits on the sidelines. On the other hand, if I invest a large chunk of cash in the near term and the market tanks, I could lose a lot!
MR,

1) The market trends upward - without guarantees, of course.
2) One takes market risks because of #1.
3) The more time in the market, the larger the benefit from #1.

Where's the problem?.... in our heads.

So, 50% now 50% over time to avoid regrets.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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markierussell
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Post by markierussell »

livesoft wrote:Here is a related study for your reading pleasure: http://www.fpanet.org/journal/CurrentIs ... Averaging/
Thanks! Unfortunately my math is not quite up to some of this stuff but I think the main point of this paper is that sequence of returns is crucial and often overlooked when people project returns based only on average returns for a security. I think they are also saying that the lump sum v. DCA question is not simple and depends in part on the actual course of the markets during the period.

Question for all: do you think the same analysis of LS v. DCA, however you see it, applies whether you're talking about investing in equities or bonds?

Cheers,

M
The Wizard
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Post by The Wizard »

Well at least you're looking to use Vanguard now. They are unlikely to go bust or be convicted of fraud.

The flip side of putting a large sum of money into stocks and bonds is how one will react WHEN the stock portion declines in value significantly. There's concern that one will sell out and revert to cash because they can't take the declines in value any longer...
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markierussell
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Post by markierussell »

The Wizard wrote:Well at least you're looking to use Vanguard now. They are unlikely to go bust or be convicted of fraud.
Guess what, I was investing in Vanguard before too (ETFs) but the problem is my online broker was based here in Bermuda (where I live and work) and they were the ones charged with fraud. That froze my account and drove me to liquidate it. Not many US-based online brokers accept NRA's as clients but I found that TD Ameritrade does so now I'm with them and hopefully they will not be charged with fraud any time soon!

M
leonard
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Post by leonard »

determine a stock/bond ratio that is conservative enough that you would buy it today. If you wouldn't buy it today because of the risk or would want to DCA in, then it is probably still too aggressive.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
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BigFoot48
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Post by BigFoot48 »

Yesterday would have been a good day. Today, probably better than tomorrow. Oops, too late.

You might do 50% immediately, and 10% a month until you're all in. The best of both worlds.

I've always done all in at a time in the past as I can't foresee the future. Good fortune!
Retired | Two-time in top-10 in Bogleheads S&P500 contest; 18-time loser
Dandy
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Post by Dandy »

Dollar cost averaging always made me feel better but probably resulted in lower gains. If you are not up for doing it all at once you can dollar cost average over a smaller time frame such as 6 months instead of years.

During the crisis that started in 2008 I rolled over 2/3 of my nest egg (in 2009) into VG Admiral Treasury. Formerly, I had most of it in a Stable Value Fund. I had no bond fund experience and both stocks and bonds were in the midst of great volitility. For piece of mind I dollar cost averaged over about 12 months- I felt then I was trading better gains for more piece of mind. Those who stayed the course did better, I am sure. I have not regretted trading those gains for piece of mind. It taught me my true risk tolerance.
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markierussell
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Post by markierussell »

Again, thanks for lots of helpful comments. One point that I don't think anyone has answered (maybe cause it was a dumb question?) was whether DCA has any application to buying bonds, or more likely bond ETFs like BND. It seems to me that the same theory should apply. For instance, right now yields are very low and a lot of people seem to think it's risky to buy bonds (although not as risky as equity of course if you're planning to hold single bonds to maturity - funds/ETFs bit more complicated, it seems). Would it make sense to DCA into a bond fund/ETF, hoping that yields improve?

MR
ResNullius
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Post by ResNullius »

It really doesn't matter when you pull the trigger, because the market likely will go down soon thereafter. How much it goes down is the unknown, and nobody knows. Just do it and quit worrying about it.
thehammer
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Post by thehammer »

You may want to be honest with yourself about your risk tolerance. Losses of 20-40 percent are not that kind uncommon in the equity market.

it seems you don't have the stomach for it, and you may end up buying high and selling low if you put a lot in the market
JW-Retired
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Post by JW-Retired »

markierussell wrote: In case it matters, I am an NRA and do not pay tax on any investment income/gains other than dividends.
I don't know if it matters. What is "an NRA"? Everyone else seems to know but I am clueless. Goggling tells me nothing but National Rifle Association.
JW
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markierussell
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Post by markierussell »

