"Never time the market" vs. lump sum investment

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bonzai
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"Never time the market" vs. lump sum investment

Post by bonzai » Thu Jun 21, 2018 8:07 am

Hi,

I understand the concept of "Never try to time the market" - however, in my particular situation I believe it's not applicable - and would like to hear what you have to say about it. I have zero experience in investing, but I'm a quick learner and I intend to begin soon.

My situation is - I have a 7 figure sum to invest, at a single time - and I think the best way to do it, is to somehow wait for the next "market crash" (which seems to happen every few years?) - understand when I'm in this situation, and then perform the buy.

Other than that - I plan on making smaller monthly investments - in which case I agree with the "Never try to time the market" concept fully and can perform such investments automatically / without waiting on a periodic basis.

  • What are your thoughts about his?
  • Am I making some mistake or do you agree that for a large one-lump-sum investment, it does make sense to time the market?
  • If it does make sense, do you have any practical advise as to how to do this - to detect a crash (and not a single day lapse), and quickly-enough perform a buy of ETF/MT?

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vineviz
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Re: "Never time the market" vs. lump sum investment

Post by vineviz » Thu Jun 21, 2018 8:15 am

The reason people say “don’t try to time the market” is because it’s impossible.

It’s not a question of whether your situation calls for it, or even if how smart you are. It’s just not a thing that you can do.

The best thing you can do is to choose the right asset allocation and just invest it.

Next best would be to invest as much of it in that allocation as you bring yourself to do, and average the rest in over (say) 12 months.

If you do anything else, imho, you’ll be acting as your own worst enemy.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

Jack FFR1846
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Re: "Never time the market" vs. lump sum investment

Post by Jack FFR1846 » Thu Jun 21, 2018 8:18 am

So let's say you wait. The market goes mostly up for the next 10 years without a crash and the Dow gets to 73,000. Then there's a big market upset and it crashes to 50% its value of 36,500. You see the crash and invest.

You've lost out on over 10,000 points.

If you're too afraid to invest, own it. Put all your money in a CD and admit that you are unable to invest.
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retiredjg
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Re: "Never time the market" vs. lump sum investment

Post by retiredjg » Thu Jun 21, 2018 8:29 am

Might work. Might not. There are people right now sitting on the sidelines. The problem is they have been there FOR YEARS. Have you noticed what the market has done in the last 10 years? They have missed all that. If you wait for the next market crash, you may be doing the same.

Just get in the market now. It goes up in the long run, doesn't really matter where it is when you get in. You don't have to "get to the bottom floor" even if that were possible, which it is not. The "bottom floor" is wherever the market is when you get started.

It is not possible to "detect a crash" until it is already on the downward spiral. At that point, it is too late to do anything. Anyone who tells you s/he can detect a crash is deluded, mistaken, lying, voicing an unreliable opinion, nuts, trying to make money off you or some combination of these things.

You have a nice sum. Just invest it. Invest it in a way that works for you in both the good times and the bad times. Trying to game the system is the very best way for you to lose huge amounts of what you have....if not all of it.

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David Jay
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Re: "Never time the market" vs. lump sum investment

Post by David Jay » Thu Jun 21, 2018 8:31 am

Here is the WIKI on windfalls, the information may be useful in your situation: https://www.bogleheads.org/wiki/Managing_a_windfall

The correct approach to investing is to select a level of risk (asset allocation) that you can live with regardless of market condition. Then invest, regardless of market conditions. If you need to DCA (dollar cost average) for emotional reasons, divide the amount to invest by 12 and invest monthly so that you are fully invested within 1 year.

Waiting for a market pull-back will not, on average, end well.
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

dbr
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Re: "Never time the market" vs. lump sum investment

Post by dbr » Thu Jun 21, 2018 8:35 am

My hypothesis is that people who can't decide between investing now and waiting are really people who have not resolved what their asset allocation should be. It the prospect is too scary it is probably because your anticipated asset allocation is too risky. At least that is something to think about.

Tamalak
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Re: "Never time the market" vs. lump sum investment

Post by Tamalak » Thu Jun 21, 2018 8:36 am

If it were a good idea to wait for a market crash before investing, then it would be a good idea to sell CURRENT investments and wait for a market crash before re-investing.

We 'buy' our portfolios every day by keeping them invested.

If the market drops 20%, you lose 20%. It doesn't matter whether you've been invested for 10 years or 10 seconds. The loss is the same. It doesn't FEEL the same (it's a lot more frustrating if you've been invested for 10 seconds!), but it is the same.

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Re: "Never time the market" vs. lump sum investment

Post by mortfree » Thu Jun 21, 2018 8:42 am

dbr wrote:
Thu Jun 21, 2018 8:35 am
My hypothesis is that people who can't decide between investing now and waiting are really people who have not resolved what their asset allocation should be. It the prospect is too scary it is probably because your anticipated asset allocation is too risky. At least that is something to think about.
could also be financial experience and level of financial education.

If someone gave me a million dollars I would be extra cautious to not screw things up...

