Invest lumpsum, "cost averaging" or "wait for the crash"

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manedark
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Invest lumpsum, "cost averaging" or "wait for the crash"

Post by manedark » Thu May 03, 2018 1:50 pm

I have a large amount of money available to invest in the stock market after selling a large chunk of single stock I owned.I got good advise to do that
here.

My question now is how to get the sum invested back into the stock market since the market is really hot right now. Do note, my mind is fairly made up about investing in diversified Vanguard Mutual Funds, it is the "timing" that is the question. I know the Bogle philosophy says to avoid timing the market, but right now we are in a really long bull run (perhaps going to reach a record bull run).

The time horizon I am looking to need this money is probably 5-10 years (as a down-payment for a home), but if the market is bad at that time, I am OK to wait a bit longer i.e. complete 10 years. I did a little research and it is said that lumpsum is always/mostly better for returns especially in the long run, and it is more of an emotional decision i.e. can you avoid the panic if the markets fall 30% but then recover in the next 1-2 years. In that sense, given that I have seen previous crashes (even 2008-2009 one), I am OK to avoid panic and wait it out.

Given all this background, what is the best strategy here, some options I could think of:
a) Invest 50% of the proceeds as a lumpsum right away in the said funds and the rest in a high-yield CD for 1 year and wait for the crash to buy more.
b) Invest 10% of the proceeds over the next 10 months in the said funds (dollar cost averaging).
c) Invest 100% right away into the said funds and dont worry about market levels.

Thanks a lot in advance!
Maned.

Darth Xanadu
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by Darth Xanadu » Thu May 03, 2018 2:07 pm

What about option d) Invest 50% right now, and 6.25% quarterly over the next 2 years?
My friends said stick to your guns, but instead I just got stuck.

ETadvisor
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by ETadvisor » Thu May 03, 2018 2:22 pm

Either lump sum or cost average or combination of the two. DO NOT "wait for the crash".

I think more information would provide better responses.

Is this going in taxable account?

Did you max out all your tax-advantaged accounts? - 401k or equivalent, IRA, HSA if applicable

Do you have outstanding debt?

Do you have Emergency Fund?

bradpevans
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by bradpevans » Thu May 03, 2018 2:29 pm

manedark wrote:
Thu May 03, 2018 1:50 pm
I have a large amount of money available to invest in the stock market after selling a large chunk of single stock I owned.I got good advise to do that
here.

My question now is how to get the sum invested back into the stock market since the market is really hot right now. Do note, my mind is fairly made up about investing in diversified Vanguard Mutual Funds, it is the "timing" that is the question. I know the Bogle philosophy says to avoid timing the market, but right now we are in a really long bull run (perhaps going to reach a record bull run).

The time horizon I am looking to need this money is probably 5-10 years (as a down-payment for a home), but if the market is bad at that time, I am OK to wait a bit longer i.e. complete 10 years. I did a little research and it is said that lumpsum is always/mostly better for returns especially in the long run, and it is more of an emotional decision i.e. can you avoid the panic if the markets fall 30% but then recover in the next 1-2 years. In that sense, given that I have seen previous crashes (even 2008-2009 one), I am OK to avoid panic and wait it out.

Given all this background, what is the best strategy here, some options I could think of:
a) Invest 50% of the proceeds as a lumpsum right away in the said funds and the rest in a high-yield CD for 1 year and wait for the crash to buy more.
b) Invest 10% of the proceeds over the next 10 months in the said funds (dollar cost averaging).
c) Invest 100% right away into the said funds and dont worry about market levels.

Thanks a lot in advance!
Maned.
*much* of the advantage of Lump Sum is that you get the money in the market sooner.
I don't look as dollar cost averaging as strategy but simply a reality for 401k and other "automatic investments"

If i am a "lump sum" guy then i want it to go up like a rocket as soon as i buy.
If i am a "buy and accumulate" guy then i really don't want it to go up until i make my last buy, and then i want it to go up like a rocket.

If you are going to put it into a low ER Mutual Fund, put it in straightaway.

mega317
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by mega317 » Thu May 03, 2018 2:30 pm

manedark wrote:
Thu May 03, 2018 1:50 pm
I know the Bogle philosophy says to avoid timing the market, but
I always take the opportunity to quote this back to people. There is almost always an active thread on "don't time the market but". My guess is the posters know the recommendation but don't really know why. Unless you have some special information about why this moment is different from all other times when market timing hasn't worked (you don't) then you should follow the conventional wisdom.

That said, "best" strategy is not a one size fits all. The strategy with the highest expected (not guaranteed) long-term return is to invest it all today. But psychological issues, while not mathematical, are real, and so some other strategy might indeed be "best" for some/many people.

An additional factor is that you indicate you have a definite goal for the money which could come as soon as 5 years from now. So now you're setting yourself up to try to time the market well twice, because you need to get out at some point. IMO in your situation it is much more important to come up with a plan that has an appropriate amount of risk given your goals, rather than the exact timing.
Last edited by mega317 on Thu May 03, 2018 2:32 pm, edited 1 time in total.

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David Jay
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by David Jay » Thu May 03, 2018 2:31 pm

1. Statistically, lump sum wins (because the market, on average, goes up). This money was already invested in stocks (a stock) so you are not increasing your risk.
2. If you can't stomach the fear of lump sum, do a mechanical DCA over the minimum number of months that you CAN handle.

