Roll out initial investments over how long time?

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greg219
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Roll out initial investments over how long time?

Post by greg219 » Thu Apr 25, 2013 1:29 am

Hi all,

I've recently learned a lot about personal investing and saving for retirement, but I haven't yet started investing. Currently, I have all my money in savings accounts, but after recent learnings, I've now come up with a reasonable asset allocation that I want to follow (something like 70/30 stock/bond, but that's not the focus of this topic). I have around $150k available for investing.

Given this, over how long period of time would you recommend that I roll out my investing plan, going from $150k (100 %) in savings accounts to $150k in 70 % stocks and 30 % bonds? As I understand it, the tradeoff is the following:
- We don't want to invest it all at once since we want to minimize the role of the timing of when we buy (e.g., we don't want to buy at the time when it turns out it's most expensive).
- We don't want to wait for too long since the earlier we get in, the more time the money has to grow.

What is sensible here? 1 year? 5 years? How would the answer change if we had $100k or $200k to invest instead?

Also, I'm 26 years old, and the monthly influx of money that I additionally plan to invest using this allocation is ~$3k.

Thanks!

Elbowman
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Re: Roll out initial investments over how long time?

Post by Elbowman » Thu Apr 25, 2013 2:10 am

I don't think there is a correct answer here, rolling out is more of an emotional crutch, but perhaps an important one. Think of it this way though: if you had everything invested now, would you sell? If not, then why not put it all in now?

Olarmy03
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Re: Roll out initial investments over how long time?

Post by Olarmy03 » Thu Apr 25, 2013 2:42 am

Dollar cost averaging is a very helpful tool, but I wouldn't want to spread it out over anymore than a year, but that is just my opinion and I'm a newbie and my portfolio isn't nearly as big as yours.

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empb
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Re: Roll out initial investments over how long time?

Post by empb » Thu Apr 25, 2013 3:59 am

DCA has been pretty thoroughly debunked but can be useful as a psychological crutch if you'd otherwise be paralysed. I'd invest it all now.

magneto
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Re: Roll out initial investments over how long time?

Post by magneto » Thu Apr 25, 2013 5:17 am

The overwhelming view when this topic comes up is to go immediately to the desired Asset Allocation, and all sorts of good reasons will be given.

However if you have been all cash for several years what is the rush? The ideal is to look back to see what the the lowest total book cost could be for the investments x years later.

If the stock market moves in cycles over say 4 years (debatable) then dollar cost averaging over three to four years would ensure buying in the troughs as well as the peaks of the cycles.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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ofcmetz
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Re: Roll out initial investments over how long time?

Post by ofcmetz » Thu Apr 25, 2013 6:20 am

Since you are not used to having the money invested, I like the idea of averaging the money into your desired asset allocation over a period of time. I think it's easier to gradually turn up the heat.

Jumping right in or averaging in is OK. I would not advise taking more than 12 months to get to your asset allocation.

Best of Luck.
Never underestimate the power of the force of low cost index funds.

Scooter57
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Re: Roll out initial investments over how long time?

Post by Scooter57 » Thu Apr 25, 2013 7:32 am

Since I did invest a bing chunk, not long before the market tanked in 2008, and watched my investment remain under what I paid for it for years and partly NEVER recover, I'd advise you to put your money in a bit each month for a couple years. That way you avoid having that happen.

Yes, you might lose some gains if the market keeps shooting up, but you avoid much more painful losses if it drops. Many here are drawing on research that says that ON AVERAGE you do better putting the money in at once, but that "average" includes the very long period from 1980 on when the market was on a long upward move. If you had put your money all in in 1999 or in 2007 you would have done much worse.

And many younger investors here are thinking that because the market drops in 2000 and 2008 were followed by swift recoveries, the same will always happen if the market tanks.

This, however, is not true. The market is capable of dropping swiftly and moving in a lower range for decades, as happened in the US after the Depression and in Japan over the past 20 years.

So by investing your money more slowly, you are ensuring that you won't put it all in at the top, and if the market does drop you'll have more cash left to invest at the much lower prices.

Ed 2
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Re: Roll out initial investments over how long time?

Post by Ed 2 » Thu Apr 25, 2013 7:37 am

greg219 wrote:Hi all,

I've recently learned a lot about personal investing and saving for retirement, but I haven't yet started investing. Currently, I have all my money in savings accounts, but after recent learnings, I've now come up with a reasonable asset allocation that I want to follow (something like 70/30 stock/bond, but that's not the focus of this topic). I have around $150k available for investing.

Given this, over how long period of time would you recommend that I roll out my investing plan, going from $150k (100 %) in savings accounts to $150k in 70 % stocks and 30 % bonds? As I understand it, the tradeoff is the following:
- We don't want to invest it all at once since we want to minimize the role of the timing of when we buy (e.g., we don't want to buy at the time when it turns out it's most expensive).
- We don't want to wait for too long since the earlier we get in, the more time the money has to grow.