Afty
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Re: "Never time the market" vs. lump sum investment

Post by Afty » Thu Jun 21, 2018 8:45 am

The market may never be lower than it is now, or not lower enough to trigger you to buy, or it might be too long for you to wait and you'll end up buying in at high prices. People have been waiting for a crash for years now, but it still hasn't happened.

dbr
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Re: "Never time the market" vs. lump sum investment

Post by dbr » Thu Jun 21, 2018 8:47 am

mortfree wrote:
Thu Jun 21, 2018 8:42 am
dbr wrote:
Thu Jun 21, 2018 8:35 am
My hypothesis is that people who can't decide between investing now and waiting are really people who have not resolved what their asset allocation should be. It the prospect is too scary it is probably because your anticipated asset allocation is too risky. At least that is something to think about.
could also be financial experience and level of financial education.

If someone gave me a million dollars I would be extra cautious to not screw things up...
Indeed so. A first step would be to think twice about what the asset allocation might be because your situation is now quite different. Probably better advice than running out and helter-skelter starting to invest in the wrong assets is to wait and not invest at all until one has things figured out. There is no scenario where DCA is helpful compared to just waiting altogether, but not in the sense of waiting to market time.

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Re: "Never time the market" vs. lump sum investment

Post by Cyclesafe » Thu Jun 21, 2018 8:53 am

DCA is an understandable emotional crutch, but if equities are inexorably rising, then long term, it is on average, relatively, a losing strategy. But behavioral factors, especially to the investing noobie with stakeholders looking over his/her shoulder, remain important (unfortunately).

Invest in a Life Strategy or Target Retirement Fund until you calm down a little, then over the years, fine tune to a three fund portfolio, then refine further (if you must) with very minor amounts of other holdings. After the initial plunge, the more time you take to make changes, the better.

mortfree
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Re: "Never time the market" vs. lump sum investment

Post by mortfree » Thu Jun 21, 2018 9:00 am

dbr wrote:
Thu Jun 21, 2018 8:47 am
mortfree wrote:
Thu Jun 21, 2018 8:42 am
dbr wrote:
Thu Jun 21, 2018 8:35 am
My hypothesis is that people who can't decide between investing now and waiting are really people who have not resolved what their asset allocation should be. It the prospect is too scary it is probably because your anticipated asset allocation is too risky. At least that is something to think about.
could also be financial experience and level of financial education.

If someone gave me a million dollars I would be extra cautious to not screw things up...
Indeed so. A first step would be to think twice about what the asset allocation might be because your situation is now quite different. Probably better advice than running out and helter-skelter starting to invest in the wrong assets is to wait and not invest at all until one has things figured out. There is no scenario where DCA is helpful compared to just waiting altogether, but not in the sense of waiting to market time.
I re-read the first post by the OP... claimed zero experience in investing.

OP may not even understand asset allocation.

OP, go to the wiki - go through the first set of initial links that are in the Getting Started section...
https://www.bogleheads.org/wiki/Getting_started

then search for windfall, three-fund portfolio and other links that may catch your eye.
https://www.bogleheads.org/wiki/Managing_a_windfall

bonzai
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Re: "Never time the market" vs. lump sum investment

Post by bonzai » Thu Jun 21, 2018 9:02 am

Thank you all for all the helpful responses!

I understand your points about this approach of waiting for a crash being a loser's game.

The asset allocation I am interested in is 100% equity, and I intend on not touching it for the next 10+ years at least (regardless of market conditions), this is why I thought that the "worst" the market is at the time of me buying in, the better the result will be when I will need this money in the distant future.

bonzai
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Re: "Never time the market" vs. lump sum investment

Post by bonzai » Thu Jun 21, 2018 9:03 am

Also thank you for the multiple references for the Windfall term - I was actually looking for something just like that, thanks!

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CyberBob
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Re: "Never time the market" vs. lump sum investment

Post by CyberBob » Thu Jun 21, 2018 9:04 am

Although it's not a black-and-white answer, I always like William Sharpe's view on the question:
William Sharpe wrote:The equities market is around an all-time high. Should future retirees buy in now or wait for it to get cheaper?
I wish I knew whether in a year, we will look back and say that the current level of the market was an all-time high. But I don't, and would warrant that few, if any, do. Better to assume the equities market is somewhat more likely to go up than down and act accordingly.
Vanguard has a paper which may help in your situation, as it looks to answer the question How might an individual who receives a $1 million windfall approach the decision of investing those funds immediately versus dollar-cost averaging the investment over time?
Last edited by CyberBob on Thu Jun 21, 2018 9:05 am, edited 1 time in total.

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JoMoney
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Re: "Never time the market" vs. lump sum investment

Post by JoMoney » Thu Jun 21, 2018 9:05 am

I don't think dollar-cost-averaging is such a bad deal. I do it with my paycheck even though I could leverage in now and pay it off over the year.
That said, all of my money is currently in the market, and I'm not about to take it out so that I can DCA back in.

I'm guessing that if you're not comfortable "lumping" in to the market, your allocation probably isn't right for your willingness to accept the risk. If you had a 50/50 allocation and stocks dropped you would have a similar effect of DCA by doing regular rebalancing.
Maybe go back and think about your asset allocation to cash/bonds relative to stocks.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

dbr
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Re: "Never time the market" vs. lump sum investment

Post by dbr » Thu Jun 21, 2018 9:05 am

bonzai wrote:
Thu Jun 21, 2018 9:02 am
Thank you all for all the helpful responses!

I understand your points about this approach of waiting for a crash being a loser's game.

The asset allocation I am interested in is 100% equity, and I intend on not touching it for the next 10+ years at least (regardless of market conditions), this is why I thought that the "worst" the market is at the time of me buying in, the better the result will be when I will need this money in the distant future.
Then my supposition was wrong. You really did have an idea that you could time the market. On that count you could succeed but probably won't.