Do not wait for a crash. You could be waiting for a long time, and when the market finally drops you will probably be unable to lump sum at that time for the same reason that you are uncomfortable about doing lump sum at this time - fear of loss.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

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ReformedSpender
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by ReformedSpender » Thu May 03, 2018 2:46 pm

Darth Xanadu wrote:
Thu May 03, 2018 2:07 pm
What about option d) Invest 50% right now, and 6.25% quarterly over the next 2 years?
Option sounds good to me

:beer
Market history shows that when there's economic blue sky, future returns are low, and when the economy is on the skids, future returns are high. The best fishing is done in the most stormy waters.

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by WhiteMaxima » Thu May 03, 2018 2:58 pm

Dollar cost averaging or lump sum whichever you like. If you plan to buy a house in 5 years, 100% stock is not the place to be. Use low cost target fund: 2018+(5+10)/2= Vanguard Target fund 2025 will do. I would guess it would be 30/70 Stock/Bond AA.

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by RDHUSA » Thu May 03, 2018 3:08 pm

I have a buddy who got out of the market when it crossed 11,000 because he "knew it was too high." He is still waiting for the crash he "knows is coming" to get back in. :oops:
Life is good.

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by Clever_Username » Thu May 03, 2018 3:31 pm

How do you know when the crash is going to be? Why do you think the eventual crash, assuming you are correct that it will happen, will bring the market lower than it is today? And, assuming it happens, will you have the courage to put your money in that day, or will you be waiting for it to drop further?
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_

student
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by student » Thu May 03, 2018 3:32 pm

For psychological reasons, I prefer dollar cost averaging into the market over the next 10 months.

metrunt
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by metrunt » Thu May 03, 2018 3:53 pm

"You buy your portfolio every day."

Anything but lump sum is trying to time the market. My crystal ball is on the fritz, so I pass on dollar cost averaging. (and yes, I've been in the market since 1997 and lived through market crashes without blinking an eye).

If you feel bad after a lump sum contribution and a crash, then the feeling bad is something you should work on, because your decision making is optimal.

manedark
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by manedark » Thu May 03, 2018 4:10 pm

Darth Xanadu wrote:
Thu May 03, 2018 2:07 pm
What about option d) Invest 50% right now, and 6.25% quarterly over the next 2 years?
Yeah something like that sounds good to me. I assume that if I go with Vanguard using a Vanguard account I dont pay extra transaction fee because of the distributed quarterly buys, right?

manedark
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by manedark » Thu May 03, 2018 4:14 pm

ETadvisor wrote:
Thu May 03, 2018 2:22 pm
Either lump sum or cost average or combination of the two. DO NOT "wait for the crash".
I agree. Waiting for the crash is a bad approach. But I am just a bit wary of entering all in.
ETadvisor wrote:
Thu May 03, 2018 2:22 pm
I think more information would provide better responses.
Is this going in taxable account?
Yes.
ETadvisor wrote:
Thu May 03, 2018 2:22 pm
Did you max out all your tax-advantaged accounts? - 401k or equivalent, IRA, HSA if applicable
I have matched employer benefit in 401k. Not considering maxing it (and IRA) out yet because of resident alien status. I put in money in an HSA last year to have some emergency fund built up, but this year I have gone for HMO plan - I can't contribute to HSA anymore being on an HMO right?
ETadvisor wrote:
Thu May 03, 2018 2:22 pm
Do you have outstanding debt?
A 10K car loan at low interest rate of 2% I think. Should I pay it off?
ETadvisor wrote:
Thu May 03, 2018 2:22 pm
Do you have Emergency Fund?
Yes - 1 year of expenses.

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BeBH65
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by BeBH65 » Thu May 03, 2018 4:20 pm

Your money was in the market before in a single stock. By investing it now in an index fund you are diversifying and lowering the risk enourmously.

As Saïd before. "You are investing your money every day". If you cannot stand the money to be in the market now why would you be able to stand it in two years? In this case reconsider your asset allocation, and maybe automenu your bond portion.

Edited to add: if you need this money in 5 years, do not invest it in stocks.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

manedark
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by manedark » Thu May 03, 2018 4:44 pm

mega317 wrote:
Thu May 03, 2018 2:30 pm
I always take the opportunity to quote this back to people. There is almost always an active thread on "don't time the market but". My guess is the posters know the recommendation but don't really know why. Unless you have some special information about why this moment is different from all other times when market timing hasn't worked (you don't) then you should follow the conventional wisdom.
The special information is that we have an economic expansion going on for 106 months which is closing in on the record of 120 months. That said, ofcourse there is no guarantee either way that the current expansion go on longer.
mega317 wrote:
Thu May 03, 2018 2:30 pm
That said, "best" strategy is not a one size fits all. The strategy with the highest expected (not guaranteed) long-term return is to invest it all today. But psychological issues, while not mathematical, are real, and so some other strategy might indeed be "best" for some/many people.
I think basically what I need to tell myself is: a) I am staying in the same assert class as I was before (stock markets) b) I am decreasing my uncompensated risk altogether by moving from a "single" stock to a diversified index fund - that is tracking a lot of different stocks - many of them very much resilient to market crashes.
mega317 wrote:
Thu May 03, 2018 2:30 pm
An additional factor is that you indicate you have a definite goal for the money which could come as soon as 5 years from now. So now you're setting yourself up to try to time the market well twice, because you need to get out at some point. IMO in your situation it is much more important to come up with a plan that has an appropriate amount of risk given your goals, rather than the exact timing.
That is a good point. Well the thing is this 5 years goal is flexible - because
a) My situations as a resident alien who doesn't yet know about how long I will stay on in the US.
b) I definitely can't buy in the bay area given the prices, and dont want to buy somewhere far where I can not maintain the property.
So given these two things - should I be considering taking a risk and consequently reward equivalent to owning real estate i.e. a Real Estate fund?

