Would you invest a lump sum or dollar cost average?

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Would you invest a lump sum or dollar cost average?

Postby Minnesota97 » Wed May 22, 2013 5:22 pm

I have a lump sum of about $50-55K that I've accumulated through a hobby business that I'm ready to invest in VASGX in a taxable account. I don't anticipate needing this money for at least 10 years. I will probably start adding in $500/month going forward to this account so will get some benefit of a DCA there, albeit a much lower % of the overall fund value.

Obviously the market has had a big run up and none of us know if that will continue. I can stomach a 10-20% near-term drop should we have a big correction starting the day after should I invest a lump sum. My gut tells me to invest about $5K per month and DCA throughout the next 10-12 months (as I accumulate a bit more), but I'm curious what others would recommend for a one time lump sum like this. Thanks.
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Re: Would you invest a lump sum or dollar cost average?

Postby The Wizard » Wed May 22, 2013 5:29 pm

VASGX is 80% stocks and 20% bonds.
Is that approximately your own AA?
$50K is a modest amount anyway, so put it all in tomorrow if that AA fits...
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Re: Would you invest a lump sum or dollar cost average?

Postby livesoft » Wed May 22, 2013 5:30 pm

I'd invest half now and the rest over the next 10 months. On a really bad day I would accelerate my purchases.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Would you invest a lump sum or dollar cost average?

Postby inbox788 » Wed May 22, 2013 5:46 pm

livesoft wrote:I'd invest half now and the rest over the next 10 months. On a really bad day I would accelerate my purchases.

I've been waiting for that bad day for the last 3 months. Hasn't come so far, and have give up about 10% growth. :oops: Holding off on purchase, since the day I buy is the day before we see that really bad day. :? Fortunately the rest of my investesments have been on a good ride.
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Re: Would you invest a lump sum or dollar cost average?

Postby 2wolves » Wed May 22, 2013 5:48 pm

I'm going through the same decision, but with $200,000. I think I'm going to invest $50,000 right away. If the market drops considerably, then I'll put in another $50k-$75k. Otherwise I'll dollar cost average over the year and maybe pay off some of the mortgage.
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Re: Would you invest a lump sum or dollar cost average?

Postby ruralavalon » Wed May 22, 2013 5:50 pm

Vanguard wrote:On average, we find that an LSI [lump sum investing] approach has outperformed a DCA [dollar cost averaging] approach approximately two-thirds of the time, even when results are adjusted for the higher volatility of a stock/bond portfolio versus cash investments. This finding is consistent with the fact that the returns of stocks and bonds exceeded that of cash over our study period in each of these markets.

https://pressroom.vanguard.com/nonindex ... raging.pdf
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Re: Would you invest a lump sum or dollar cost average?

Postby 2wolves » Wed May 22, 2013 5:50 pm

inbox788 wrote:
livesoft wrote:I'd invest half now and the rest over the next 10 months. On a really bad day I would accelerate my purchases.

I've been waiting for that bad day for the last 3 months. Hasn't come so far, and have give up about 10% growth. :oops: Holding off on purchase, since the day I buy is the day before we see that really bad day. :? Fortunately the rest of my investesments have been on a good ride.


I'm willing to give up on some of those gains by DCA. The alternative of putting it all in at once and having it lose 20% of it's value seems much worse to me. I'd regret that a lot more than losing out on some of the gains.
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Re: Would you invest a lump sum or dollar cost average?

Postby 2wolves » Wed May 22, 2013 5:55 pm

ruralavalon wrote:
Vanguard wrote:On average, we find that an LSI [lump sum investing] approach has outperformed a DCA [dollar cost averaging] approach approximately two-thirds of the time, even when results are adjusted for the higher volatility of a stock/bond portfolio versus cash investments. This finding is consistent with the fact that the returns of stocks and bonds exceeded that of cash over our study period in each of these markets.

https://pressroom.vanguard.com/nonindex ... raging.pdf


That's just common sense. The market in general has gone up since inception. But that does nothing to measure utility and so doesn't really work as an indicator of what will leave a person better off on average (in terms of utility, not dollars)
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Re: Would you invest a lump sum or dollar cost average?