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Re: "Never time the market" vs. lump sum investment

Post by AlohaJoe » Thu Jun 21, 2018 9:08 am

bonzai wrote:
Thu Jun 21, 2018 8:07 am
  • Am I making some mistake or do you agree that for a large one-lump-sum investment, it does make sense to time the market?
You are wrong on this. You haven't actually provided any evidence. If the strategy worked for big investments it would work for small investments, too.

There have been many threads, maybe thousands by now, from people with large amounts of money -- even those with seven figures -- who need to make a lump sum investment and think that market timing is right for them. You could probably search and find many of those. In general, you aren't going to find many sympathetic ears.

If you decide to market time, be prepared to lose a lot of money. I remember one poster here who said they had been sitting in cash since 2010 because of their belief that another crash was right around the corner. They aren't unique but they are unique in admitting and in calculating how many hundreds of thousands of dollars they've lost.

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Re: "Never time the market" vs. lump sum investment

Post by pkcrafter » Thu Jun 21, 2018 9:19 am

bonzai, what is your age and low long to needing the money? Have you decided on an overall asset allocation?

I agree with others that the timing idea isn't a good idea. What if you wait and the market goes down? How far down will trigger your entry? It could continue to drop after you enter, or it could come up and then crash again. The point is if you are going to invest you cannot avoid down side volatility. You have to set an asset allocation that allows you to ride the market's movements.

An acceptable alternative to all-in or timing is to dollar cost average your entry into the market.

https://www.bogleheads.org/wiki/Dollar_cost_averaging

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

bonzai
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Re: "Never time the market" vs. lump sum investment

Post by bonzai » Thu Jun 21, 2018 9:27 am

Thank you all very much. I appreciate all the feedback, and am glad to be checked on this!

I do understand and accept the points you all made.

I will be doing further reading on the subject, and many others, on my journey to my first investment.

Many thanks!

bonzai
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Re: "Never time the market" vs. lump sum investment

Post by bonzai » Thu Jun 21, 2018 9:29 am

pkcrafter wrote:
Thu Jun 21, 2018 9:19 am
bonzai, what is your age and low long to needing the money? Have you decided on an overall asset allocation?

I agree with others that the timing idea isn't a good idea. What if you wait and the market goes down? How far down will trigger your entry? It could continue to drop after you enter, or it could come up and then crash again. The point is if you are going to invest you cannot avoid down side volatility. You have to set an asset allocation that allows you to ride the market's movements.

An acceptable alternative to all-in or timing is to dollar cost average your entry into the market.

https://www.bogleheads.org/wiki/Dollar_cost_averaging

Paul
For this specific money the intention is to be there, invested, forever :) And me being able to enjoy its dividends (or 3-4% withdrawal rate) yearly.

I actually don't like the DCA concept and prefer the lump sum investment - the only consideration about this that I had was relating to timing the market and I do understand why it's a bad idea, thanks to all the responses.

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Re: "Never time the market" vs. lump sum investment

Post by retiredjg » Thu Jun 21, 2018 9:33 am

bonzai wrote:
Thu Jun 21, 2018 9:02 am
The asset allocation I am interested in is 100% equity....
You say you have no experience so you cannot possibly know what it will feel like for your (let's call it) $1 million to shrink to about $500k over 6 months or so and stay in that neighborhood for a year or so.

It is devastating. Many call it "gut wrenching". It can gnaw at you day and night.

You think you can gut it out. No big deal. Many people do think that. It can't be that bad.

Well, yes it can be that bad and worse. A gut wrench that goes on day after day for month after month takes a toll on a person and all the relationships that person has. Happiness and health are affected. Families are affected. Marriages are affected. Work life suffers. And all of this is unnecessary because you have absolutely no need to invest your money at 100% stocks.

You should consider your need to take risk. It is probably very low because this amount of money puts you way ahead or wherever you actually need to have saved at this point in your life.

You should consider your ability to take risk - something we know nothing about because all we know is you don't need it for 10 years.

Very lastly, you should consider your willingness to take risk. Your willingness seems high, but I think that is really just a lack of experience talking. It seems like a walk in the park so you are willing to do it.

Here's an idea you will not like, but you should consider it anyway. Try to keep an open mind. It is actually an ideal choice for a person in your situation.

Invest now at about 60% stocks and 40% bonds. As you get experience (years, not months) you will see how the market goes up and down and what it feels like to you. If you are lucky enough to experience a real crash, when it is over you will know for sure whether 100% stocks is a good place for you to be. If it is, go there.

If there is no crash for many years, you will at least see how things work and how you react to it. You will have better judgement about what your asset allocation (stock to bond ratio) should be.

Somehow you have a nice sum to do something with. Don't get in over your head. Test the water a little and find out just how deep it is before diving in head first.

An inexperienced person jumping in with a 7 figure sum at 100% equities lack wisdom.

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Re: "Never time the market" vs. lump sum investment

Post by MotoTrojan » Thu Jun 21, 2018 9:38 am

100% seems like a bad idea to me. But I’d lump sum. If you had $3M in a 401K accumulated over 35 years would you move to money market and wait for a crash every few years? Of course not. Every day you leave it invested is a day you choose to lump sum it. Emotionally it feels different but in practice there is none.