manedark
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by manedark » Thu May 03, 2018 4:47 pm

WhiteMaxima wrote:
Thu May 03, 2018 2:58 pm
Dollar cost averaging or lump sum whichever you like. If you plan to buy a house in 5 years, 100% stock is not the place to be. Use low cost target fund: 2018+(5+10)/2= Vanguard Target fund 2025 will do. I would guess it would be 30/70 Stock/Bond AA.
That is a nice option. You mean the fund - Vanguard Target Retirement 2025 Fund (VTTVX) - right?
Funny, that I didnt think of these "retirement" funds as an option you can avail even before retirement!

manedark
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by manedark » Thu May 03, 2018 4:50 pm

metrunt wrote:
Thu May 03, 2018 3:53 pm
If you feel bad after a lump sum contribution and a crash, then the feeling bad is something you should work on, because your decision making is optimal.
ha ha, nice way to put it :D

Tamalak
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by Tamalak » Fri May 04, 2018 8:54 am

If you lump sum and the market drops 10%, you've lost 10%.

If you've been invested for decades and the market drops 10%, you've lost 10%.

The loss is the same. The second doesn't FEEL as bad, but it is.

Lump sum. Jump in the pool. Scream if you need to. You'll be fully immersed eventually anyway, so get it over with!

CantPassAgain
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by CantPassAgain » Fri May 04, 2018 10:27 am

manedark wrote:
Thu May 03, 2018 1:50 pm
I have a large amount of money available to invest in the stock market after selling a large chunk of single stock I owned.I got good advise to do that
here.

My question now is how to get the sum invested back into the stock market since the market is really hot right now. Do note, my mind is fairly made up about investing in diversified Vanguard Mutual Funds, it is the "timing" that is the question. I know the Bogle philosophy says to avoid timing the market, but right now we are in a really long bull run (perhaps going to reach a record bull run).

The time horizon I am looking to need this money is probably 5-10 years (as a down-payment for a home), but if the market is bad at that time, I am OK to wait a bit longer i.e. complete 10 years. I did a little research and it is said that lumpsum is always/mostly better for returns especially in the long run, and it is more of an emotional decision i.e. can you avoid the panic if the markets fall 30% but then recover in the next 1-2 years. In that sense, given that I have seen previous crashes (even 2008-2009 one), I am OK to avoid panic and wait it out.

Given all this background, what is the best strategy here, some options I could think of:
a) Invest 50% of the proceeds as a lumpsum right away in the said funds and the rest in a high-yield CD for 1 year and wait for the crash to buy more.
b) Invest 10% of the proceeds over the next 10 months in the said funds (dollar cost averaging).
c) Invest 100% right away into the said funds and dont worry about market levels.

Thanks a lot in advance!
Maned.
The whole point is to diversify and reduce single stock risk, right?

Before you sold, this money was 100% in a single stock. Why are you now afraid of buying back in 100% in thousands of different stocks?

Sounds like this is a problem of asset allocation (percentage of stocks/fixed income) and not "should I or shouldn't I lump sum."

Go back to square one, figure out what you want your asset allocation to be based on your need, ability, and willingness for risk and then execute.

Maybe read this if you haven't, or read it again if you have:
https://www.bogleheads.org/wiki/Getting_started

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by HongKonger » Fri May 04, 2018 10:37 am

What do you know about the housing market such that purchasing in 5 years is the optimal time?

manedark
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by manedark » Fri May 04, 2018 11:10 am

Tamalak wrote:
Fri May 04, 2018 8:54 am
If you lump sum and the market drops 10%, you've lost 10%.

If you've been invested for decades and the market drops 10%, you've lost 10%.

The loss is the same. The second doesn't FEEL as bad, but it is.

Its not the same loss. If you were invested for decades your average price could be lower than the 10% fall and there could even be no loas at all.

mega317
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by mega317 » Fri May 04, 2018 11:28 am

Average price doesn't matter. If you have x amount of money before a 10% drop, you have x-10% afterwards. It's a loss. If you lump sum now, it quadruples over your investing life, and then drops 75% the day before you plan to sell, is that not a loss?

Afty
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by Afty » Fri May 04, 2018 11:31 am

manedark wrote:
Fri May 04, 2018 11:10 am
Tamalak wrote:
Fri May 04, 2018 8:54 am
If you lump sum and the market drops 10%, you've lost 10%.

If you've been invested for decades and the market drops 10%, you've lost 10%.

The loss is the same. The second doesn't FEEL as bad, but it is.