Postby inbox788 » Wed May 22, 2013 5:59 pm

ruralavalon wrote:
Vanguard wrote:On average, we find that an LSI [lump sum investing] approach has outperformed a DCA [dollar cost averaging] approach approximately two-thirds of the time, even when results are adjusted for the higher volatility of a stock/bond portfolio versus cash investments. This finding is consistent with the fact that the returns of stocks and bonds exceeded that of cash over our study period in each of these markets.

https://pressroom.vanguard.com/nonindex ... raging.pdf

Makes the case over the 10 year period studied. DCA over 10 months isn't all that different than 1 year lump sum.
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Re: Would you invest a lump sum or dollar cost average?

Postby Artsdoctor » Wed May 22, 2013 6:08 pm

Minnesota,

How much of your portfolio will this be? Is $50,000 a small segment or the majority? You say you won't need the money for more than 10 years but do you actually intend on keeping this fund for more than 10 years or will you be switching it out as your portfolio grows?

This fund will provide you with an 80/20 split and the bond allocation will include international debt as well as the AGG. Is this what you want?

Statistically, lump sum investing is more likely than DCA to produce a superior return. If you've never lived through a major bear market, I would not lump sum. If you're not bothered by a significant drop and/or this is a small portion of your overall portfolio, then I would lump sum.

You could also consider just making up your own asset allocation and investing the individual portions yourself: Total Stock, Total International, and whatever bond allocation you like. It would be cheaper and you can adjust your asset allocation as your financial goals change.

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Re: Would you invest a lump sum or dollar cost average?

Postby Browser » Wed May 22, 2013 6:31 pm

I have another way to look at the decision: Let's say that you had previously invested an amount in VASGX that was now worth $50K. Based on your feelings about the market today, would you withdraw some or all of that $50K right now or just leave it in VASGX? Whatever you think you'd leave in right now is what you should invest as a lump sum. If you'd leave it all in, then you should do a lump sum right now of the $50K. If you'd take it all out, then you should probably stay on the sidelines for now, or maybe DCA in.
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Re: Would you invest a lump sum or dollar cost average?

Postby ruralavalon » Wed May 22, 2013 6:45 pm

Bogleheads wiki wrote:For a completely rational investor, lump sum investing will always produce a higher expected return, because it immediately moves your funds from asset classes with lower expected returns to ones with higher expected returns. Note that higher expected returns do not guarantee that your actual returns will be higher. According to an investopedia article, [6] studies indicate that lump sum investing has produced higher returns 66% of the time.

Some investors have the goal, not of maximizing their expected returns, but of minimizing their potential regret. For those investors, dollar cost averaging is superior because it reduces the chances of investing just prior to a market drop. If you instead decide to invest 1/6th of the money each month for 6 months, you will reduce the chance of buying just before a crash. Instead, as the price fluctuates each month, you will buy more shares when the price is low and less when it is high.

Many new investors are more interested in minimizing their potential regret, and it's important that an ill-timed market drop not scare them off from investing in the future. Many experienced investors are more interested in maximizing their expected returns. You can also decide to split the difference, where you invest half immediately and the other half over 6 or so months

Wiki article link: Dollar cost averaging .

Personally I would lump sum it all at once (and have in the past done that) just to get it over with and get on with the rest of my life. But if thats too scary for you, ...
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Re: Would you invest a lump sum or dollar cost average?

Postby gkaplan » Wed May 22, 2013 6:55 pm

I would lump sum.
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Re: Would you invest a lump sum or dollar cost average?

Postby BestWishes » Wed May 22, 2013 7:21 pm

I would lump sum also because
- I also want to get it over with and don't bother with it any more.
- I been through bear/bull markets. Large drop or raise in value don't affect me too much. Most of the time, I don't even look at it.
- It is a small percent of my portfolio.

You need to do what you are comfortable with.
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Re: Would you invest a lump sum or dollar cost average?

Postby Blues » Wed May 22, 2013 7:23 pm

I used DCA during my working years to add to taxable accounts, IRA's and TSP. However, I prefer to invest a lump sum when the opportunity presents.
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Re: Would you invest a lump sum or dollar cost average?