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Re: "Never time the market" vs. lump sum investment

Post by dbr » Thu Jun 21, 2018 9:40 am

Well, maybe the presumption that the asset allocation needs thinking through is not wrong at all.

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vineviz
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Re: "Never time the market" vs. lump sum investment

Post by vineviz » Thu Jun 21, 2018 9:48 am

CyberBob wrote:
Thu Jun 21, 2018 9:04 am
Vanguard has a paper which may help in your situation, as it looks to answer the question How might an individual who receives a $1 million windfall approach the decision of investing those funds immediately versus dollar-cost averaging the investment over time?
Thanks for providing that link.

Vanguard makes a point at the end which I think is very important: discussions about dollar cost averaging generally refer to investing FROM CURRENT INCOME, not investing a windfall.

When you DCA from current income, you are effectively LUMP SUM INVESTING: putting all the investable money to work ASAP (i.e. each paycheck). I think this distinction sometimes gets lost and confused when people think about a windfall, so I'm glad Vanguard reiterated this point.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: "Never time the market" vs. lump sum investment

Post by FrugalInvestor » Thu Jun 21, 2018 9:51 am

I think that just like choosing an appropriate asset allocation for your investments, deciding between a lump sum vs. periodic strategy comes down to which allows you to sleep well (or better) at night and stick with your decision.

Over the long-term the market goes up so there's a greater likelihood that a lump sum strategy will win out. I believe that's a fact. But because the market also gyrates in the short-term our mind often tells us that we must be near a short-term high which makes us want to take advantage of that situation and 'beat' the market with a short-term bet.

Chances are that we'll be much better off acknowledging the indisputable long-term trend and rejecting the psychological pull of outsmarting the market in the short-term, but that is hard and is why Bogleheads preach having a long-term plan and sticking with it. It isn't that a long-term focus and sticking with a plan guarantees that we'll end up better off in the end, it's just that it significantly increases our chances.

So which choice will allow you to focus on the future, stick with your plan (and sleep)? If it's lump summing, then do it. If it's dollar-cost-averaging then do that. The most important thing is that you decide and then follow through on that decision because the biggest disservice you can do yourself is to act on your emotions which are likely to tell you to make interim changes based on short-term market movements and the prognostications of 'experts.'
IGNORE the noise! | Our life is frittered away by detail... simplify, simplify. - Henry David Thoreau

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Re: "Never time the market" vs. lump sum investment

Post by Sandtrap » Thu Jun 21, 2018 9:54 am

This might help you decide.

Read About Bob, The Worst Market Timer
What happens if you only invested at market highs?
http://awealthofcommonsense.com/2014/0 ... ket-timer/

Investing Behavior Pitfalls
https://www.bogleheads.org/wiki/Behavioral_pitfalls

dbr
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Re: "Never time the market" vs. lump sum investment

Post by dbr » Thu Jun 21, 2018 10:00 am

vineviz wrote:
Thu Jun 21, 2018 9:48 am
CyberBob wrote:
Thu Jun 21, 2018 9:04 am
Vanguard has a paper which may help in your situation, as it looks to answer the question How might an individual who receives a $1 million windfall approach the decision of investing those funds immediately versus dollar-cost averaging the investment over time?
Thanks for providing that link.

Vanguard makes a point at the end which I think is very important: discussions about dollar cost averaging generally refer to investing FROM CURRENT INCOME, not investing a windfall.

When you DCA from current income, you are effectively LUMP SUM INVESTING: putting all the investable money to work ASAP (i.e. each paycheck). I think this distinction sometimes gets lost and confused when people think about a windfall, so I'm glad Vanguard reiterated this point.
The original notion of dollar cost averaging had to do with whether one should buy a fixed dollar amount of stocks at regular intervals or a fixed number of shares at regular intervals. Simple arithmetic shows that the former has an advantage over the latter in producing a lower average basis. For some reason that whole discussion is sidetracked into a debate about how to deploy large already existing sums of money but still seems to confuse the original not applicable result which really was dollar cost averaging but now isn't. The issue was a big deal long ago because investing constant dollar amounts was not easy to do compared to buying shares in round lots. Those issues are now obsolete.

Vanguard does publish a misleading result, however. They state that lump sum comes out ahead about two thirds of the time. This is true but the misleading part is that the possibility that DCA comes out ahead 1/3 of the time makes the proposition sound like a bet with odds. The fact is that this result is nothing more than the fact that volatile investments have some chance of being at a loss during any period of being invested, though the chances of being at a gain are greater. That is why the real question is asset allocation and not odds of being at a loss or a gain by one scheme or another.

dbr
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Re: "Never time the market" vs. lump sum investment

Post by dbr » Thu Jun 21, 2018 10:05 am

FrugalInvestor wrote:
Thu Jun 21, 2018 9:51 am
I think that just like choosing an appropriate asset allocation for your investments, deciding between a lump sum vs. periodic strategy comes down to which allows you to sleep well (or better) at night and stick with your decision.

Over the long-term the market goes up so there's a greater likelihood that a lump sum strategy will win out. I believe that's a fact. But because the market also gyrates in the short-term our mind often tells us that we must be near a short-term high which makes us want to take advantage of that situation and 'beat' the market with a short-term bet.

Chances are that we'll be much better off acknowledging the indisputable long-term trend and rejecting the psychological pull of outsmarting the market in the short-term, but that is hard and is why Bogleheads preach having a long-term plan and sticking with it. It isn't that a long-term focus and sticking with a plan guarantees that we'll end up better off in the end, it's just that it significantly increases our chances.