Its not the same loss. If you were invested for decades your average price could be lower than the 10% fall and there could even be no loas at all.
Tamalak is making the point that keeping already-invested money in the market is equivalent to lump summing that amount of cash every day. Previous gains/losses are irrelevant (aside from tax implications) if you switch to this mindset.

DouroBound
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by DouroBound » Fri May 04, 2018 11:33 am

manedark wrote:
Fri May 04, 2018 11:10 am
Tamalak wrote:
Fri May 04, 2018 8:54 am
If you lump sum and the market drops 10%, you've lost 10%.

If you've been invested for decades and the market drops 10%, you've lost 10%.

The loss is the same. The second doesn't FEEL as bad, but it is.

Its not the same loss. If you were invested for decades your average price could be lower than the 10% fall and there could even be no loas at all.
It seems like you don’t count your unrealized stock/real estate/etc. appreciation in your net worth? I certainly do. Your approach to measuring losses seems totally arbitrary (though understandable psychologically I suppose).

Situation a: I buy stock for 10, it goes up to 100, then drops back to 10. Situation b: I buy stock for 10, it goes to 100, I sell it and buy different stock for 100, the second stock drops to 10.

Under your logic, you lost “nothing” in situation a, but lost 90 in situation b. To my mind, it’s the same difference (leaving taxes aside): I’m 90% poorer than I was before the drop.

magicrat
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by magicrat » Fri May 04, 2018 11:44 am

Imagine an alternate scenario where you had already owned diversified vanguard mutual funds, instead of the single stock. Would you have sold those mutual funds, then come to the forum asking the same questions?

BogleMelon
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by BogleMelon » Fri May 04, 2018 11:50 am

What if You Only Invested at Market Peaks?
http://awealthofcommonsense.com/2014/02 ... ket-timer/
"One of the funny things about stock market, every time one is buying another is selling, and both think they are astute" - William Feather

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by UpperNwGuy » Fri May 04, 2018 12:04 pm

I am confused. I keep reading about a crash. What crash?

stocknoob4111
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by stocknoob4111 » Fri May 04, 2018 12:10 pm

waiting for the crash is futile... I waited for the crash from 2014-2018 when the press was consistently saying that equities are overvalued and a crash is imminent, then got tired (FOMO) and invested in Jan 2018 after which is promptly crashed a few weeks later in early Feb...lol, talk about rotten timing. My portfolio is all negative now but in any case will be staying put and riding it out.

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kenyan
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by kenyan » Fri May 04, 2018 12:16 pm

We aren't necessarily even in a bull market right now. If we reach bear market status, it's defined by the previous high, which would mean subsequently mean that we've been in a bear market for three and a half months so far.

If you have advance knowledge of the crash, please let me know. I'd prefer not to lose money. Since I don't know when it's coming and how deep it'll be (so I know when to buy back in), I'm otherwise going to stay fully invested at my desired asset allocation.
Retirement investing is a marathon.

Tamalak
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by Tamalak » Fri May 04, 2018 12:28 pm

manedark wrote:
Fri May 04, 2018 11:10 am
Tamalak wrote:
Fri May 04, 2018 8:54 am
If you lump sum and the market drops 10%, you've lost 10%.

If you've been invested for decades and the market drops 10%, you've lost 10%.

The loss is the same. The second doesn't FEEL as bad, but it is.

Its not the same loss. If you were invested for decades your average price could be lower than the 10% fall and there could even be no loas at all.
It doesn't matter where the money you lost 10% on came from. Whether you got it from inheritance, or capital gains, or a salary, it's the same hit. Money has no memory and $1 is always $1. Losing 10% of your lifetime salary earnings that you just lump summed is losing 10%. Losing 10% of money you got mostly from past capital gains is losing 10%.
Last edited by Tamalak on Fri May 04, 2018 12:31 pm, edited 1 time in total.

stocknoob4111
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by stocknoob4111 » Fri May 04, 2018 12:28 pm

actually if you look at the historical bull and bear market averages we are still under returns, the average length and return from a bull market is 9 years and +434%. We are at 9 years but the returns are just +320% so there is a possibility that we still have significant upside. Ignore anything the press (i.e. CNBC, Marketwatch etc.) says they are just clueless. If you listen to the press you will just lose every time.

Boxtrap
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by Boxtrap » Fri May 04, 2018 12:31 pm

manedark wrote:
Thu May 03, 2018 1:50 pm
I have a large amount of money available to invest in the stock market after selling a large chunk of single stock I owned.I got good advise to do that
here.

My question now is how to get the sum invested back into the stock market since the market is really hot right now. Do note, my mind is fairly made up about investing in diversified Vanguard Mutual Funds, it is the "timing" that is the question. I know the Bogle philosophy says to avoid timing the market, but right now we are in a really long bull run (perhaps going to reach a record bull run).

The time horizon I am looking to need this money is probably 5-10 years (as a down-payment for a home), but if the market is bad at that time, I am OK to wait a bit longer i.e. complete 10 years. I did a little research and it is said that lumpsum is always/mostly better for returns especially in the long run, and it is more of an emotional decision i.e. can you avoid the panic if the markets fall 30% but then recover in the next 1-2 years. In that sense, given that I have seen previous crashes (even 2008-2009 one), I am OK to avoid panic and wait it out.