Postby Clearly_Irrational » Wed May 22, 2013 7:27 pm

For $50k, I'd lump sum. For $5 Million I'd probably DCA. Sure, the math mostly works better for lump sum but I'd be willing trade some upside to avoid "worst possible time" syndrome on a large amount.
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Re: Would you invest a lump sum or dollar cost average?

Postby Browser » Wed May 22, 2013 7:32 pm

Clearly_Irrational wrote:For $50k, I'd lump sum. For $5 Million I'd probably DCA. Sure, the math mostly works better for lump sum but I'd be willing trade some upside to avoid "worst possible time" syndrome on a large amount.

So, if you had $5 mil in right now, you'd withdraw it all, put it in cash, and DCA back in? Then when it's all back in -- rinse and repeat?
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Would you invest a lump sum or dollar cost average?

Postby Clearly_Irrational » Wed May 22, 2013 7:42 pm

Browser wrote:
Clearly_Irrational wrote:For $50k, I'd lump sum. For $5 Million I'd probably DCA. Sure, the math mostly works better for lump sum but I'd be willing trade some upside to avoid "worst possible time" syndrome on a large amount.

So, if you had $5 mil in right now, you'd withdraw it all, put it in cash, and DCA back in? Then when it's all back in -- rinse and repeat?


No. I mean if I received it as say an inheritance or lottery winnings or something like that. Yes, I'm aware that mathematically lump sum wins 2/3rds of the time. I'm also aware that once you're done with DCA then it's the same as if you've lump summed. I'm just saying that it's worth losing some potential upside to avoid investing at the worst possible time for a large sum. In such a situation I would likely grab a spreadsheet and spend some time figuring out what the optimum DCA length is assuming that you pick the worst possible days to invest prior to the biggest crashes on record.
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Re: Would you invest a lump sum or dollar cost average?

Postby livesoft » Wed May 22, 2013 8:00 pm

inbox788 wrote:
livesoft wrote:I'd invest half now and the rest over the next 10 months. On a really bad day I would accelerate my purchases.

I've been waiting for that bad day for the last 3 months.

You have not been reading the forum then. A bad day was announced about 10% ago. Many folks bought on that day.

Also note that in the LS+DCA schedule that I wrote, you quoted, and I have re-quoted again, there is nothing about waiting for a really bad day to invest. There is something about accelerating the schedule if one or more RBDs happen.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Would you invest a lump sum or dollar cost average?

Postby Minnesota97 » Wed May 22, 2013 8:03 pm

Some great replies - thanks all.

To answer a few questions. I'm comfortable with the 80/20 mix as an addition to my portfolio. The $50K will make up around 7-8% of my portfolio, although a much larger share of my taxable accounts.

I like the idea of making my own portfolio with 3 funds, (likely the same three funds) which will allow me to balance this one way or another going forward.

I will most likely invest it all.
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Re: Would you invest a lump sum or dollar cost average?

Postby Imperabo » Wed May 22, 2013 8:08 pm

I would lump sum. You should DCA, since if you have to ask . . .
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Re: Would you invest a lump sum or dollar cost average?

Postby dbr » Wed May 22, 2013 8:10 pm

Imperabo wrote:I would lump sum. You should DCA, since if you have to ask . . .


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Re: Would you invest a lump sum or dollar cost average?

Postby Artsdoctor » Wed May 22, 2013 8:14 pm

Minnesota,

I would strongly urge you to avoid a Life Strategy fund in the taxable account. Taxable account purchases should be viewed as something that you could possibly hold "forever," and not something you'd sell if a manager changes, your goals change, tax efficiency changes, etc. Taxable bonds may seem like a good idea now but that might not always be the case (and that goes double for the international bonds that will be included in the Life Strategy fund).

It is FAR better to keep things as simple as possible in your taxable account. Because the $50,000 doesn't even make up 10% of your total portfolio, you can lump sum invest without any problem. If the market tanks, you can always tax-loss harvest.

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Re: Would you invest a lump sum or dollar cost average?