So which choice will allow you to focus on the future, stick with your plan (and sleep)? If it's lump summing, then do it. If it's dollar-cost-averaging then do that. The most important thing is that you decide and then follow through on that decision because the biggest disservice you can do yourself is to act on your emotions which are likely to tell you to make interim changes based on short-term market movements and the prognostications of 'experts.'
I agree the issue is about sticking to a long term plan in general and also avoiding market timing in particular. These are the reasons why the issue is not about lump sum vs DCA but rather about whether or not the proposed asset allocation is the right one. I agree that a lot of lump sum dilemmas are about people who have changed circumstances, windfall, etc. Rather than DCA it would be better to wait altogether until one has thought through what to do. DCA does not reduce the risk in a risky asset allocation.

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Re: "Never time the market" vs. lump sum investment

Post by vineviz » Thu Jun 21, 2018 10:07 am

dbr wrote:
Thu Jun 21, 2018 10:00 am
Vanguard does publish a misleading result, however. They state that lump sum comes out ahead about two thirds of the time. This is true but the misleading part is that the possibility that DCA comes out ahead 1/3 of the time makes the proposition sound like a bet with odds.
I'm not sure what you mean: it certainly IS a bet with odds, odds which Vanguard has nicely calculated for us.

Using dollar cost averaging on a windfall is essentially making a bet that the average purchase price over (say) 12 months will be lower than the price today. On average, an investor taking that bet (i.e. choosing to DCA) will lose about 2/3 of the time. It's like buying a lottery ticket: you MIGHT win, but you probably won't.
dbr wrote:
Thu Jun 21, 2018 10:00 am
That is why the real question is asset allocation and not odds of being at a loss or a gain by one scheme or another.
This is indeed an important question, as Vanguard points out in the very final paragraph of their conclusion (emphasis mine).
If an investor is uncomfortable with the risks associated with a given market entry strategy, it may imply a low willingness to take risk in general, and if so, we recommend revisiting the target asset allocation to ensure that it appropriately addresses risk tolerance levels and investing goals.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: "Never time the market" vs. lump sum investment

Post by BeBH65 » Thu Jun 21, 2018 10:09 am

bonzai wrote:
Thu Jun 21, 2018 9:02 am
Thank you all for all the helpful responses!

I understand your points about this approach of waiting for a crash being a loser's game.

The asset allocation I am interested in is 100% equity, and I intend on not touching it for the next 10+ years at least (regardless of market conditions), this is why I thought that the "worst" the market is at the time of me buying in, the better the result will be when I will need this money in the distant future.
So your intended Asset Allocation 100/0 and your current allocation is 0/100.


1. Why do you think you can recognize the crashes and successfully time the market?
Try this to see if you are any good at timing the market. Please think how you would feel if you are betting 1M$ with such a game.

2. You intend to go from 0/100 to the 100/0 at the next crash.
Assume that in June 2023 the market crashes with 30% over a period of 5 months (*).
Do you invest your 1M$? In a descending market? that has been going down in the last 5 months? that might be yet another x % lower tomorrow?
Do not underestimate the emotions with such a decision. I doubt that you will do the trade at that moment.
We regularly get people on this forum telling us they went to cash some time ago and asking us when to enter the market again. We then ask them: why did you not enternin 2011? why did you not reener in 2015-16? why did you not reenter in 2018?

3.
Play around with a tool like portfoliovisualiser comparing different scenarios with different starting dates:
1- Cash
2- 100% stock
3- something in the middle with maybe a 50/50 AA
Compare both extreme scenarios.

4. Once you have invested your 1M$ you are now fully invested in the market, with its up and downs. The next day the next crash can happen.


Please read the wiki entries about lunpsum vs DCA. Lumpsum might not be for you, but maybe you need to set a reasonable AA (between 30/70 and 70/30 for instance) and create a plan that you will invest X% every quarter for the next X quarter.




(*) please see the posts above: the market might not crash in the next x years, and the bottom of the crash might actually still be higher then the current level.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

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Re: "Never time the market" vs. lump sum investment

Post by Dottie57 » Thu Jun 21, 2018 10:13 am

Fear doesn’t work well with investing. Decide on a plan and invest. Don’t look at the short term but the long term

Asset allocation Is important. I know I can’t handle big losses in retirement, so am at 50/50 allocation.

If there is no tolerance for loss go with treasuries or bank CDs.

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Re: "Never time the market" vs. lump sum investment

Post by dbr » Thu Jun 21, 2018 10:25 am

vineviz wrote:
Thu Jun 21, 2018 10:07 am
dbr wrote:
Thu Jun 21, 2018 10:00 am
Vanguard does publish a misleading result, however. They state that lump sum comes out ahead about two thirds of the time. This is true but the misleading part is that the possibility that DCA comes out ahead 1/3 of the time makes the proposition sound like a bet with odds.
I'm not sure what you mean: it certainly IS a bet with odds, odds which Vanguard has nicely calculated for us.

Using dollar cost averaging on a windfall is essentially making a bet that the average purchase price over (say) 12 months will be lower than the price today. On average, an investor taking that bet (i.e. choosing to DCA) will lose about 2/3 of the time. It's like buying a lottery ticket: you MIGHT win, but you probably won't.