Given all this background, what is the best strategy here, some options I could think of:
a) Invest 50% of the proceeds as a lumpsum right away in the said funds and the rest in a high-yield CD for 1 year and wait for the crash to buy more.
b) Invest 10% of the proceeds over the next 10 months in the said funds (dollar cost averaging).
c) Invest 100% right away into the said funds and dont worry about market levels.

Thanks a lot in advance!
Maned.
My two cents...

My first inclination was to recommend A because it felt like the option I might choose if I were you. But just bear in mind that if you choose A, you are engaging in market timing with part of your money, and you assume the risks inherent with that. I'm not a total hater of market timing philosophically, although I have never engaged in it myself. If you're willing to play that game with portion of the money, you should go ahead. But ask yourself - how confident am I that I can accurately call a market bottom? Very few people can. Your strategy to market time also hinges on the fact that you believe there WILL be a crash.

JoeRetire
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by JoeRetire » Fri May 04, 2018 12:59 pm

manedark wrote:
Thu May 03, 2018 1:50 pm
My question now is how to get the sum invested back into the stock market since the market is really hot right now. Do note, my mind is fairly made up about investing in diversified Vanguard Mutual Funds, it is the "timing" that is the question. I know the Bogle philosophy says to avoid timing the market, but right now we are in a really long bull run (perhaps going to reach a record bull run).
So you understand the suggestion to avoid market timing, but want to time it anyway - even though you think the market is "hot" and we are perhaps going to reach a record bull run?
Given all this background, what is the best strategy here, some options I could think of:
a) Invest 50% of the proceeds as a lumpsum right away in the said funds and the rest in a high-yield CD for 1 year and wait for the crash to buy more.
b) Invest 10% of the proceeds over the next 10 months in the said funds (dollar cost averaging).
c) Invest 100% right away into the said funds and dont worry about market levels.
C) Invest 100% right away into the said funds and don't worry about market levels.

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by manedark » Fri May 04, 2018 1:17 pm

DouroBound wrote:
Fri May 04, 2018 11:33 am
It seems like you don’t count your unrealized stock/real estate/etc. appreciation in your net worth? I certainly do. Your approach to measuring losses seems totally arbitrary (though understandable psychologically I suppose).

Situation a: I buy stock for 10, it goes up to 100, then drops back to 10. Situation b: I buy stock for 10, it goes to 100, I sell it and buy different stock for 100, the second stock drops to 10.

Under your logic, you lost “nothing” in situation a, but lost 90 in situation b. To my mind, it’s the same difference (leaving taxes aside): I’m 90% poorer than I was before the drop.
No. I count my unrealized stock gain as net worth. And I agree with your example, I think I lost both times.

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by manedark » Fri May 04, 2018 1:52 pm

Tamalak wrote:
Fri May 04, 2018 12:28 pm
It doesn't matter where the money you lost 10% on came from. Whether you got it from inheritance, or capital gains, or a salary, it's the same hit. Money has no memory and $1 is always $1. Losing 10% of your lifetime salary earnings that you just lump summed is losing 10%. Losing 10% of money you got mostly from past capital gains is losing 10%.
I agree - money is money. Let us forget where it came from. Take these examples.
a) Invested $100 today in a single unit of a stock at $100 per unit. After 2 years the price dropped to $50 - loss is 50%.
b) Invested $100 over the 2 years, but with a average "cost basis" price of $50 per unit, loss is still 50% on the original principal, even though some units will have "no loss" (one that were bought at $50 or lower).

I think this kind of concrete example shows what you meant to say. It is easier for me to imagine it this way.
Thanks!

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by manedark » Fri May 04, 2018 1:55 pm

Boxtrap wrote:
Fri May 04, 2018 12:31 pm
My two cents...

My first inclination was to recommend A because it felt like the option I might choose if I were you. But just bear in mind that if you choose A, you are engaging in market timing with part of your money, and you assume the risks inherent with that. I'm not a total hater of market timing philosophically, although I have never engaged in it myself. If you're willing to play that game with portion of the money, you should go ahead. But ask yourself - how confident am I that I can accurately call a market bottom? Very few people can. Your strategy to market time also hinges on the fact that you believe there WILL be a crash.
I agree it is hard if not impossible to time the market for a single individual.
I guess all the answers have got me into thinking that my hidden question really is about "Asset Allocation" disguising itself because of psychological reasons into one of DCA vs lumpsum.

What I really need the answer to it, given 5-10 time horizon, how should I allocate my assets - how much risk vs reward ratio I am willing to consider.

The thing is that I took a big risk for 10 years - maybe some of it was avoidable by diversifying and have tidy sum, now I want to take lesser risk, but how much less - is just diversifying into index funds is low risk enough, or introducing some "bonds" into the equation as well to lower the risk even further. I am beginning to think that I want age appropriate allocation at this stage, since I am 38, I should put 38% in bonds and the rest in index funds.
(Do note, I am not having the same allocation for my 401K which is still riskier at 80-20, because that money I know I am not going to touch at all for atleast 20 years so I am comfortable with that kind of aggressive risk).

What do you think about this line of thinking?

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by Boxtrap » Fri May 04, 2018 3:25 pm

manedark wrote:
Fri May 04, 2018 1:55 pm
Boxtrap wrote:
Fri May 04, 2018 12:31 pm
My two cents...