JW Nearly Retired wrote:
markierussell wrote: In case it matters, I am an NRA and do not pay tax on any investment income/gains other than dividends.
I don't know if it matters. What is "an NRA"? Everyone else seems to know but I am clueless. Goggling tells me nothing but National Rifle Association.
JW
Haha sorry I should have used the full term, cause I am not referring to rifles. :D Non-resident alien. It's a defined term in the U.S. Tax Code and basically refers to any non-U.S. citizen who does NOT have a green card (i. e. is NOT resident in the U.S. for tax purposes) so is not taxed like a U.S. citizen.
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Scott S
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Post by Scott S »

I think the best course is probably to lump sum, while keeping in mind that you can rebalance if something happens afterward. Like Leonard and others have said, if you can't stomach going all in, then your AA is probably too aggressive.

- Scott
"Old value investors never die, they just get their fix from rebalancing." -- vineviz
thehammer
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Post by thehammer »

Let's say you have a million go 40/60.

See stocks drop 30 percent, your nest egg loses $120,000 in the matter of a few months what are you going to do?
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markierussell
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Post by markierussell »

thehammer wrote:Let's say you have a million go 40/60.

See stocks drop 30 percent, your nest egg loses $120,000 in the matter of a few months what are you going to do?
Right = that of course is the big question! It's easy for people to say, oh just go lump sum but your scenario is quite possible and it's deadly. I've been reading Jim Otar's book and his biggest message is that sequence of returns is crucial in a retirement portfolio. He says that if you have a significant loss in the first 4 years of retirement, it's almost impossible for the portfolio ever to recover. In fact he says that 2 negative years or even 4 flat years at the start of retirement can cut portfolio life in half. That's because of the effect of ongoing withdrawals and inflation, with the result that the growth needed in later years to restore the portfolio to the expected curve is unrealistic.
dbr
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Post by dbr »

markierussell wrote:
thehammer wrote:Let's say you have a million go 40/60.

See stocks drop 30 percent, your nest egg loses $120,000 in the matter of a few months what are you going to do?
Right = that of course is the big question! It's easy for people to say, oh just go lump sum but your scenario is quite possible and it's deadly. I've been reading Jim Otar's book and his biggest message is that sequence of returns is crucial in a retirement portfolio. He says that if you have a significant loss in the first 4 years of retirement, it's almost impossible for the portfolio ever to recover. In fact he says that 2 negative years or even 4 flat years at the start of retirement can cut portfolio life in half. That's because of the effect of ongoing withdrawals and inflation, with the result that the growth needed in later years to restore the portfolio to the expected curve is unrealistic.
Again, the same question applies to whatever point in time you arrive at 60/40. If stocks then drop 30 percent, what are you going to do?

(Right Answer: Nothing)

If you don't have an idea what it means to be invested 40/60, then that is the wrong asset allocation. It has nothing to do with whether or not you lump sum.

If you are reading Otar, then you should look to see what withdrawal rate can be sustained when you don't hold stocks, avoid stocks, and work with that withdrawal rate. TIPS, annuities, and lots of wealth relative to spending can be considered.
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Scott S
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Post by Scott S »

markierussell wrote:
thehammer wrote:Let's say you have a million go 40/60.

See stocks drop 30 percent, your nest egg loses $120,000 in the matter of a few months what are you going to do?
Right = that of course is the big question! It's easy for people to say, oh just go lump sum but your scenario is quite possible and it's deadly. I've been reading Jim Otar's book and his biggest message is that sequence of returns is crucial in a retirement portfolio. He says that if you have a significant loss in the first 4 years of retirement, it's almost impossible for the portfolio ever to recover. In fact he says that 2 negative years or even 4 flat years at the start of retirement can cut portfolio life in half. That's because of the effect of ongoing withdrawals and inflation, with the result that the growth needed in later years to restore the portfolio to the expected curve is unrealistic.
Stocks could also "wait" until you're done DCAing to drop 30+%. Sounds like 40/60 may still be too aggressive for you.

Maybe you could invest entirely in bonds right away, then gradually "rebalance" into stocks until you're at an AA you can live with?