Postby ruralavalon » Wed May 22, 2013 9:07 pm

I also suggest you NOT use any Lifestrategy fund (like VASGX), balanced fund, or bond fund in a taxable account, because they are tax INefficient. Please see -- Wiki article link: Principles of Tax-Efficient Fund Placement.

Use the $50k to buy some Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) and Vanguard Total International Stock Index Fund Investor Shares (VGTSX) in a taxable account, and then exchange some stock fund in a tax protected account to a bond fund in the tax protected asccount to balance it all out to your desired asset allocation.
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Re: Would you invest a lump sum or dollar cost average?

Postby Browser » Wed May 22, 2013 9:18 pm

Clearly_Irrational wrote:
Browser wrote:
Clearly_Irrational wrote:For $50k, I'd lump sum. For $5 Million I'd probably DCA. Sure, the math mostly works better for lump sum but I'd be willing trade some upside to avoid "worst possible time" syndrome on a large amount.

So, if you had $5 mil in right now, you'd withdraw it all, put it in cash, and DCA back in? Then when it's all back in -- rinse and repeat?


No. I mean if I received it as say an inheritance or lottery winnings or something like that. Yes, I'm aware that mathematically lump sum wins 2/3rds of the time. I'm also aware that once you're done with DCA then it's the same as if you've lump summed. I'm just saying that it's worth losing some potential upside to avoid investing at the worst possible time for a large sum. In such a situation I would likely grab a spreadsheet and spend some time figuring out what the optimum DCA length is assuming that you pick the worst possible days to invest prior to the biggest crashes on record.

You're right. The decision to DCA a new sum of money is functionally exactly the same as the decision to liquidate the same sum of money from existing investments and DCA back in. The only difference is framing. It's amazing how many people who are afraid to lump sum are OK with letting the same amount that has already been invested ride. That's why it's helpful to me to try to frame the decision as if the money had already been invested. For example, I feel like I'm too unsure of the market to increase my stock allocation from 10% to 30% in a lump sum transfer right now, but paradoxically I also feel that I wouldn't want to drastically decrease an existing 30% allocation all the way down to 10% immediately -- I'd probably be comfortable maintaining a 30% allocation if I already had it. The human mind is an interesting puzzle isn't it? So, I've found this mental exercise to be helpful in trying to decide what allocation I can live with. Once I've determined that, I believe one should immediately make adjustments if necessary and not horse around with DCA-ing -- which is mainly just a psychological gimmick we use on ourselves.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Would you invest a lump sum or dollar cost average?

Postby Dandy » Thu May 23, 2013 8:16 am

Studies show that lump summing it usually results in a better long term return. But that doesn't mean it sits well mentally. If you are concerned then a combinaton of a chunk lump summed and the rest DCA over 6 - 9 months is a good middle ground.
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Re: Would you invest a lump sum or dollar cost average?

Postby Scooter57 » Thu May 23, 2013 9:24 am

Studies show that 3 out of 4 times lump summing does better.

That means 1 out of 4 times it does worse. If it's a one time windfall you are investing, that 1 out of 4 chance of a major loss is worth respecting.

I am dealing with a similar situation and have been Value Averaging. (Search on this forum and you'll find lots of other discussions about what it is.) Yes, I have not participated very heavily in the latest run up, so I haven't made big profits from it, but I have enough money that I don't need to make big profits, and, indeed, if I make big enough profits much of what I make will go to the State of Massachusetts when I die or even the Feds. Why I should be risking capital for them, is beyond me!

I spent a couple months extracting my inheritance from the abysmally poorly chosen stocks and funds paid advisors had put it in, (high expenses, mediocre performance, and enough losses that I could take capital gains on dumping everything and only have to pay taxes on about $60K in capital gains, despite the run up in the market between 2010 and 2012. Since half of those capital gains were Apple stock--locking in a profit the market has since erased, I did quite well.)

I then spent a couple months reading up on investing--a subject about which I knew almost nothing. It's not rocket science, which is why just about anyone coming in off the street can become a stockbroker and anyone with a college degree can become a financial advisor.