But Vanguard poses it as being about the wrong question and the wrong odds. It isn't about odds regarding lump sum vs DCA. It is about the odds of anyone at any time being invested in risky investments compared to not bring invested (aka holding cash). So it is about asset allocation and also about not market timing. Lump sum vs DCA is a pointless red herring and Vanguard should not even imply that DCA somehow might be a "winning bet" sometimes rather than a pointless idea all the time.

dbr wrote:
Thu Jun 21, 2018 10:00 am
That is why the real question is asset allocation and not odds of being at a loss or a gain by one scheme or another.
This is indeed an important question, as Vanguard points out in the very final paragraph of their conclusion (emphasis mine).
If an investor is uncomfortable with the risks associated with a given market entry strategy, it may imply a low willingness to take risk in general, and if so, we recommend revisiting the target asset allocation to ensure that it appropriately addresses risk tolerance levels and investing goals.

Yep, there they get it right.

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Re: "Never time the market" vs. lump sum investment

Post by BigMoneyNoWhammies » Thu Jun 21, 2018 10:32 am

bonzai wrote:
Thu Jun 21, 2018 8:07 am
Hi,

I understand the concept of "Never try to time the market" - however, in my particular situation I believe it's not applicable - and would like to hear what you have to say about it. I have zero experience in investing, but I'm a quick learner and I intend to begin soon.

My situation is - I have a 7 figure sum to invest, at a single time - and I think the best way to do it, is to somehow wait for the next "market crash" (which seems to happen every few years?) - understand when I'm in this situation, and then perform the buy.

Other than that - I plan on making smaller monthly investments - in which case I agree with the "Never try to time the market" concept fully and can perform such investments automatically / without waiting on a periodic basis.

  • What are your thoughts about his?
  • Am I making some mistake or do you agree that for a large one-lump-sum investment, it does make sense to time the market?
  • If it does make sense, do you have any practical advise as to how to do this - to detect a crash (and not a single day lapse), and quickly-enough perform a buy of ETF/MT?
you don't state your age or financial situation, but if you have $1,000,000+ to allocate at once, do you really even need to take the risk of investing in the market? Depending on your age and financial particulars, a combo of CD ladder/savings bonds/treasuries could probably have you more than covered without the volatility of the market, which by the sounds of it is a concern for you.

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Re: "Never time the market" vs. lump sum investment

Post by livesoft » Thu Jun 21, 2018 10:46 am

Suppose the next "market crash" just drops back to where the market is now? What then? Yes, what if the stock market goes up 30% and then drops 20% after that?

But, then define "market crash" to us explicitly. If you don't explicitly define it ahead of time, then you won't act when it happens anyways. That is, you are completely screwed.

Sorry about that.

OTOH, if you just invest 10% of your cash every month, that will probably work just as well as anything else although it may not work out as the best thing to do. That's the answer: Don't worry about doing the best thing now because the best thing can only be known in hindsight which you really won't have until some time in the future.
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Re: "Never time the market" vs. lump sum investment

Post by JoMoney » Thu Jun 21, 2018 11:05 am

livesoft wrote:
Thu Jun 21, 2018 10:46 am
...OTOH, if you just invest 10% of your cash every month, that will probably work just as well as anything else although it may not work out as the best thing to do. That's the answer: Don't worry about doing the best thing now because the best thing can only be known in hindsight which you really won't have until some time in the future.
:thumbsup
It's just about guaranteed to NOT get you in at the absolute lowest price (I don't know anyone who knows how to do that), but it's absolutely going to get you invested at the average price available over that period.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: "Never time the market" vs. lump sum investment

Post by GAAP » Thu Jun 21, 2018 11:08 am

Money sitting in cash, waiting for a crash -- is money losing value to inflation. The longer you wait, the more you lose...

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Re: "Never time the market" vs. lump sum investment

Post by mhadden1 » Thu Jun 21, 2018 11:09 am

Tamalak wrote:
Thu Jun 21, 2018 8:36 am

We 'buy' our portfolios every day by keeping them invested.
I only began to understand this in the last couple of years, due to another excellent BH post that explained things in a similar way.
Oh I can't, can I? That's what they said to Thomas Edison, mighty inventor, Thomas Lindberg, mighty flyer,and Thomas Shefsky, mighty like a rose.

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Re: "Never time the market" vs. lump sum investment

Post by Fallible » Thu Jun 21, 2018 11:14 am

David Jay wrote:
Thu Jun 21, 2018 8:31 am
Here is the WIKI on windfalls, the information may be useful in your situation: https://www.bogleheads.org/wiki/Managing_a_windfall

The correct approach to investing is to select a level of risk (asset allocation) that you can live with regardless of market condition. Then invest, regardless of market conditions. If you need to DCA (dollar cost average) for emotional reasons, divide the amount to invest by 12 and invest monthly so that you are fully invested within 1 year.

Waiting for a market pull-back will not, on average, end well.
Agree on the windfall and asset allocation advice, as both should come first.
Bogleheads® wiki | Investing Advice Inspired by Jack Bogle

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Re: "Never time the market" vs. lump sum investment

Post by vineviz » Thu Jun 21, 2018 11:27 am

dbr wrote:
Thu Jun 21, 2018 10:25 am
But Vanguard poses it as being about the wrong question and the wrong odds.
No.

This question (DCA vs lump sum investment) is not only an INCREDIBLY common question, even among investors with some experience, but it is EXACTLY the question posed by the OP.

