Investment timing strategies for 401(k) -> IRA rollovers?

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Investment timing strategies for 401(k) -> IRA rollovers?

Postby DaleM » Thu Jan 31, 2013 5:52 pm

I am about to rollover my 401(k) to an IRA. I know my target asset allocation and it will all be in Vanguard ETFs, but the only question is how to get there. Since this is a sizable chunk to move at one time, I am looking for some advice.

I see three options:

1. Just invest it all immediately when it's available.

Concern: No chance to smooth over an rough spots. I could get lucky and buy on the low side, or unlucky and buy on the high side. On the other hand, since I can't time the market anyway, why not just get it over with?


2. Put in limit buy orders just slightly less than current market, figuring natural volatility will allow the buy to go through during the next dip.

Concern: My "slightly less" is below the dip, the buys never get executed and I miss the increase.

3. Break up the purchase into even amounts over the next several months/weeks and buy on a "dollar cost averaging" basis.

Concern: Slightly more expense in transaction fees (which possibly might be waved), closer monitoring, and loss if market increases (or gain if market decreases).

I recall (I think) in the Bogleheads guide many years ago that option #3 was slightly preferred, but not by much. I was wondering what the latest thought on this issue is.

Thanks
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Re: Investment timing strategies for 401(k) -> IRA rollovers

Postby Sidney » Thu Jan 31, 2013 6:08 pm

Are you at your target allocation now?

If not, why not?
I always wanted to be a procrastinator.
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Re: Investment timing strategies for 401(k) -> IRA rollovers

Postby damjam » Thu Jan 31, 2013 6:13 pm

DaleM wrote:3. Break up the purchase into even amounts over the next several months/weeks and buy on a "dollar cost averaging" basis.

Read this article by Larry Swedroe for his opinion. And this study by Vanguard.
Personally I don't DCA for the reasons sited in the above links. Also I like to keep things simple.
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Re: Investment timing strategies for 401(k) -> IRA rollovers

Postby retiredjg » Thu Jan 31, 2013 6:32 pm

Unless you are changing your stock to bond ratio, just sell and buy immediately - it's a sideways move. If there is going to be time out of the market, which would allow the market to go up or down while you are on the sidelines, I might not move it all at once, but I'd invest whatever got moved immediately.
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Re: Investment timing strategies for 401(k) -> IRA rollovers

Postby linuxuser » Thu Jan 31, 2013 6:33 pm

Last year I rolled over about $20K - is that a large sum - in entirety. I have never DCA.
I have rolled over nine other 401Ks in similar fashion.
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Re: Investment timing strategies for 401(k) -> IRA rollovers

Postby Easy Rhino » Thu Jan 31, 2013 6:38 pm

One time I was doing a largish, slowish transfer between two taxable accounts and i actually invested in margin in the new account some so I could hold closer to the target amount of stocks/bonds during the interim period.
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Re: Investment timing strategies for 401(k) -> IRA rollovers

Postby DaleM » Fri Feb 01, 2013 1:39 pm

This is great info. Especially thankful to "damjam" for referencing these articles.

As a normal guy who's spent most of his career doing regular payroll contributions to the 401(k), that dollar cost averaging approach is all that I am used to (since it was my only option; there were no lump sums :happy ).

But for the lump sum approach, it's very interesting to see that about 66-70% of the time you'll be ahead with the lump sum approach.

What I found even more fascinating in the cbsnews article is that the market was up 70% of the time whether you looked a large period from 1926 through 2010 or from during the 10-year period 2001-2010.

To "Sidney" -- who asked about my target allocation -- in addition to rolling over from privately managed funds in my 401(k), my big project now is adjusting to how paying off the mortgage impacts the overall investment strategy. My recent research has confirmed my hunches that paying off the mortgage should be treated like investing in very safe bonds. You would either treat the bond rate as the mortgage percent (if you take the standard deduction) or discount the rates by your marginal tax bracket (if you itemize). With mortgage rates down so much, I am well ahead even for the next few years where I can still itemize. (My mortgage is 3.68% and 10 year T-Bills are less than 2%, and there's no way that I am am even close to an 84% ((3.68% - 2%) / 2%) tax bracket.) Then, when I take the standard deduction in a few years, I'll be even further ahead in paying off the mortgage. Based on this analysis, I am currently over-allocated in bond funds, so when I roll over the 401(k), I'll go heavier (or maybe totally) into stock funds. (I am also balancing with my wife's plan, which is allocated to stocks and bond funds.)
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Re: Investment timing strategies for 401(k) -> IRA rollovers

Postby retiredjg » Fri Feb 01, 2013 1:47 pm

DaleM wrote:But for the lump sum approach, it's very interesting to see that about 66-70% of the time you'll be ahead with the lump sum approach.

Isn't this info related to getting a lump sum of cash (like a windfall) into investments in the first place?

If you are already in stocks and bonds now, I think it would be unwise to go to cash (other than just the time it takes to transfer) and then "get back in".
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Re: Investment timing strategies for 401(k) -> IRA rollovers

Postby DaleM » Sat Feb 02, 2013 1:21 pm

retiredjg wrote:If you are already in stocks and bonds now, I think it would be unwise to go to cash (other than just the time it takes to transfer) and then "get back in".


This is exactly the problem. Fidelity manages the existing 401(k) that I am closing out, and I understand they will cut me a hard copy check and send it in the mail to me, and then I get to either send it (or drive it) to a branch where I have my IRA (which is TDAmeritrade). I'll be lucky only to be out of the market for two weeks.

In fact, I heard from some rep at TD that Fidelity manages to make a ton of money on the interest they earn while the money is being transferred (i.e. from the time they cash out my account to the time I get the check and deposit it). I don't know if there's any truth to this, but if it is the case, then I can see why they wouldn't be in any hurry to have me deposit that check.
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Re: Investment timing strategies for 401(k) -> IRA rollovers

Postby retiredjg » Sat Feb 02, 2013 2:22 pm

If the market doesn't do much in those two weeks, it might as well be 2 minutes and everything should be invested right away. If the market goes down in that 2 weeks, put it all in at bargain prices. :happy If the market goes up....then you have to decide something. But I'd probably lump it all in on the "guess" that the market might continue to go up and I better take advantage of what is available.

Besides, even if the market goes up, it's not likely to go up enough to hurt you much. If you are really concerned about all this, see if they can distribute your 401k in thirds or quarters.
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Re: Investment timing strategies for 401(k) -> IRA rollovers

Postby money » Sat Feb 02, 2013 4:49 pm

I am going to do a rollover of a Fidelity 401k to a Vanguard IRA somewhat soon. I think you can specify that the check go directly to Vanguard and what to invest in when the funds hit the account. Maybe TD also can do this to at least cut-down the delay a little bit. I plan on doing an immediate sideways move of all funds to similar funds/ETFs with Vanguard for lower fees and account consolidation. If you only want to invest in Vanguard. ETFs, maybe you should go direct to avoid trading costs.
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Re: Investment timing strategies for 401(k) -> IRA rollovers

Postby retiredjg » Sat Feb 02, 2013 5:25 pm

DaleM wrote:This is exactly the problem. Fidelity manages the existing 401(k) that I am closing out, and I understand they will cut me a hard copy check and send it in the mail to me, and then I get to either send it (or drive it) to a branch where I have my IRA (which is TDAmeritrade). I'll be lucky only to be out of the market for two weeks.

I wonder how long you would be "out of the market" if you rolled the 401k to an IRA at Fido? They have excellent choices in their Spartan funds.
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