- Scott
"Old value investors never die, they just get their fix from rebalancing." -- vineviz
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markierussell
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Post by markierussell »

dbr wrote:
markierussell wrote:
thehammer wrote:Let's say you have a million go 40/60.

See stocks drop 30 percent, your nest egg loses $120,000 in the matter of a few months what are you going to do?
Right = that of course is the big question! It's easy for people to say, oh just go lump sum but your scenario is quite possible and it's deadly. I've been reading Jim Otar's book and his biggest message is that sequence of returns is crucial in a retirement portfolio. He says that if you have a significant loss in the first 4 years of retirement, it's almost impossible for the portfolio ever to recover. In fact he says that 2 negative years or even 4 flat years at the start of retirement can cut portfolio life in half. That's because of the effect of ongoing withdrawals and inflation, with the result that the growth needed in later years to restore the portfolio to the expected curve is unrealistic.
Again, the same question applies to whatever point in time you arrive at 60/40. If stocks then drop 30 percent, what are you going to do?

(Right Answer: Nothing)
Otar seems to say you cannot afford a loss in the first 4 years of retirement. Let's suppose there is a 30% drop in the year you hit 40/60, whenever that is. And assume all other years have 5% positive growth. Then it does make a big difference what point in time you arrive at 40/60. For example, if you ramped up in the first years of retirement: 10/90 15/85 20/80 ... etc. you wouldn't hit 40/60 until the 7th year. If the 30% drop happens then, you will be far better off than if that year is your 1st year (at 40/60). (And if instead the 30% drop had happened in the first year, when you were only at 10/90, you'd be pretty safe because your loss would be a mere 10% x 30% = 3%.) So I conclude that a large equity component in the early years is asking for trouble. I must say, however, I don't think I've yet seen this conclusion spelled out in Otar's book (but I'm only part way through!).
dbr
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Post by dbr »

markierussell wrote: Otar seems to say you cannot afford a loss in the first 4 years of retirement. Let's suppose there is a 30% drop in the year you hit 40/60, whenever that is. And assume all other years have 5% positive growth. Then it does make a big difference what point in time you arrive at 40/60. For example, if you ramped up in the first years of retirement: 10/90 15/85 20/80 ... etc. you wouldn't hit 40/60 until the 7th year. If the 30% drop happens then, you will be far better off than if that year is your 1st year (at 40/60). (And if instead the 30% drop had happened in the first year, when you were only at 10/90, you'd be pretty safe because your loss would be a mere 10% x 30% = 3%.) So I conclude that a large equity component in the early years is asking for trouble. I must say, however, I don't think I've yet seen this conclusion spelled out in Otar's book (but I'm only part way through!).
The basic phenomenon is correct. However, 40% equities is not a large equity allocation in the analysis Otar is doing. 80% equities would be a large equity allocation. The sequence of returns problem people are studying is exactly why withdrawals can't be too high. The infamous 4% rule derives from that, but it is a "safe" lower bound. If a person is concerned that today's conditions are uniquely worse than the worst historical conditions, then you can elect a lower withdrawal rate. There is little you can do with asset allocation to beat this problem possibly excepting use of immediate annuities or looking at methods involving all TIPS portfolios. You might enjoy reading people like Zvi Bodie on this. (Note Bodie does not recommend all TIPS in spite of some popular comments alleging that he does.)

Typical studies of the sort Otar does show that when attempting roughly 4% type withdrawals the failure rate starts to rise significantly when the equity allocation falls below about 40%. If you want a very conservative portfolio with little allocated to stocks, you need to adjust your withdrawal rate down accordingly.

Here is some information pertaining to a bonds first withdrawal plan:

http://bobsfinancialwebsite.com/Harvest ... awals.html
thehammer
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Post by thehammer »

Not to nitpick, but the right answer isn't do nothing.

The right answer is to be disciplined and re balance into stocks. The worst thing is to dump your equities.

I think everyone here may have some real-word experience in their tolerance of equities because of 2008-2009.

I have the impression the OP wouldn't optimally handle a 30-40 percent drop in stocks if it meant his portfolio lost 15 percent or so.
dbr
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Post by dbr »

thehammer wrote:Not to nitpick, but the right answer isn't do nothing.