What I like about slowly buying in is that a) I keep reading and studying more, which lets me fine tune my strategy, b) I sleep very well no matter what the market does

The most important thing you will have to decide is how much of your money to put into stocks, bonds, real estate, CDs, and cash. Don't make ANY rash moves before you thoroughly study that subject. It's called allocation or portfolio design. There are lots and lots of conflicting theories about how to do it. People who profit when you buy stocks and bonds (including Vanguard), not so surprisingly, will urge you to put all your money into stocks and bonds. Take their advice with a grain of salt.

Check out the taxation of anything you buy. Taxation on sales of gold, for example, are fully taxable at ordinary income rates. Certain dividends are taxed at much lower rates, bond dividends are taxed at ordinary income rates.

Be respectful but paranoid about everyone who gives you advice. Listen to what they say, but then check it out on your own.

If it takes you 3 years to figure out what you are doing and you preserve your capital that whole time, there is no great loss. The people who are afraid to miss a month of market profits are often people whose only hope of having the kind of money you have now lies in catching a runaway bull market since they can only invest small amounts from weekly paychecks.
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Re: Would you invest a lump sum or dollar cost average?

Postby Jfet » Thu May 23, 2013 9:29 am

you should get your opportunity today...market will be down 2%
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Re: Would you invest a lump sum or dollar cost average?

Postby BolderBoy » Thu May 23, 2013 9:31 am

Minnesota97 wrote:Obviously the market has had a big run up and none of us know if that will continue. I can stomach a 10-20% near-term drop should we have a big correction starting the day after should I invest a lump sum. My gut tells me to invest about $5K per month and DCA throughout the next 10-12 months (as I accumulate a bit more), but I'm curious what others would recommend for a one time lump sum like this. Thanks.

The research boys say that lump sum ultimately yields a higher return over the long term, and that is what I would do. You have to be able to live with your decision, so consider that.
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Re: Would you invest a lump sum or dollar cost average?

Postby Browser » Thu May 23, 2013 11:07 am

It still amazes me how many people think there is something to DCA-ing when there is nothing there. Investing is all about figuring out the appropriate portfolio allocation for yourself taking into consideration your need, ability, and willingness to assume risk and then maintaining that allocation. If you find a bag of money on the street and want to invest it, then "lump sum" it according to your allocation strategy. Take into consideration that the introduction of a significant sum of new money into the equation may affect your allocation strategy; i.e., your need to assume risk may have declined so you can invest less in risky assets. It doesn't sound like $50K is enough to affect the OP's allocation strategy so there is no reason not to "lump sum" this amount according to that strategy. If it were $5 million, the allocation strategy would be impacted and the OP might need or desire a lower allocation to stocks. As soon as he figures out what the new allocation strategy should be, he should "lump sum" the $5 M into that allocation. This isn't hard. DCA makes it unnecessarily complicated and is a sheer waste of time and effort, and the odds are that you end up with a lower return over time than if you had lump summed. If you feel the need to DCA, then you have the wrong portfolio allocation. Revise it to one with lower risk that you are willing to lump sum.
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Re: Would you invest a lump sum or dollar cost average?

Postby Toons » Thu May 23, 2013 11:11 am

lump sum :happy
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Re: Would you invest a lump sum or dollar cost average?

Postby assumer » Thu May 23, 2013 11:15 am

Clearly_Irrational wrote:For $50k, I'd lump sum. For $5 Million I'd probably DCA. Sure, the math mostly works better for lump sum but I'd be willing trade some upside to avoid "worst possible time" syndrome on a large amount.


Appropriate username :D

As for me, just don't overthink it, and lump sum half, and DCA the other half. This way you'll minimize potential regret of one being the better move in hindsight.
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Re: Would you invest a lump sum or dollar cost average?

Postby Tarabara » Thu May 23, 2013 11:46 am

Last summer I had a lump of cash and I asked the same question on the forum. After carerully considering all the replies and reading the wikis, I did lump sum if that helps at all.
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Re: Would you invest a lump sum or dollar cost average?