My first inclination was to recommend A because it felt like the option I might choose if I were you. But just bear in mind that if you choose A, you are engaging in market timing with part of your money, and you assume the risks inherent with that. I'm not a total hater of market timing philosophically, although I have never engaged in it myself. If you're willing to play that game with portion of the money, you should go ahead. But ask yourself - how confident am I that I can accurately call a market bottom? Very few people can. Your strategy to market time also hinges on the fact that you believe there WILL be a crash.
I agree it is hard if not impossible to time the market for a single individual.
I guess all the answers have got me into thinking that my hidden question really is about "Asset Allocation" disguising itself because of psychological reasons into one of DCA vs lumpsum.

What I really need the answer to it, given 5-10 time horizon, how should I allocate my assets - how much risk vs reward ratio I am willing to consider.

The thing is that I took a big risk for 10 years - maybe some of it was avoidable by diversifying and have tidy sum, now I want to take lesser risk, but how much less - is just diversifying into index funds is low risk enough, or introducing some "bonds" into the equation as well to lower the risk even further. I am beginning to think that I want age appropriate allocation at this stage, since I am 38, I should put 38% in bonds and the rest in index funds.
(Do note, I am not having the same allocation for my 401K which is still riskier at 80-20, because that money I know I am not going to touch at all for atleast 20 years so I am comfortable with that kind of aggressive risk).

What do you think about this line of thinking?
It sounds like the real question you're asking yourself is indeed about your asset allocation, which is of course critical but also intensely personal and personalized. I'm not a fan of just blindly following the rules of thumb you read about, such as "your age in bonds". Not that there's anything wrong with that strategy but there are other factors to consider.

Using myself as an example - I am 40 and got a late start to saving/investing for retirement. I started at 33. A fact which I kick myself for often, but all I can do now is focus on the future. So in my instance, I have decided that for the time being I am comfortable with an AA of 90 /10 on stocks/bonds. There are many who would say that's WAY too risky for a 40 year old. Some would advise me towards 80/20 at my age, and if you go strictly by "your age in bonds" I should already be down to 40% in bonds. So here's my point about it being intensely personal and personalized....if I went 60/40 right now, I am confident I don't stand a chance at reaching my retirement goals, despite knowing that I (probably) will have to work until I'm 65. So for me - for right now - 90/10 works and I'm comfortable with it. For now.

So my thought for you is this - decide what you want your OVERALL asset allocation to be across all your portfolios and accounts and treat it as one master portfolio. If you really want to cherry pick and be 80/20 with this pile of money and 62/38 with that pile of money, you can, but even so I would still recommend that you figure out what the blended AA is across the entire thing because at the end of the day that's all that matters. If the market crashes and you only then realize your overall AA was way too high for your comfort level, you won't find any solace in the cherry picking you did.

If you want to be more conservative and protective with the portion you KNOW you'll need in 5 - 10 years, then taking a significant amount of bond exposure with that piece might be the way to go. (Always remember - bonds aren't really for making money, they're mostly for protecting money). But even if you do that, I still think it's prudent to view all your assets as one master portfolio, and that might mean that you need to rebalance the holdings in your 401k so that the AA of the master portfolio is still where you are comfortable.

So to distill my long winded response into one statement: Choose your OVERALL asset allocation based on an honest assessment of the total amount of risk you're willing to take with ALL your money, and then use that as your road map for your allocations if you go the cherry picking route.

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by Jags4186 » Fri May 04, 2018 3:37 pm

Agree with the above. Decide what the appropriate asset allocation is for your situation and lump sum in. If you're worried about a "crash" then your asset allocation is too aggressive. I tend to wonder how many people who say they're going DCA in mechanically over 2 years actually do so. I bet a fair amount of people, if the market goes down, they wait hoping to buy lower or, if the market goes up, wait hoping it comes back down to where it was.

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by Boxtrap » Fri May 04, 2018 3:38 pm

Jags4186 wrote:
Fri May 04, 2018 3:37 pm
Agree with the above. Decide what the appropriate asset allocation is for your situation and lump sum in. If you're worried about a "crash" then your asset allocation is too aggressive. I tend to wonder how many people who say they're going DCA in mechanically over 2 years actually do so. I bet a fair amount of people, if the market goes down, they wait hoping to buy lower or, if the market goes up, wait hoping it comes back down to where it was.
Double agree with that. "Time in the market is much more your friend than timing the market"

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by manedark » Fri May 04, 2018 4:23 pm