Issues like this, where the intuitive action is likely to be self-damaging, are ones where having actual data is more valuable than having folksy rules of thumb or pseudo-aphorisms passed back and forth among anonymous internet commentators.

Because what investors need to hear when they ask this question (which they do almost every day on this board) is not advice about allocation instead of DCA/lump sum: they need the complete answer.

Which, it seems, we agree is something like the following. "Using DCA on a windfall instead on investing it all right away is very likely to cost you money, not make you money. And if you find yourself nervous at the thought of investing your windfall according to a particular asset allocation, you really ought to stop and consider whether that allocation ACTUALLY matches your need, ability, and willingness to take risk."

Saying it is the "wrong question" belittles the legitimate uncertainty and concern that many investors have around this topic, IMHO.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: "Never time the market" vs. lump sum investment

Post by dbr » Thu Jun 21, 2018 11:44 am

vineviz wrote:
Thu Jun 21, 2018 11:27 am
dbr wrote:
Thu Jun 21, 2018 10:25 am
But Vanguard poses it as being about the wrong question and the wrong odds.
No.

This question (DCA vs lump sum investment) is not only an INCREDIBLY common question, even among investors with some experience, but it is EXACTLY the question posed by the OP.

Issues like this, where the intuitive action is likely to be self-damaging, are ones where having actual data is more valuable than having folksy rules of thumb or pseudo-aphorisms passed back and forth among anonymous internet commentators.

Because what investors need to hear when they ask this question (which they do almost every day on this board) is not advice about allocation instead of DCA/lump sum: they need the complete answer.

Which, it seems, we agree is something like the following. "Using DCA on a windfall instead on investing it all right away is very likely to cost you money, not make you money. And if you find yourself nervous at the thought of investing your windfall according to a particular asset allocation, you really ought to stop and consider whether that allocation ACTUALLY matches your need, ability, and willingness to take risk."

Saying it is the "wrong question" belittles the legitimate uncertainty and concern that many investors have around this topic, IMHO.
We definitely agree on what we agree on. I think you probably have misunderstood my point about the bet thing as I am not reading you say anything I disagree with. Maybe I misstated my point. To be honest this DCA thing gets so stupid and tiresome I don't know why I reply on these threads. It is probably right up there with the stupid and tiresome about dividend investing. I can't think of anything worse than these two -- maybe tilting and factor investing, but in that there might actually be some meat to be discussed.

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Re: "Never time the market" vs. lump sum investment

Post by livesoft » Thu Jun 21, 2018 11:58 am

vineviz wrote:
Thu Jun 21, 2018 11:27 am
Because what investors need to hear when they ask this question (which they do almost every day on this board) is not advice about allocation instead of DCA/lump sum: they need the complete answer.

Which, it seems, we agree is something like the following. "Using DCA on a windfall instead on investing it all right away is very likely to cost you money, not make you money. And if you find yourself nervous at the thought of investing your windfall according to a particular asset allocation, you really ought to stop and consider whether that allocation ACTUALLY matches your need, ability, and willingness to take risk."
I don't think that is the complete answer. Studies show that the complete answer is:

Lump Sum historically has outperformed DCA-over-12-months by about 1% to 4% on average, but only about 2/3rds of the time. That is, DCA-over-12-months outperforms Lump Sum about one-third of the time.

Thus, the "cost" to DCA-over-12-months is not that much ... about as much as a single bad day in the market. This is such a small price to pay for peace-of-mind, mental accounting, and insurance against a major drop after a LS investment, that it is probably worth it to some investors.

If one wishes to reduce the "cost" of DCA versus LS, then one can do both with parts of the amount to be invested. For instance, if one takes half (50%) of the money to be invested and Lump Sums it, but DCAs the other 50% over the next 10 months, then the "cost" is like reduced by 50% or just 0.5% to 2%. Furthemore, if one accelerates or shortens the DCA schedule from 12 months to 6 months or 4 months, there is also a reduction in the difference in outcome of LS vs DCA.

There are plenty of other mental-accounting or peace-of-mind or behavioral traps that cost one about 0.5% to 2% of their portfolio value. This LS to DCA decision is just another one of them. Other examples might be not investing tax efficiently or buying Wellesley and/or Wellington in a taxable account or paying 0.3% to Vanguard PAS.

Bottom line: Lump sum investing is not the big win that many people seem to think it is.
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Re: "Never time the market" vs. lump sum investment

Post by dbr » Thu Jun 21, 2018 12:06 pm

livesoft wrote:
Thu Jun 21, 2018 11:58 am
vineviz wrote:
Thu Jun 21, 2018 11:27 am
Because what investors need to hear when they ask this question (which they do almost every day on this board) is not advice about allocation instead of DCA/lump sum: they need the complete answer.

Which, it seems, we agree is something like the following. "Using DCA on a windfall instead on investing it all right away is very likely to cost you money, not make you money. And if you find yourself nervous at the thought of investing your windfall according to a particular asset allocation, you really ought to stop and consider whether that allocation ACTUALLY matches your need, ability, and willingness to take risk."
I don't think that is the complete answer. Studies show that the complete answer is:

Lump Sum historically has outperformed DCA-over-12-months by about 1% to 4% on average, but only about 2/3rds of the time. That is, DCA-over-12-months outperforms Lump Sum about one-third of the time.