Postby The Wizard » Thu May 23, 2013 12:02 pm

Browser wrote:
Clearly_Irrational wrote:For $50k, I'd lump sum. For $5 Million I'd probably DCA. Sure, the math mostly works better for lump sum but I'd be willing trade some upside to avoid "worst possible time" syndrome on a large amount.

So, if you had $5 mil in right now, you'd withdraw it all, put it in cash, and DCA back in? Then when it's all back in -- rinse and repeat?

This is my way of thinking as well.
If one is nervous about having a few million dollars in investments, then you likely have too risky an asset allocation.
Seems like a lot of these threads lately are proposing to go heavily into the stock side of investing (based on recent performance?) and that's the risky side...
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Re: Would you invest a lump sum or dollar cost average?

Postby The Wizard » Thu May 23, 2013 12:07 pm

Jfet wrote:you should get your opportunity today...market will be down 2%

How are you able to determine these things?
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Re: Would you invest a lump sum or dollar cost average?

Postby The Wizard » Thu May 23, 2013 12:14 pm

Browser wrote:It still amazes me how many people think there is something to DCA-ing when there is nothing there...

Not quite true.
DCAing was invented at least 50 years ago for employees that get paid every two weeks, every month, etc.
Broker-types would draw sine-wave graphs of stock prices, showing how you get more shares when prices were down.
Idea was to CONTINUE buying stocks during/after a crash, not quit due to large paper "losses".
DCAing helped keep those brokers' income stable as well, back when most funds had 5% loads...
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Re: Would you invest a lump sum or dollar cost average?

Postby gkaplan » Thu May 23, 2013 12:17 pm

The Wizard wrote:...DCAing was invented at least 50 years ago for employees that get paid every two weeks, every month, etc....


This is periodic investing, not dollar cost averaging.
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Re: Would you invest a lump sum or dollar cost average?

Postby The Wizard » Thu May 23, 2013 12:24 pm

gkaplan wrote:
The Wizard wrote:...DCAing was invented at least 50 years ago for employees that get paid every two weeks, every month, etc....


This is periodic investing, not dollar cost averaging.

It's really BOTH...
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Re: Would you invest a lump sum or dollar cost average?

Postby Browser » Thu May 23, 2013 12:25 pm

One other take: DCA is simply a backdoor way of lowering portfolio risk, compared to lump sum, by keeping investable assets in safe cash or cash-like assets and trickling it gradually into risky assets like stocks. Over the period of the DCA, the portfolio has lower average risk and can be expected to have lower average return as a consequence. Portfolio risk is lowest at the beginning of DCA and becomes progressively higher. Why anybody thinks this makes any sense completely eludes me. If they want lower risk, then just lower the allocation to risky assets in one's allocation plan and be done with it. Additionally, I think that most investors on this forum feel that portfolio risk should be inversely related to age (i.e., length of investment horizon) - risk should move from higher to lower over time. DCA manages to do just the opposite, moving portfolio risk from lower to higher over time.
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Re: Would you invest a lump sum or dollar cost average?

Postby Imperabo » Thu May 23, 2013 12:25 pm

The Wizard wrote:
Jfet wrote:you should get your opportunity today...market will be down 2%

How are you able to determine these things?


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Re: Would you invest a lump sum or dollar cost average?

Postby 2wolves » Thu May 23, 2013 12:37 pm

ruralavalon wrote:
Bogleheads wiki wrote:For a completely rational investor, lump sum investing will always produce a higher expected return, because it immediately moves your funds from asset classes with lower expected returns to ones with higher expected returns. Note that higher expected returns do not guarantee that your actual returns will be higher. According to an investopedia article, [6] studies indicate that lump sum investing has produced higher returns 66% of the time.

Some investors have the goal, not of maximizing their expected returns, but of minimizing their potential regret. For those investors, dollar cost averaging is superior because it reduces the chances of investing just prior to a market drop. If you instead decide to invest 1/6th of the money each month for 6 months, you will reduce the chance of buying just before a crash. Instead, as the price fluctuates each month, you will buy more shares when the price is low and less when it is high.

Many new investors are more interested in minimizing their potential regret, and it's important that an ill-timed market drop not scare them off from investing in the future. Many experienced investors are more interested in maximizing their expected returns. You can also decide to split the difference, where you invest half immediately and the other half over 6 or so months

Wiki article link: Dollar cost averaging .