The right answer is to be disciplined and re balance into stocks. The worst thing is to dump your equities.

I think everyone here may have some real-word experience in their tolerance of equities because of 2008-2009.

I have the impression the OP wouldn't optimally handle a 30-40 percent drop in stocks if it meant his portfolio lost 15 percent or so.
Yes, I agree with all of that. The point I was underlining is that doing nothing is far better than thinking something has to be done and have that lead to dumping equities. My thought process has to do with understanding that portfolios that experience losses still succeed in supporting withdrawals over time if the rate of withdrawal was conservative enough, even if not rebalanced. Failing to rebalance would not be optimum, but it would most likely not be a disaster.

I agree the OP is struggling with the whole concept of being in stocks at all. A person who does not want to be in equities at all does have options. It all depends on how much income needs to be supported and how palatable alternatives such as annuities might be. What other income streams exist is highly relevant.

Note the conversation has changed from fear of lump summing to fear of holding equities at all, which appears to be the root of the whole problem.

M, are you willing to mention how much income you want relative to the size of your assets?
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markierussell
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Post by markierussell »

dbr wrote:
thehammer wrote:Not to nitpick, but the right answer isn't do nothing.

The right answer is to be disciplined and re balance into stocks. The worst thing is to dump your equities.

I think everyone here may have some real-word experience in their tolerance of equities because of 2008-2009.

I have the impression the OP wouldn't optimally handle a 30-40 percent drop in stocks if it meant his portfolio lost 15 percent or so.
...
I agree the OP is struggling with the whole concept of being in stocks at all. A person who does not want to be in equities at all does have options. It all depends on how much income needs to be supported and how palatable alternatives such as annuities might be. What other income streams exist is highly relevant.

Note the conversation has changed from fear of lump summing to fear of holding equities at all, which appears to be the root of the whole problem.

M, are you willing to mention how much income you want relative to the size of your assets?
I'm not against holding equities, although I'm sure I'm on the conservative side. I think maybe I have to read Otar more carefully. I saw where he said that suffering a loss in the first 4 years means you will never recover but I may have misunderstood the implication. It could be that with a withdrawal rate below 4% that is not an issue (because presumably the rate can survive even the biggest hit, e.g. 1929). To answer the question, I would be OK with a withdrawal rate of something like 3.5%.
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chuck-lyn
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Post by chuck-lyn »

One rule of thumb often mentioned on this forum is to limit your equity exposure to what you could tolerate if a 50% market drop occurred and put the balance in fixed income. If it were my money I would invest the fixed income right away and DCA the balance into equity over a 1-3 year period.

Cheers,

charlie
leonard
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Post by leonard »

markierussell wrote:Again, thanks for lots of helpful comments. One point that I don't think anyone has answered (maybe cause it was a dumb question?) was whether DCA has any application to buying bonds, or more likely bond ETFs like BND. It seems to me that the same theory should apply. For instance, right now yields are very low and a lot of people seem to think it's risky to buy bonds (although not as risky as equity of course if you're planning to hold single bonds to maturity - funds/ETFs bit more complicated, it seems). Would it make sense to DCA into a bond fund/ETF, hoping that yields improve?

MR
I think at least one person addressed the issue of DCA'ing - bonds or otherwise.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
dbr
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Post by dbr »

markierussell wrote:
I'm not against holding equities, although I'm sure I'm on the conservative side. I think maybe I have to read Otar more carefully. I saw where he said that suffering a loss in the first 4 years means you will never recover but I may have misunderstood the implication. It could be that with a withdrawal rate below 4% that is not an issue (because presumably the rate can survive even the biggest hit, e.g. 1929). To answer the question, I would be OK with a withdrawal rate of something like 3.5%.
Well, historically that withdrawal rate can be sustained for thirty years with balanced portfolios of stocks and bonds. Portfolios that are 100% bonds have a failure rate around 17% at 3.5% withdrawal in the FireCalc model of this kind of thing. A 40% stock portfolio has a failure rate of 0 out of 110 rolling periods at 3.5% withdrawal. Now I would absolutely not use this kind of model as an engineering calculation for how to design a retirement, but I would heed the trends that are seen. Exactly what properties our particular future will have compared to the past is also uncertain. Otar bases his analysis on the same kind of historic periods data that FireCalc uses, and he has his own model if you want to use it.