Boxtrap wrote:
Fri May 04, 2018 3:25 pm
Using myself as an example - I am 40 and got a late start to saving/investing for retirement. I started at 33. A fact which I kick myself for often, but all I can do now is focus on the future. So in my instance, I have decided that for the time being I am comfortable with an AA of 90 /10 on stocks/bonds. There are many who would say that's WAY too risky for a 40 year old. Some would advise me towards 80/20 at my age, and if you go strictly by "your age in bonds" I should already be down to 40% in bonds. So here's my point about it being intensely personal and personalized....if I went 60/40 right now, I am confident I don't stand a chance at reaching my retirement goals, despite knowing that I (probably) will have to work until I'm 65. So for me - for right now - 90/10 works and I'm comfortable with it. For now.
I am kind of in the same boat as you, even though I started early but I am new to the US. That is why I am tending to be more aggressive, but also mindful of the possible 5 year target of a home down-payment.
Boxtrap wrote:
Fri May 04, 2018 3:25 pm
So my thought for you is this - decide what you want your OVERALL asset allocation to be across all your portfolios and accounts and treat it as one master portfolio. If you really want to cherry pick and be 80/20 with this pile of money and 62/38 with that pile of money, you can, but even so I would still recommend that you figure out what the blended AA is across the entire thing because at the end of the day that's all that matters. If the market crashes and you only then realize your overall AA was way too high for your comfort level, you won't find any solace in the cherry picking you did.
Agree about overall AA. I eventually want to do this streamlining, but it will take some time, so doing it step by step. Right now want to focus on the huge chunk of cash from the stocks I sold.
Boxtrap wrote:
Fri May 04, 2018 3:25 pm
If you want to be more conservative and protective with the portion you KNOW you'll need in 5 - 10 years, then taking a significant amount of bond exposure with that piece might be the way to go. (Always remember - bonds aren't really for making money, they're mostly for protecting money). But even if you do that, I still think it's prudent to view all your assets as one master portfolio, and that might mean that you need to rebalance the holdings in your 401k so that the AA of the master portfolio is still where you are comfortable.
This is the tricky part really here that I am not able to wrap my head around. So briefly I have 100K in cash right now.
Scenarios:
a) Plan to stay on in Bay Area permanently and buy here - that means just preserve this 100K for the 20% down-payment on a possible 500K home, which means 100% bond or CDs allocation.
b) Plan to stay in Bay Area for working life only and buy a retirement home somewhere else. This purchase may happen anytime from now to the enxt 20 years, no set time limit on that. In this scenario I can be 80-20 with this money.

How do I overcome the dilemma of choosing either A or B right away. Indirectly what I am asking is how to hedge for both possibilities? (is it too hard to do that - i.e. keeping plans fluid is a bad choice)!

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by Boxtrap » Fri May 04, 2018 5:54 pm

I hear you. One way to accomplish that hedge might be a No Penalty CD. Ally Bank and CIT bank offer them, I believe. With a no penalty CD you can sock that $100k away, no risk to principal, earn probably about 1.9%, and it’s a no penalty so you can access it pretty fast if you need the money quickly - for no penalty. This achieves your hedge because if you choose to buy soon you’ve protected your down payment and made a few bucks with no risk. If in a few years you decide you wanna push it off for a purchase much later on, THEN you can pop it in a Muni bond fund in your taxable account and let it sit.

I think that may be the hedge you seek.

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by manedark » Sat May 05, 2018 12:16 am

Boxtrap wrote:
Fri May 04, 2018 5:54 pm
I hear you. One way to accomplish that hedge might be a No Penalty CD. Ally Bank and CIT bank offer them, I believe. With a no penalty CD you can sock that $100k away, no risk to principal, earn probably about 1.9%, and it’s a no penalty so you can access it pretty fast if you need the money quickly - for no penalty. This achieves your hedge because if you choose to buy soon you’ve protected your down payment and made a few bucks with no risk. If in a few years you decide you wanna push it off for a purchase much later on, THEN you can pop it in a Muni bond fund in your taxable account and let it sit.

I think that may be the hedge you seek.
Actually I have a Savings Account already with Ally giving me 1.5% - the no penalty CD is also offering 1.5% - why to go for CD in this case then - is it that Savings account interest rate can change any time without notice whereas CD is locked for a period?

Also, if I am willing to make a lock CD rates are much better - I think around 2% for 1 year CD - again with Ally Bank.

Lastly I am in California on a 22% federal bracket and 9.4% CA bracket - does it make sense to invest in VCADX. what things I need to keep in mind for this - is there a lock in period or I can sell out any time like a normal fund, average 1 year return has been 2.44% - which is pretty good (but can it fall dramatically?). Any other such CA specific funds to consider?

Thanks in advance!

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randomizer
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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by randomizer » Sat May 05, 2018 12:19 am

Lump-sum according to desired asset allocation.
75:25 AA / Expected retirement: 2097

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by StevieG72 » Sat May 05, 2018 4:47 am

Option C is the way to go....

Pull the trigger now and don't look back.
Fools think their own way is right, but the wise listen to others.

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by SagaciousTraveler » Sat May 05, 2018 5:20 am

StevieG72 wrote:
Sat May 05, 2018 4:47 am
Option C is the way to go....

Pull the trigger now and don't look back.
This.

You will drive yourself insane trying to time the market.

Take Thursday for example. If you put in an order to buy a mutual fund when you saw the DOW was down 400 points in the morning, you would have been in for quiet the shock when it finished flat.

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by kenyan » Sat May 05, 2018 5:32 am

manedark wrote:
Sat May 05, 2018 12:16 am
Boxtrap wrote:
Fri May 04, 2018 5:54 pm
I hear you. One way to accomplish that hedge might be a No Penalty CD. Ally Bank and CIT bank offer them, I believe. With a no penalty CD you can sock that $100k away, no risk to principal, earn probably about 1.9%, and it’s a no penalty so you can access it pretty fast if you need the money quickly - for no penalty. This achieves your hedge because if you choose to buy soon you’ve protected your down payment and made a few bucks with no risk. If in a few years you decide you wanna push it off for a purchase much later on, THEN you can pop it in a Muni bond fund in your taxable account and let it sit.