Personally I would lump sum it all at once (and have in the past done that) just to get it over with and get on with the rest of my life. But if thats too scary for you, ...


By that logic, you should always invest entirely stocks (no bonds) because it "will always produce a higher expected return". It's not always about the expected return.
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Re: Would you invest a lump sum or dollar cost average?

Postby 2wolves » Thu May 23, 2013 12:45 pm

Browser wrote:It still amazes me how many people think there is something to DCA-ing when there is nothing there. Investing is all about figuring out the appropriate portfolio allocation for yourself taking into consideration your need, ability, and willingness to assume risk and then maintaining that allocation. If you find a bag of money on the street and want to invest it, then "lump sum" it according to your allocation strategy. Take into consideration that the introduction of a significant sum of new money into the equation may affect your allocation strategy; i.e., your need to assume risk may have declined so you can invest less in risky assets. It doesn't sound like $50K is enough to affect the OP's allocation strategy so there is no reason not to "lump sum" this amount according to that strategy. If it were $5 million, the allocation strategy would be impacted and the OP might need or desire a lower allocation to stocks. As soon as he figures out what the new allocation strategy should be, he should "lump sum" the $5 M into that allocation. This isn't hard. DCA makes it unnecessarily complicated and is a sheer waste of time and effort, and the odds are that you end up with a lower return over time than if you had lump summed. If you feel the need to DCA, then you have the wrong portfolio allocation. Revise it to one with lower risk that you are willing to lump sum.


And if your allocation includes some amount of cash? It's about balancing risk and returns. Different people have different tolerance for risk. Too many people here are basing their arguments on the average expected return and ignoring risk and individual goals.
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Re: Would you invest a lump sum or dollar cost average?

Postby Aptenodytes » Thu May 23, 2013 12:49 pm

I suspect you may be asking the wrong question. If you need the money in just ten years, you should be scrutinizing your AA much more carefully. If I needed money in ten years I would not have it in 80% stocks, more like 20% or 0%.

In the end your choice of AA is going to have a far bigger impact on how you fare than the DCA/Lump Sum choice.
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Re: Would you invest a lump sum or dollar cost average?

Postby Dandy » Thu May 23, 2013 1:07 pm

There are a lot of smart/wise people that on on both sides of the issue. Some jump right in according to their target allocation others decide to temper risk a bit even if 75% of the time they may be giving up a bit of performance. Comfort with your investment approach is important- as long as you are aware of the pro's and con's do what makes sense for you. Don't be bullied or embarassed into any investment decision.
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Re: Would you invest a lump sum or dollar cost average?

Postby Browser » Thu May 23, 2013 1:35 pm

Here's an example: my current allocation of $100,000 is 80% stocks, 20% bonds. I inherit $100,000 that I put into a money market account. If I want to keep an 80/20 allocation, I can lump sum $80,000 into stocks and $20,000 into bonds. Instead, I feel that I'm more comfortable if I DCA this money into my investment portfolio over a 10-month period. Therefore, my starting portfolio allocation is $80K stocks, $20K bonds, and $100K money market. Each month, I use $10K from the money market account to purchase $8,000 in stocks and $2,000 in bonds. For purposes of illustration, assume no growth in stocks, bonds, or money market over the 10-month period. Using an Excel spreadsheet, I find that, with this DCA strategy, my average stock allocation over the 10-month period would be 62%, my average bond allocation would be 15.5%, and my average money market allocation would be 22.5%. This is considerably less risky than my target 80/20 allocation. Therefore, I'd expect lower volatility and lower returns from the DCA strategy over the 10-month period. Of course, if this is more comfortable for me, I could have simply modified my allocation strategy to, say, 60% stocks, 25% bonds, and 15% money market in the first place and then invested the $100K as a lump sum. This would have had the same average portfolio risk as the DCA strategy, but would have had the advantage of maintaining a consistent risk level. The DCA strategy varies from a low-risk allocation of 44% stocks, 11% bonds, and 45% money market in Month #1 to a high-risk allocation of 80% stocks, 20% bonds, 0% money market in Month #10. The risk profile is quite unevenly distributed over the DCA period, so it is nothing much more than a "bet" on the distribution of stock and bond returns over that period. We know from Investment 101 that, unless you have a working crystal ball, it's better to maintain a consistent portfolio risk profile over time, unless it has to be modified in response to changes in one's need, ability, or willingness to assume investment risk.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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Re: Would you invest a lump sum or dollar cost average?