It is true that the whole explanation of sequence of returns is aimed at higher than the so called convention safe rates. The history to that examination goes back a couple of decades to the Trinity study and a couple of similar insightful studies that pointed out that overly optimistic retirement planning suggesting people might take out 6%-8%-10% of assets annually based on bull market stock growth were mistaken. The critical components were a better historical appreciation of returns and recognition of the sequence problem. At the time the 4% line was put forward as the worst case. You can read up on the massive ongoing discussion of this subject with arguments on both sides that even 4% is too optimistic or that it is too pessimistic. There are many studies of modified strategies for withdrawal as well.

I like Bob's pages for some good overall reading, as I referenced before:

http://bobsfinancialwebsite.com/

I also like Otar as the only whole book on exactly this problem that I am aware of, but I think you are misreading a little bit.
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markierussell
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Post by markierussell »

dbr wrote:
markierussell wrote:
I'm not against holding equities, although I'm sure I'm on the conservative side. I think maybe I have to read Otar more carefully. I saw where he said that suffering a loss in the first 4 years means you will never recover but I may have misunderstood the implication. It could be that with a withdrawal rate below 4% that is not an issue (because presumably the rate can survive even the biggest hit, e.g. 1929). To answer the question, I would be OK with a withdrawal rate of something like 3.5%.
Well, historically that withdrawal rate can be sustained for thirty years with balanced portfolios of stocks and bonds. Portfolios that are 100% bonds have a failure rate around 17% at 3.5% withdrawal in the FireCalc model of this kind of thing. A 40% stock portfolio has a failure rate of 0 out of 110 rolling periods at 3.5% withdrawal. ... Otar bases his analysis on the same kind of historic periods data that FireCalc uses, and he has his own model if you want to use it.

It is true that the whole explanation of sequence of returns is aimed at higher than the so called convention safe rates. .. I like Bob's pages for some good overall reading, as I referenced before:

http://bobsfinancialwebsite.com/

I also like Otar as the only whole book on exactly this problem that I am aware of, but I think you are misreading a little bit.
Thanks dbr! I spent another couple hours with Otar last night (great book but boy, over 500 pages ..) and I do think I jumped the gun in my first reference to him about the sequence problem. Seems you're right, the problem only becomes serious with withdrawal rates higher than the Safe Withdrawal Rate (which for him is about 3.8%). The phenomenon will still exist with lower rates, in that the portfolio will never recover to its expected size if there are losses in the first few years, but at the SWR or less, you still won't run out of cash, you'll just have less at the end. This reduces the argument for slowly DCA'ing into equities, gives more support to the lump sum approach (as long as you stick at or below the SWR).
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chuck-lyn
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Post by chuck-lyn »

Don't get carried away by all the math. How do think you would "feel" if you lumped in just before a 50% crash? Look at DCA as insurance just like you do for life insurance, fire insurance and health insurance. Like livesoft said, the lumping advantage is only marginal ... not a home run.

Cheers,

charlie
dbr
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Post by dbr »

chuck-lyn wrote:Don't get carried away by all the math. How do think you would "feel" if you lumped in just before a 50% crash? Look at DCA as insurance just like you do for life insurance, fire insurance and health insurance. Like livesoft said, the lumping advantage is only marginal ... not a home run.

Cheers,

charlie
True, but . . . how would you feel if you DCA'd in and just then there is a 50% crash? . . . or if you hold the investment for a decade and then there is a 50% crash.

It is true that DCA is great for preventing timing regret, but it does nothing to manage whether or not a person can tolerate the risk of that allocation, which I wager is almost always the real issue.
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touchdowntodd
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Post by touchdowntodd »

i agree with 50% now, DCA the other 50% over 3-6 months
tryin to do this right... thanks guys
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Post by rustymutt »

I sure wouldn't have wanted to tell a friend to lump sum in during 2008.
On the other hand, I lumped all in during March of 2009 and got lucky.
A lot depends on your own situation. I wouldn't tell you one way or the other without knowing more about your finances and cost of living.