Thus, the "cost" to DCA-over-12-months is not that much ... about as much as a single bad day in the market. This is such a small price to pay for peace-of-mind, mental accounting, and insurance against a major drop after a LS investment, that it is probably worth it to some investors.

If one wishes to reduce the "cost" of DCA versus LS, then one can do both with parts of the amount to be invested. For instance, if one takes half (50%) of the money to be invested and Lump Sums it, but DCAs the other 50% over the next 10 months, then the "cost" is like reduced by 50% or just 0.5% to 2%. Furthemore, if one accelerates or shortens the DCA schedule from 12 months to 6 months or 4 months, there is also a reduction in the difference in outcome of LS vs DCA.

There are plenty of other mental-accounting or peace-of-mind or behavioral traps that cost one about 0.5% to 2% of their portfolio value. This LS to DCA decision is just another one of them. Other examples might be not investing tax efficiently or buying Wellesley and/or Wellington in a taxable account or paying 0.3% to Vanguard PAS.

Bottom line: Lump sum investing is not the big win that many people seem to think it is.
I think the real point is that the debate should not be about which one "wins" or what it "costs" but rather about the false idea that DCA somehow manages the risk of an asset allocation that is the wrong one to start with. That is, the prospective investor should stop thinking about the wrong thing and start thinking about the right thing.

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Re: "Never time the market" vs. lump sum investment

Post by Dandy » Thu Jun 21, 2018 1:20 pm

I like to tell people who are concerned about the market to do the following:

1. Pick you stock/fixed income allocation
2. invest some immediately at that allocation. e.g. 20%? 30%?
3. Set up an automatic investment each month for the rest at your desired allocation to be completely invested in a year or so. That is take the amount left over and divide it by 12 or 14 and automatically invest that amount each month.
4. When the equity market drops in a month double that month's investment.

This has three "advantages":
1. Gets you off the sidelines
2. Trains you to buy when the market is down
3. Gets you fully invested in a year or so -- maybe less

Most times it is better to just invest the lump some all at once but depending on age, investment experience etc. that isn't always easy to do.

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Re: "Never time the market" vs. lump sum investment

Post by CarpeDiem22 » Thu Jun 21, 2018 11:20 pm

From what I've read, people like Jack Bogle and William Bernstein "allow" market timing strictly based on market valuations (P/B essentially). No market timing is allowed based on economic or political news or expectations. In the book Bogle on Mutual Funds, Bogle says never to go below 25% equity allocation, but says that asset allocation can be modified based on market valuations.

In the book Intelligent Asset Allocator, William Bernstein also says that, as evidenced by past data, current P/B has some correlation with future returns (higher current P/B leads to lower future returns).

If you look back to the Nifty 50 crash, people were buying equities irrespective of the price. Not a very smart thing to do in my humble opinion.

For your specific issue, if I were in your position, I would invest the lumpsum in a non-equity asset class (bonds, money market funds etc.), wait for the equity valuations to come down to reasonable levels (based on past data), and then make lumpsum investment in equities. Before doing this, you should do some rough calculations on whether this would yield better that lumpsum investing in equities right now. It may well come out that lumpsum investing in current equity market would still yield better than what I mentioned above. One variable would be WHEN the valuations would come down, you'll have to do some excel simulation for the same.

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Re: "Never time the market" vs. lump sum investment

Post by CarpeDiem22 » Thu Jun 21, 2018 11:30 pm

CyberBob wrote:
Thu Jun 21, 2018 9:04 am
Vanguard has a paper which may help in your situation, as it looks to answer the question How might an individual who receives a $1 million windfall approach the decision of investing those funds immediately versus dollar-cost averaging the investment over time?
I would have loved to see how DCA vs LSI compare when measured against starting P/B. Very informative paper, nonetheless. Thanks.

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Re: "Never time the market" vs. lump sum investment

Post by pkcrafter » Sat Jun 23, 2018 2:18 pm

JoMoney wrote:
Thu Jun 21, 2018 11:05 am
It's just about guaranteed to NOT get you in at the absolute lowest price (I don't know anyone who knows how to do that)
Yeah, and I'll bet you don't know anyone who knows anyone who can do that. :happy

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When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: "Never time the market" vs. lump sum investment

Post by Toons » Sat Jun 23, 2018 6:25 pm

Go ahead and initiate the transaction Now for Monday,
All in ...
The compounding machine never takes time off .
Time is the precious commodity that we all have only so much of.
And not guaranteed,
Put the money to work.

:happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee

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Re: "Never time the market" vs. lump sum investment

Post by Actin » Sat Jun 23, 2018 7:46 pm

Just because something is mathematically correct doesn't mean it is the best choice.

I remember how frustrating it was when I first started buying index funds a decade ago and I lost money everyday the first week. I could only imagine how someone who lump sum invested 100k+ at the beginning of 2008 felt by the summer

Most beginners will be more comfortable with DCA vs lump sum investing, because no matter how rational you are, those red numbers will always get an emotional response on some level.

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Re: "Never time the market" vs. lump sum investment

Post by gold99xx » Sat Jun 23, 2018 8:27 pm

Had a similar situation, a large amount at one time, here is what ACTUALLY happened:

S and P 500 $190 the first time I looked
S and P 500 $207 when I dumped in
S and P 500 $255 today

Run that with any numbers, and you will come to the same conclusion I did.... Should have gone in at $190, glad I did at $207....happy it's at $255
I plan to stay invested as long as possible now that the hard part is over.

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