Postby Scott S » Thu May 23, 2013 2:21 pm

*I* would lump it all into my chosen asset allocation (78/22) tomorrow.
My Plan: * Age-10 in bonds until I reach age 60, 50/50 thereafter. * Equity split: 50/50 US/Int'l, Bond split: 50/50 TBM/TIPS. * Everything over 2 months' expenses gets invested.
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Re: Would you invest a lump sum or dollar cost average?

Postby 2wolves » Thu May 23, 2013 6:42 pm

Browser wrote:Here's an example: my current allocation of $100,000 is 80% stocks, 20% bonds. I inherit $100,000 that I put into a money market account. If I want to keep an 80/20 allocation, I can lump sum $80,000 into stocks and $20,000 into bonds. Instead, I feel that I'm more comfortable if I DCA this money into my investment portfolio over a 10-month period. Therefore, my starting portfolio allocation is $80K stocks, $20K bonds, and $100K money market. Each month, I use $10K from the money market account to purchase $8,000 in stocks and $2,000 in bonds. For purposes of illustration, assume no growth in stocks, bonds, or money market over the 10-month period. Using an Excel spreadsheet, I find that, with this DCA strategy, my average stock allocation over the 10-month period would be 62%, my average bond allocation would be 15.5%, and my average money market allocation would be 22.5%. This is considerably less risky than my target 80/20 allocation. Therefore, I'd expect lower volatility and lower returns from the DCA strategy over the 10-month period. Of course, if this is more comfortable for me, I could have simply modified my allocation strategy to, say, 60% stocks, 25% bonds, and 15% money market in the first place and then invested the $100K as a lump sum. This would have had the same average portfolio risk as the DCA strategy, but would have had the advantage of maintaining a consistent risk level. The DCA strategy varies from a low-risk allocation of 44% stocks, 11% bonds, and 45% money market in Month #1 to a high-risk allocation of 80% stocks, 20% bonds, 0% money market in Month #10. The risk profile is quite unevenly distributed over the DCA period, so it is nothing much more than a "bet" on the distribution of stock and bond returns over that period. We know from Investment 101 that, unless you have a working crystal ball, it's better to maintain a consistent portfolio risk profile over time, unless it has to be modified in response to changes in one's need, ability, or willingness to assume investment risk.


You bring up a good point with consistent risk level. I'm saying that it is not everyone's goal to have a consistent risk level. Many people out there are quite risk averse. At the same time, they know that they need additional risk to achieve greater returns. DCA helps those people become more comfortable with higher risk levels that may put them in a better spot to achieve their goals.

For those risk averse folks, lets look at 3 scenarios for DCA
1. Market keeps going up - They invest some and so gain enough value that they are more comfortable contributing more because the market would have to fall even more for them to lose money overall.
2. Market goes down - More comfortable investing future contributions at a lower price point.
3. Market stays about even - This is not the best for the risk averse individual because it ends up being almost the same as lump sum.

It's about perception. Not everyone will think this way, but I know a lot of people who do.
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Re: Would you invest a lump sum or dollar cost average?

Postby Browser » Thu May 23, 2013 6:58 pm

2Wolves - I just don't prefer the idea of using DCA to try to ease yourself into a risk level that you're not willing to assume right now. Using the old metaphor, we can ease a frog into being boiled alive if we heat up the kettle slowly. I personally prefer setting the temperature to a level I'm comfortable with right now and just jumping in. That's more likely to be the level that I can stick with when the storm hits. You shouldn't rely on DCA to find that level, IMO.
If we have data, let’s look at data. If all we have are opinions, let’s go with mine. – Jim Barksdale
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