You might want to wait til the next big market correct. That could next week, or three years from now. Timing markets is a losers game as so many here have mentioned, but a in your situation, waiting and imputing at the correct time could make a huge difference in your returns in say, 20 years.
Even educators need education. And some can be hard headed to the point of needing time out.
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markierussell
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Post by markierussell »

It's really an interesting debate and helpful to me in sorting out my own view, so thanks. On the one hand are the "true believers" in the market who do not fear lump sum, and on the other, the more cautious group who acknowledge their emotional, and very human, reluctance to wager a big wad of cash, at least all at once. Seems to me one way of teasing this out is to consider what happens when you annuitize the whole nest egg. There, you are, from the start, accepting a 100% loss in your assets. But in return you have a lifetime income stream. Your only concern should be default risk. In a sense, the "true believers" view the market as a kind of annuity provider: as long as they stay within the safe withdrawal rate, they trust in the market's ability to deliver it (just as an annuity buyer trusts the annuity provider will not default) and can ignore what happens to the portfolio balance, accepting even a 50% drop because their only concern is the income stream. The other group is more attached to the portfolio itself and cringes at the prospect of "statement shock". Quite understandable, especially if one's faith in the market (and in the academic studies) is limited. I wonder whether the latter attitude is more common among people actually retired, or near it, whereas maybe the "true believer" is more often someone far from retirement and therefore less scared of losing a big chunk of cash?
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Post by dbr »

As a retired person, I think it is insane not to have a portion of one's income stream annuitized. But the big picture is that includes pensions and social security that one may already have as givens beside investments. It is one of the factors in why delaying SS is a good tactic, if that supports a better balance of lifetime annuity vice investments, especially for joint annuitants.

I also think there is a fundamental misunderstanding about risks. I hate to go back and pervert that blog of Larry Swedroe's about uncertainty and risk, but a point is that uncertainty about what one's portfolio balance might be at any point in time and calculating the chances that one may actually run out of money while still alive are two different things. It is simply a fact that portfolios that wander all over the place in value can all be safe at a sufficiently minimal rate of withdrawal. The real risk is that one will have been so conservative that almost all the actual outcomes will involve dying with more money than one could ever have imagined. It is also the case that the most certain portfolios can have the highest risk of failing.

The academics almost universally deplore the unsatisfactory state of relying on variable assets for fixed needs and solve that problem by suggesting that annuitization is by far the most efficient tool for providing retirement income. And, allowing reserves for unexpected circumstances and taking account of legacy intentions, so annuities are. Of course, people are completely spooked by fear of insurance company default and shennanigans, with some degree of justification.
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chuck-lyn
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Post by chuck-lyn »

The larger problem with lumping at the worst time is the very real possibility that the shock will cause you to stray from your plan.

Don't be too cocky about your ability to "stay the course" until you have been around the block a few times.

Yes, older investors are more risk adverse for good reason. Most of us have experienced the dot.com bubble and the recent crash. Some of us were around in the 70s and 80s when stagflation was insane. We know that the older you get, the less time you have to recover and eventually when your personal capital runs out you are more vulnerable to market whims . Thus as dbr suggested, we turn to SPIAs and/or much lower equity exposure.

It is hard for a young person to internalize the experience of others from reading books, etc., but good luck to you as you start on your journey.

Cheers,

charlie

Edit: I re-read your first post and discovered you are not "young" per se.
I forgot which thread I was on. :oops:
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markierussell
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Post by markierussell »

chuck-lyn wrote:Edit: I re-read your first post and discovered you are not "young" per se.
I forgot which thread I was on. :oops:
Haha right, I'm 57! Well, to me that's getting old, no doubt. But haven't been seriously investing very long so bit of a newbie for sure. And I guess I'm somewhat on the young side to be retiring. I did get hit by 2008 so that definitely spooked me, like so many. Fortunately hadn't plunged in to equities very far by then so survived intact. But would hate to have been in deep.
thehammer
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Post by thehammer »

I think your problem is you're still too obsessed about lump sum vs. slowly putting it in.

With either strategy, you'll still be at 40 percent equities in let's say, a year.

Can you tolerate a substantial loss in your equities of 30-50 percent without flipping out and selling low?

That question needs to be answered , before anything else.
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