What is sensible here? 1 year? 5 years? How would the answer change if we had $100k or $200k to invest instead?

Also, I'm 26 years old, and the monthly influx of money that I additionally plan to invest using this allocation is ~$3k.

Thanks!
I just wish if we had more questions like this in 2009 for example :wink:
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Grt2bOutdoors
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Re: Roll out initial investments over how long time?

Post by Grt2bOutdoors » Thu Apr 25, 2013 7:41 am

Half now, the remainder over the course of the next 12 to 24 months. Probably 24 months is better for you, since your monthly savings rate is $3K, averaging the remaining 50% over that time would amount to approximately $3K. My reasoning is this, if you can't handle a $3K decline in the value of your portfolio, you will find out over the course of the next 24 months and be able to fine tune your asset allocation plan to best match your ability to shoulder the risk. The market could very easily decline in value by 5-10% in a week or even a months time - an initial investment of $75K would experience a $3,500 decline in NAV if the market declined by 5%, but if you continue to add in $3K per month (averaging your cost), you may get yourself accustomed to market fluctuation and be less likely to run for the hills when the occassional turbulence does show up. Good Luck.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

greg219
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Re: Roll out initial investments over how long time?

Post by greg219 » Fri Apr 26, 2013 12:29 am

Thanks for all of your replies; appreciate you taking your time.

I realize now that the following wiki article largely answers my questions -- so sorry for having missed that previously:
http://www.bogleheads.org/wiki/Dollar_cost_averaging
Elbowman wrote:I don't think there is a correct answer here, rolling out is more of an emotional crutch, but perhaps an important one. Think of it this way though: if you had everything invested now, would you sell? If not, then why not put it all in now?
Good point. I think it's possible to be a bit more nuanced though. For example, if I were all invested already, I would also have had some (emotional) experience of what it's like being all invested, which I currently don't.
empb wrote:DCA has been pretty thoroughly debunked but can be useful as a psychological crutch if you'd otherwise be paralysed. I'd invest it all now.
Could you provide some reference on this? There's one reference in the article I mentioned, but maybe you have more?
Grt2bOutdoors wrote:Half now, the remainder over the course of the next 12 to 24 months. [...]
I think this advice makes a lot of sense in my case. I do have some experience in investing but I don't have any (emotional) experience with my currently suggested AA and portfolio size, so rolling it out like you suggest might make sense to be able to see how I react to fluctuations before being too invested.

I also think Scooter57's viewpoint is relevant at least in my case, so thanks for that. It's easy to be rational when planning, but a bit harder when you see your saved money lose 30 - 40 % in value over a few months.

Does anyone else have interesting points to consider?

Thanks again.

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empb
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Re: Roll out initial investments over how long time?

Post by empb » Fri Apr 26, 2013 4:16 am

http://faculty.chicagobooth.edu/george. ... A_1979.pdf

I'm not sure if that's the paper that the wiki references but it's the one that basically shut the door on this issue 35 years ago.

http://www.bogleheads.org/forum/viewtop ... 10&t=83767

And here's a thread where we discuss it ad-nauseum.

Having said that, your concerns are understandable, my suggestion, however, would just be to lump sump into a less risky AA (say 50/50) and see how you get on. If you slowly DCA your way into 70/30 and then the next day the market collapses, what have you accomplished?

magneto
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Re: Roll out initial investments over how long time?

Post by magneto » Fri Apr 26, 2013 5:09 am

Someone came to see me in 1999 because a neighbour mistakenly thought I was an expert in the art of investment and referred him to me. This guy was anxious to invest as we were in a go go market and everyone else was making money. I urged caution as we had been selling stocks which seemed expensive and buying UK real estate which was then cheap.

However this guy was desperate and in a hurry to invest in stocks and went ahead with dire results. I wish now that I had been more forceful in my opinion that he take more time but who am I to predict markets and I was uncertain. DCA over three to four years would have saved him in allowing him to start investing without committing everything on one throw of the dice.

Is the stock market high today? As always one cannot be certain, but it is not cheap compared to a year or two back, and there is again the possibility of being carried away with enthusiasm.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

feh
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Re: Roll out initial investments over how long time?

Post by feh » Fri Apr 26, 2013 1:23 pm

I tend to look at these things analytically. From that viewpoint, invest all of it, now.

If you're not emotionally comfortable with that, I like the idea of investing it geometrically. Half now, half of the remainder in 2 months, half of that 2 months later, etc.

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ruralavalon
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Re: Roll out initial investments over how long time?

Post by ruralavalon » Fri Apr 26, 2013 2:55 pm

greg219 wrote:Given this, over how long period of time would you recommend that I roll out my investing plan, going from $150k (100 %) in savings accounts to $150k in 70 % stocks and 30 % bonds?
Please see this Vanguard paper -- https://pressroom.vanguard.com/nonindex ... raging.pdf -- in summary
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.
See also -- Wiki article link: Dollar cost averaging .