I think that may be the hedge you seek.
Actually I have a Savings Account already with Ally giving me 1.5% - the no penalty CD is also offering 1.5% - why to go for CD in this case then - is it that Savings account interest rate can change any time without notice whereas CD is locked for a period?

Also, if I am willing to make a lock CD rates are much better - I think around 2% for 1 year CD - again with Ally Bank.

Lastly I am in California on a 22% federal bracket and 9.4% CA bracket - does it make sense to invest in VCADX. what things I need to keep in mind for this - is there a lock in period or I can sell out any time like a normal fund, average 1 year return has been 2.44% - which is pretty good (but can it fall dramatically?). Any other such CA specific funds to consider?

Thanks in advance!
If you're looking for a cash equivalent, Vanguard's California Money Market now has an attractive tax-adjusted yield. At your tax rate, yield of 1.44% tax free is better than you'll find on fully taxed yields. No duration risk or credit risk like the fund you cited, if that's important to you.
Retirement investing is a marathon.

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by simas » Sat May 05, 2018 7:05 am

As others said - if you are worried about market crash (sale! sale! sale!) then you have wrong asset allocation...

and X months out of Y months streak long expansion, short expansion, bold president, blonde president, blue moon aligned over red shift make-up-your-reason-here commentary talking heads on TV utter with smart looking faces - all means very little. no one knows the future

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by Boxtrap » Sat May 05, 2018 10:39 am

manedark wrote:
Sat May 05, 2018 12:16 am
Boxtrap wrote:
Fri May 04, 2018 5:54 pm
I hear you. One way to accomplish that hedge might be a No Penalty CD. Ally Bank and CIT bank offer them, I believe. With a no penalty CD you can sock that $100k away, no risk to principal, earn probably about 1.9%, and it’s a no penalty so you can access it pretty fast if you need the money quickly - for no penalty. This achieves your hedge because if you choose to buy soon you’ve protected your down payment and made a few bucks with no risk. If in a few years you decide you wanna push it off for a purchase much later on, THEN you can pop it in a Muni bond fund in your taxable account and let it sit.

I think that may be the hedge you seek.
Actually I have a Savings Account already with Ally giving me 1.5% - the no penalty CD is also offering 1.5% - why to go for CD in this case then - is it that Savings account interest rate can change any time without notice whereas CD is locked for a period?

Also, if I am willing to make a lock CD rates are much better - I think around 2% for 1 year CD - again with Ally Bank.

Lastly I am in California on a 22% federal bracket and 9.4% CA bracket - does it make sense to invest in VCADX. what things I need to keep in mind for this - is there a lock in period or I can sell out any time like a normal fund, average 1 year return has been 2.44% - which is pretty good (but can it fall dramatically?). Any other such CA specific funds to consider?

Thanks in advance!
Yeah a normal CD will give you a slightly better rate than the no penalty, but the trade off is the penalty if you decide to take it out early to put down your down payment. The benefit to the no penalty CD is mainly the flexibility. So with that you just need to decide what’s more important - a slightly better rate or flexibility.

I’m not an expert on tax exempt bond funds (I don’t have any myself yet) but I believe that you can sell them at any time just like most funds. The real question is do you want to? Meaning if you think you’re going to need/want the money in the short term (a few years) a Muni bond fund doesn’t make as much sense in my opinion, even though you might be able to avoid the taxes. It’s more about the risk - Muni bond funds do carry some risk, although they are certainly not nearly as risky as a junk bond fund. Your main criteria, I think, are what risk level do you want to assume with this $100k and what level of flexibility do you want. You already have enough for that 20% down payment. If it was me I’d want to be sure I didn’t risk a loss on that. But again that’s what I’d do in the short term outlook. If I decided it would instead go towards purchase of a retirement home in 20 years, I’d definely do the Muni bond fund for the longer term and give it some more growth power.

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Re: Invest lumpsum, "cost averaging" or "wait for the crash"

Post by Leif » Sat May 05, 2018 11:18 am

Lump sum is great if you have a long time horizon and will not get stressed out and bail if the market drops.

Since the market typically goes up Cost averaging "could" be a loser. But less likely to experience buyer's regret.

Waiting for a crash is great IF:

1. You knew when that would happen.
2. You knew how long that would happen.
3. You had the guts to invest at that stressful time.

Otherwise, a fourth option is Value averaging. It is sort of cost averaging on steroids.
The technique of value averaging is based on a formula (below) which guides how much one invests into a given investment at a specific time. The emphasis is on establishing a portfolio target value or “value path”. Value averaging seeks to increase the investment's value by this calculated amount on a periodic basis. Whenever a portfolio under-performs, the investors will therefore have to make a larger investment to make up for the under-performance. The converse is also true, and if the portfolio outperforms it’s targeted rate of return, then it is not the time to purchase more shares. Conceptually, value averaging can be thought of as combining the attributes of both dollar cost averaging and portfolio rebalancing.
Value Averaging - Wiki
Last edited by Leif on Sat May 05, 2018 11:32 am, edited 6 times in total.
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