So historically the arithmetic suggests that "all at once" is usually best. But there is no guarantee that this will hold true in any particular time frame in the future.

Some people worry that the market will tank as soon as they invest, and so dribble it in over time. Other people worry that the market will skyrocket while they are delaying their investment, and they will miss the boat.

Its basically a matter of what you feel most comfortable with. My own personal preference is to dump it all in at once and get it over with. If you elect to invest the $150k in segments, decide on a predetermined schedule, such as 10% the first of the month every month, so that you do not trap yourself into the futile task of trying to guess when "the best time" will be for your periodic investments.

A compromise some people use is 50% all at once followed by periodic investment of the rest, say 10% every 2 months thereafter.
Greg219 wrote:Also, I'm 26 years old, and the monthly influx of money that I additionally plan to invest using this allocation is ~$3k.
For the additional $3k/mo from income, just invest that every month when it becomes available.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

Dandy
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Re: Roll out initial investments over how long time?

Post by Dandy » Fri Apr 26, 2013 3:26 pm

Historically, I believe jumping in all at once works out better in most cases. I understand the fear of doing it all at once. If that is the case I would suggest doing a moderate lump investment now and dollar cost averaging in over 6-9 months. It is good to get started and depending on your investment choices you might be able to start off with VG Admiral shares. It is important to get off the starting blocks.
Good luck

magneto
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Re: Roll out initial investments over how long time?

Post by magneto » Sat Apr 27, 2013 4:47 am

In The Intelligent Asset Allocator, Chapter 8, William Bernstein reviews the two methods (all in or phased). For a phased entry into stocks he recommends two to three years, to have an authentic bear market (or at least correction) during this time. Personally I prefer three to four years but then I am ultra cautious even with rebalancing speeds.

Bill's advice on the two methods is worth a read.


Good Luck
Last edited by magneto on Sat Apr 27, 2013 7:32 am, edited 1 time in total.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

YDNAL
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Re: Roll out initial investments over how long time?

Post by YDNAL » Sat Apr 27, 2013 6:13 am

greg219 wrote:Also, I'm 26 years old, and the monthly influx of money that I additionally plan to invest using this allocation is ~$3k.
Greg, welcome to the Forum!

I'm not answering your question, primarily because it is largely a psychological thing, but would like to say that $150K saved thus far is an accomplishment. I will, however, tell you that your focus should be on the BIG picture which includes the fact that you are very young (26) and saving $36K annually - the latter is MOST important than anything else.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde

gt4715b
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Re: Roll out initial investments over how long time?

Post by gt4715b » Sat Apr 27, 2013 7:05 am

I would probably split the difference, investing immediately in the bond and international equity portion of your portfolio and then DCA-ing the US equity portion, where valuations are higher.

aquifer
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Re: Roll out initial investments over how long time?

Post by aquifer » Sat Apr 27, 2013 8:04 am

The market can tank any time. You could slowly invest over months or years and the market could collapse the next morning, as someone mentioned previously. You can't know the future and I would suggest that WHEN you invest doesn't matter. What matters is HOW. Someone advised picking a 50/50 allocation and dump the money in all at once, then adjust the allocation as you learn what risk tolerance you have. That is good advice IMO. Make sure to keep enough cash for your emergency fund. Other than that, invest it all at once.

Splais
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Re: Roll out initial investments over how long time?

Post by Splais » Sat Apr 27, 2013 8:20 am

OP You did not mention in your original post your duration, how long is this money going to be invested. If it will be there for 30+ years and not withdrawn for anything less than the absolute worst catastrophe, then investing all in probably would let you sleep at night because the odds of a full or better recovery from a crash/crashes are high. The less investing duration you anticipate the higher the rest from a crash sometime after investing. I'm new to all this. I've found I am very risk adverse, you may not be. How you really "feel" about the risks of investing is important in your decision to me.

Scooter57
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Re: Roll out initial investments over how long time?

Post by Scooter57 » Sat Apr 27, 2013 10:02 am

Magneto,

It was Bernstein's book, The Investor's Manifesto, A very simple book that turns out to be "Four Pillars Lite", that made me aware of the Value Averaging way of putting money in slowly. I read the book that he recommended that laid out the theory, and have been using the spreadsheet that comes with it it ever since to make my monthly investments.

The beauty of Value Averaging is that if the market does start to drop, I will be automatically be increasing my contributions, so it gives me the discipline to buy more on dips.

Since there is some good evidence that your long term results depend heavily on the average PE at the time you invest a lump sum, I'm very much hoping to see a significant correction. Since they occur every year or two, I probably won't have all that long to wait. Meanwhile, I hedge my bets by putting in a modest amount each month to cover the unlikely possibility that the market will only go up.

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